17 April 2023
As a US person moving to the UK you should review your investments before becoming UK tax resident, and consider how they will be taxed. For many common investments, the US and the UK tax treatment is likely to differ, and investments that provided tax advantages while you were US resident may cause tax problems once you are resident in the UK.
While some investments have tax advantages for US persons living in the US, they may have adverse UK tax implications for UK residents. Similarly, while some investments have tax advantages for UK residents (particularly non-UK domiciled individuals), they may have adverse US tax implications for US persons who remain subject to US worldwide taxation.
For considerations relating to investing in UK real estate, please see our previous article here.
While living in the US, you may have made investments in mutual funds, cash funds, certificates of deposit, unibonds or other similar investments which are advantageous from a US tax perspective. For the most part, the UK tax treatment of such investments does not attract the same tax benefits. For instance, mutual funds tend to have non-reporting tax status in the UK, meaning that any gains realised on such funds are taxable in the UK at income tax rates (which can be as high as 45%).
If you hold an interest in a US LLC, you are likely to have been taxed in the US on the profits of the LLC in a tax transparent way so far. However, the UK generally treats US LLCs as tax opaque – meaning that you will not be taxed in the UK on the profits of the LLC as they arise but will be taxed on any distributions you receive from the LLC. Such a mismatch in taxation between the US and the UK can result in taxation in both countries, with limited possibilities for relief from double taxation as what is being taxed is not regarded as the same income. Similar issues can also arise in respect of holdings in S-corporations.
Additionally, if you hold an interest, or are a director of, a US company, and you subsequently move to the UK and continue making decisions for the US company, that US company may become UK tax resident and be subject to taxation in the UK on its worldwide income and gains.
As such, we would recommend that a review is carried out of your significant investments – including your holdings in US entities – as well as your influential roles, prior to moving to the UK, as there may be opportunities to restructure in a tax preferential way ahead of time.
Arguably one of the most common and tax efficient investments for individuals living in the UK is an Individual Saving Account (ISA). The ISA wrapper allows an individual to invest a certain amount each year (either in stocks and shares or as cash), with any gains and/or interest not attracting UK tax. Nevertheless, the US tax rules generally ignore the ISA wrapper. This means that it is likely that any interest received will still be taxable on a US person in the US. In addition, a stocks and shares ISA is likely to be treated as a Passive Foreign Investment Company (PFIC) for US tax purposes. This is likely to not only attract US tax on a US person, but at punitive US tax rates.
Given the mismatch in tax treatment of certain types of investments, taking action as soon as possible, and in good time before you move to the UK is likely to be key. As such, it would be prudent to:
If you would like to discuss your move to the UK with a member of our Private Client team, please get in touch. Our market leading International Private Wealth team is made up of over 100 lawyers across 17 jurisdictions and can advise on all tax aspects of your move to the UK.
Please note that this general guidance is correct as of publication but is not a substitute for legal or tax advice. The US tax implications noted above do not constitute US tax advice and are for illustrative purposes only.