To be or not to be….an American citizen, that is the question

Prince Harry hit the headlines last week after sharing that he has considered becoming an American citizen in an interview with Good Morning America. Now, Harry will not be the first or last person to feel the pull away from the rain and grey of the UK towards the sunnier climes of California. However, he will also not be the first or last person to realise that this decision brings with it a host of complex US and UK tax and immigration considerations.

For a UK citizen facing the dilemma of whether to become a US citizen or, for that matter, 'a permanent resident' (the so-called 'green card holder'), below we outline some of the key factors to consider before making the jump across the pond. 

• US citizens and green card holders (US persons) are subject to US income tax (and reporting obligations) on worldwide income and gains regardless of their residence. In other words, wherever a US person is tax resident, their tax and reporting obligations to the US continue to apply. The US and the UK have entered into double tax treaties with one another, which are often helpful in providing individuals with relief from double taxation. But there are a variety of traps for the unwary, so care and expert advice will need to be taken to avoid triggering multiple layers of tax, particularly if the individual is dual UK and US resident.

• If the individual is a beneficiary and/or settlor of a trust (or multiple trusts), becoming a US person will introduce inevitable complexity from a UK and US tax perspective. US persons can be subject to punitive effective rates of US tax when they receive distributions from foreign (ie non-US) trusts – and even in certain circumstances where they do not receive distributions or benefits from the trust. Furthermore, although the US and the UK have some similarities in the way they tax offshore trusts, there are also some notable differences, which can lead to double taxation unless some form of, often complex, restructuring is carried out.

• US citizens and domiciliaries are subject to US gift and estate taxes on their worldwide personal assets. By way of contrast, non-US citizens and domiciliaries are only subject to gift tax on US tangible assets (eg real estate/chattels but not shares/securities) and to estate tax only on their US-situated assets. 

• The individual may currently be UK domiciled, but if the move to the US is on a permanent basis this may present some interesting questions as to whether they have shed their UK domicile in favour of a US (specific state) domicile of choice. There may be useful tax planning opportunities flowing from this, but subject to each individual's circumstance, if the individual's ties to the UK remain strong (for example, Prince Harry as a member of the British royal family might find it particularly difficult to argue that he has only weak ties to the UK), then HMRC may seek to challenge the individual's asserted non-UK domicile status.

• California is sunny, but the UK has some beautiful historic palaces. In other words, it is possible that an individual who has acquired US citizenship after moving to the US will change their mind about living there, and they may wish to return to the UK. That individual's US citizenship status will remain though, as will taxation by the US of all of their worldwide income and gains. The route of expatriation from the US may help to avoid the US tax net and reporting burden, but if the individual's net worth is over $2 million this may well come at a significant US tax cost. 

• The individual will of course need to take US immigration advice on the options available to them for obtaining US citizenship. Depending on the individual's circumstances this may not be straightforward or perhaps even possible.

Suffice to say then that the decision as to whether to become a US citizen is not one to be taken lightly – and this may be one reason why Prince Harry has said that it is not a 'high priority' decision for him at the moment. For UK individuals, we would always advise speaking to your US and UK advisers ahead of any planned move so as to avoid falling into any of the traps that exist.