Over the 25 years that I’ve spent in the industry, I’ve worked with a host of individuals and families who have crossed the pond from the US to the UK. I was delighted to share my experiences in Atlanta recently, at the US Family Office Summit at the invitation of the UK Department of Business and Trade.
The Foreign Income and Gains (FIG) regime – how we got here
“News of my demise was greatly exaggerated”, the misquoted reply given by American author Mark Twain in 1897 in response to a newspaper report claiming he was dying in London, can, in my view at least, just as well be levelled at attracting high net wealth individuals to the UK. As with all headlines, the truth is more complex and nuanced than all of that.
I have dealt with what we used to call resident, non-domiciled (‘RND’) clients for just about 25 years now. As a fresh-faced associate advising on ceased sourced planning, I was always warned that the RND system may not be here forever. I remember, not with much enthusiasm, the run-up to what ended up being Finance Act 2008 and the constant changes, seemingly coming through each day. As a profession, we foresaw that lots of RNDs would go; they didn’t, though were undoubtedly spooked. In 2015, the storm clouds gathered only to be replaced by the ray of sunshine that was Protected Foreign Source Income, which broadly kept the status quo for high net wealth, well-advised RNDs. By 2019, with the impending left-wing Corbyn revolution, we drew up battle plans for clients to leave, which were packed away again just before Christmas with a Conservative victory. By 2024, the tone of the political debate had changed, and following Jeremy Hunt’s first round of proposed changes last March, Rachel Reeves took these a step further to sweep away RND rules and replace these with the new FIG regime.
As someone who has prepared tax returns and advised clients on the RND scheme for a quarter of a century, there will always be a part of me that drops RNDs into the conversation, only to catch myself and call them Long Term Residents (LTRs). I don’t need to regurgitate the new rules and why they seem to be less generous than the old rules – there is plenty of material out there, including from my own firm.
Feeling the love
As I posted last week, I was kindly invited by the UK Department of Business and Trade to participate in a panel discussion on UK tax and succession for a US Family Office Summit. As the UK tax advisor in the room and with due deference to my hosts, I wanted to be passionate about the UK as a destination for capital deployment (to which I will come back to in a future post) and dare I say it, where members of the family may want to live. As a Brit, I remain positive about the UK, the place I was brought up, and want it to remain my home with my family. As a UK and US tax advisor, I spend as much professional time with Brits as Americans. We share our love for our respective countries and I am always heartened by the affection and high regard that so many US people have for the UK. Many US citizens like the UK so much that they have made the trip over the pond and stayed. There are no reliable figures for the number of US citizens living abroad, though the consensus is that the UK remains the primary destination for US citizens (outside Canada and Mexico).
With the tax changes, some RNDs have left the UK to beat the April 2025 changes and the numbers of those remain conjecture. Some may return if the rules change again, especially around Inheritance Tax. The tax revenue lost from their departure remains unknown, though most feel that it will reduce tax take from that community, despite the Temporary Repatriation Facility (‘TRF’), which is welcome (and a leaf out of the US Tax Cuts and Jobs Act and the transition tax playbook). Have US citizens left the UK in droves? Anecdotally, not so much and so if tax is an issue, why?
The simple answer is that US citizens are subject to US federal income tax on their worldwide income and gains wherever they are and so paying tax in the UK on the same basis makes no difference, does it? If I get a full credit for the UK taxes I pay in the US, is it just a question of who I pay my taxes to? Well, yes and no. When asked about this, we need to compare an apple with an apple. So, if my home state is New York or California, then I should compare what tax would be due if I were living there and any cost of living adjustment against what I pay in the UK. If my home state were Texas or Florida, that financial analysis is different. The other factor is real estate taxes, which are higher than our Council Tax, which can be claimed as a deduction on the UK and US tax return against your rental income if your US property were being let out.
What can be done?
So, the changes simply mean that our high net wealth clients should come to the UK for no more than four years (assuming they’ve not been here for ten years beforehand) and then go again? Well, not necessarily. Setting aside the highly valid and relevant points on lifestyle, education and work, the four-year window should be seen as one in which US citizens organise their financial affairs to make these as tax efficient as possible. So, for example, many have US funds in their portfolios, which would be treated as offshore funds without reporting status and so subject to UK income tax on future sale (from the start of the fifth year), so adjusting these on to funds with reporting status would align their treatment in the UK and the US. Also, holding of certain investment structures in the US for a UK resident create issues, such as LLCs, so attending to these before the start of the fifth year can chip off the harsher elements of the new FIG regime. Careful review and planning of a client’s assets and liabilities, as well as an understanding of their foreign tax credit position can undoubtedly extend their stay in the UK.
However, anecdotally, the biggest driver for the highest net wealth RNDs that have left the UK before the April 2025 changes seems to be the Inheritance Tax changes around Trusts. The main bone of contention was that the excluded property status of the trust has been fundamentally altered, for domestic UK Inheritance Tax purposes, if the settlor remains a LTR. Setting the rights and wrongs of this aside, which one could debate endlessly, the Estate Tax planning considerations are different for a US person (US citizen or domiciled) than individuals from other jurisdictions. The US has a unified Gift and Estate Tax allowance of a smidge under $14million per person, though in the UK, the equivalent is just £325,000 (or $440,000 now). For most US persons in the UK, the primary issue is the significant disparity between these two effective exemptions between the two jurisdictions.
In the past, we would have dealt with the UK tax exposure either by adding “excess” assets into a Trust, typically resident outside the UK, or taking out a life insurance policy (which is added into a separate trust). The life insurance option remains unaffected by the recent changes, though for domestic law purposes, the Trust is no longer the viable option it was. However, none of the April 2025 changes affect the terms of the UK/US Gift and Estate Tax Treaty, which covers both deaths and lifetime transfers, and trumps UK domestic law. So, for US citizens (who are not UK citizens), if assets are added into trust when they are still US domiciled for the purposes of the Treaty, then the UK has ceded rights to tax these assets, if they are not UK situated, as was the case under the pre-April 2025 domestic law. The fact that the settlor later becomes a LTR does not change this analysis. Whilst HMRC has not confirmed their agreement to this, the law seems to be clear here, albeit that we would need to act earlier than we would have done prior to April 2025.
So, my advice for the audience last week was that the well advised and proactive client will have less to fear from the new regime than they may have been led to believe. I expect to still see a steady flow of US citizens relocating down the golden corridor between the US to the UK and a need to ensure that they have appropriate structures. For the ultra high net worth wealth creators, does this still hold true? Yes, though with the caveat that they will still need to avoid the alphabet stew of US domestic tax planning that is GRATS, SLATS, CRUTS and CRATS, as they would have been advised to have when they were deemed domiciled under pre-April 2025 law.
If you are affected by any of the above issues, let’s arrange a call and discuss your situation.
