These Key Tax Issues Affect UK Nationals Moving Across the Pond

It’s essential for UK nationals to consider the tax implications when moving to the US, given the complex and far-reaching nature of the tax system there.

First, it’s necessary to establish when UK residence will cease. This is determined by the statutory residence test, or SRT, which is split into three parts: automatic overseas tests, automatic residence tests, and sufficient ties test.

This is the order of priority and, once someone qualifies under one of the tests, there is no need to move on to the next. To qualify as a non-UK resident, an individual either needs to meet one of the automatic overseas tests, or not meet any of the automatic tests but qualify under the sufficient ties test.

The number of “UK days” in a tax year is a key consideration—this is a day where a person was in the UK at midnight. If a person spends 183 days or more in the UK in a tax year, they will always be treated as a UK resident. If they spend fewer than 16 days in the UK, they will always be treated as a non-UK resident. If the day count falls between 16 and 183 days, the statutory residence test will require closer inspection to determine residence status.

Departure Mid-Tax Year

Normally, an individual is treated as UK resident for a full UK tax year—April 6 to April 5.

However, in some circumstances a tax year can be split into a UK part—taxed as a UK resident—and an overseas part—taxed as a non-UK resident. This accelerates the point at which the person ceases to be taxable in the UK on certain receipts of income and capital gains.

When leaving the UK, split-year treatment will be available only if someone is starting full time work overseas—or their partner is—or they stop having a home in the UK.

Dual Residency

An individual can be treated as both resident in the UK and the US for a period (dual resident). This is often due to the mismatch in the tax year end for the UK (April 5) and the US (Dec. 31).

To prevent double taxation, it’s necessary to look to the tie-breaker clause in Article 4 of the UK–US double tax treaty to determine treaty residence, i.e., which country has primary taxing rights.

This is a step-by-step process and once treaty residence has been determined under one of the steps, there is no need to go any further. The following factors for an individual are considered: location of permanent home; personal and economic relations; habitual residence; nationality.

If an individual is treated as resident in the UK under the SRT but as US treaty resident, they are broadly taxed in the UK as a non-UK resident. This doesn’t apply in all circumstances, so they must check the specific article in the treaty for each source of income and gains.

Timing is Key

Tax savings could be made by timing income and capital gains either before or after UK residence has ceased. It is crucial to be certain of the date UK residence ceases for any planning of this nature.

It may be possible to delay certain transactions until after UK residence has ceased so that the event is outside the scope of UK tax, although, for income, the individual will need to have some control over the timing. Note that earnings from employment carried out while UK resident will usually be taxable in the UK, even if paid after the individual has left. They also could consider delaying the disposal of an asset standing at a gain until after their departure to shelter the gain from UK tax.

There will be US tax consequences to consider—any UK tax savings against US tax liabilities must be considered when deciding on the optimal timing of receipts.

UK capital gains tax is always applied to gains realized on the sale of UK residential property, regardless of residence status. However, non-UK residents have the option of rebasing the property so that only a gain arising after April 5, 2015 is taxable. If the individual is planning on selling their UK property, it’s worth running the figures to see if UK capital gains tax could be saved if a sale is made while non-UK resident. If there is a mortgage in place, be warned that the US taxes currency gains on the repayment of a non-US dollar mortgage.

A sale while non-UK resident is only likely to be beneficial where the property being sold hasn’t been used as a main home, such as a buy-to-let. This is because there is a UK capital gains tax relief (principal private residence relief) that exempts gains realized on the sale of a main home. If the UK property has always been an individual’s main home, there may not be any exposure to UK capital gains tax.

If an individual sells their UK property while resident in the US, any gain will be taxed in US dollar terms, with credit allowed for tax paid in the UK. The US tax exemption on the sale of a main home is less generous ($250,000 per person). Therefore, it will likely be more tax efficient to sell the main home before commencing tax residence in the US.

The US taxes “passive foreign investment companies” more punitively, which includes UK unit trusts. Where this type of investment is held, an individual may want to consider making disposals while UK resident (subject to an investment decision), particularly when the investment is held within an individual savings account, or ISA, and can be sold capital gains tax-free. Once US resident, the ISA will be subject to US tax as the US doesn’t recognize the same tax-free status.

If a person is non-UK resident for five years or less, “the temporary non-residence rules” could apply to them. If so, certain types of income and gains realized during a period of non-UK residence are taxed in the year the person returns to the UK, and they should always factor in their longer-term plan when assessing their tax.

If a person completes self-assessment tax returns, their departure will need to be reported on their return. In addition, split-year treatment and treaty relief will need to be claimed via the tax return.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alice Pearson is a partner in the private client team at Mercer & Hole accountants.