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US/UK TAX PLANNING with ALEX JONES, Partner at London Tax Firm, RAWLINSON-HUNTER
Thousands of Americans live and work in the UK and record numbers of them are applying for British citizenship. Planning for taxes for these folks has always been challenging, but in 2024, with the change in the non-DOM rules, it’s gotten even more difficult. To help us understand what’s happening here and to try to identify some of these issues is ALEX JONES. He’s a partner at Rawlinson Hunter, the British tax firm. Enjoy.
Outline
00:00 Understanding UK Tax Law Changes for US Citizens
07:00 Navigating Residency and Tax Implications
11:49 Planning for Inheritance Tax and Trusts
19:51 Pre-Immigration Tax Planning Strategies
30:03 Managing Double Taxation and Tax Credits
Transcript of US/UK Tax Planning
Frazer Rice (00:04)
Well, we have certainly had a lot of news with British tax law changing. And for those of us here in America who may or may not be part of getting to Europe in a major way and in the UK in a more permanent way, maybe give us a little overview of ⁓ A, what happened, but more specifically, how the UK thinks of US citizens, which can take different forms.
Alex Jones (00:31)
Let’s start with the back end of that question, how we regard Americans. So from a tax point of view, clearly what we’re really saying is how do we regard Americans who are exposed to UK taxes? And typically that means Americans who are here. Like most countries in the world, the UK will tax people on UK sources of income.
If somebody has a trade or business operating in the United Kingdom, we’re going to try and tax it whether they are here or not. But if the US individuals physically in the United Kingdom, then the UK is going to try and tax them in a number of different ways, which I’ll talk about in a second.
The pause is really just to emphasize the fact that they’re American. So a US citizen or US green card holder is going to be US worldwide taxable, whether they live in America or not. So America is going to look at everything everywhere in an American way in dollars in a calendar year. And at exactly the same moment in time, albeit in the UK we have a different tax year end. Our year end is a rather crazy 5th of April year end.
Exactly the same amount of time the UK is going to look at exactly that same person and say, hey, what are we going to tax? And so you’re starting with the premise that both countries are fighting over who gets the tax first. And the first thing you have to do is look at the two sets of domestic legislation to see how to start, where the problems are, and then you start looking beyond that.
In principle, the UK is going to tax people who are resident in the UK on worldwide income. So anything everywhere under UK rules, UK fiscal year, in sterling, et cetera, et cetera. And somebody who’s not resident in the UK on UK-CITUS connected income only. However, the UK has long had a regime which has been known as the domicile regime or the remittance basis regime, which has been pretty well known internationally where we said,
Look, if you don’t originate from here, if you’re a foreigner coming in for a period of time, could be indefinite, could be reasonably long, but not permanently, then we won’t necessarily tax all things which are non-UK. We would tax things that you brought into the UK, remitted, but we wouldn’t necessarily tax non-UK things that you didn’t otherwise bring or use or benefit from in the United Kingdom.
So the thing that changed in the budget that was announced at the end of October 2024 that largely came into force on the 6th of April 2025 is that we said, hey, this domicile regime, this remittance basis regime is kind of too beneficial to wealthy individuals. You have neighbors who are paying differential amounts of tax just because one person’s kind of foreign and the other person’s a blue blooded Brit who’s lived here forever.
That’s not right or fair morally. So what we’ll do is we’ll say, okay, we’re to do away with this term domicile. We’re not going to use it for income tax or the estate tax purposes particularly. And we’re going to create some new terms. And one of them we’ll create it, which is a four year regime. call the fig regime for an income gain regime where we basically say, again, we’re going to tax UK stuff, but we won’t tax foreign things for that four year window.
But once you’ve been in the UK for more than four years, we’re then going to tax your worldwide income. And then we have an extra piece we’ve added on, which says, if however you’ve been here for a long time, which is basically resident for 10 out of the last 20 years, we’re also going to say, now you get worldwide inheritance tax.
If you die while here, well, if you die with UK stuff, we’re going to tax you on your worldwide assets. as opposed to potentially just your UK only assets, which is how we typically would have treated you if you were a non-domiciled individual under the old regime.
So lots of change as to how the UK taxes people and therefore how we view the American is all about the interaction of the two. It’s all about, yeah, but I’ve got both. I’m an American, I’m paying US income tax, I’m paying US estate and gift taxes. How do I deal with the fact? How do I prevent?
Two sets of taxation globally, such that my income tax rate isn’t a top rate of 37. What I don’t want it to be is 37 plus the top rate in the UK of 45, plus maybe some tax I’m still paying in California or New York because I’ve got a residential property that I’m renting out in one of those two locations. how we treat Americans is we treat them under domestic rules.
We treat them in a way that says what are we or are we not going to tax in our way how we think about things. And by that I mean if we think it’s taxable, it’s taxable. If you guys think it’s municipal bond interest which is exempt, that doesn’t mean anything to UK eyes. We look at it go, well, it’s just interest income. From our perspective, Britain has our own domestic rules which try and stop double taxation. That means give credit for other people’s taxes.
Frazer Rice (05:37)
Sure.
Alex Jones (05:50)
And also, most importantly, between the UK and US, we have two tax treaties. We have one tax treaty that deals with UK and US income tax, and we have a completely separate tax treaty which deals with UK inheritance tax and US estate and gift taxes. So we call estate and gift tax inheritance tax in the UK, and it applies in life or death. So we’ve got two treaties which are both trying to minimize unacceptable double taxation. That’s kind of a… kooky term of art,
Minimise unacceptable double taxation. A little bit of double taxation may be acceptable in the eyes of government. Well, these two treaties, they’re designed to try and minimise. So when we deal with both UK and US taxes, and I’m a both UK and US tax guy, I’ve been doing US tax since the late 1980s, what we’re trying to do is try and get the two systems as closely aligned as we can. To the amount of credit we can get between the two countries so that overall the person’s paying the lowest amount of tax that they should pay as opposed to maybe double tax.
Frazer Rice (07:00) US/UK Tax Planning
So if you’re so let’s steer this back to the Americans quickly. The typical situation that you’re running into is, guess, an American who has moved over to the UK either for work or for something else. Maybe take us through a little bit of how you analyze that in terms of sort of understanding how long they’ve been there and then how that sort of surfaces through the regime you just described.
Alex Jones (07:25)
Yeah, so. there’s always a duality here so we have to talk about sort of both sides to understand the whole but from a UK perspective when we’re thinking about how long have people been here is what we’re really saying is hey are they UK tax resident have they done enough to make themselves UK tax resident because if they are they’ve got an expansion on the things we can tax maybe we can start taxing worldwide income and in the UK we have a test we call substantial residence test, statutory residence test, excuse me.
And that’s a slightly complicated set of rules, which is designed to say, hey, if you spent too much time in the UK, are you tax resident? If somebody spends, as an example, more than 183 days or 183 days or more a year in the UK, we’re going to treat you as a tax resident under pretty much all circumstances. But if you spend less than 16 days a year in the United Kingdom, we are always going to treat you as non-resident. And that’s quite a big gap.
In between those two, there’s a combination of day of time and factors which can trigger residency. So we’re looking at how much time. We’re also looking now under this four year FIG regime as to have you been here for more than four years? Have you been here for more than last four years? Because if you have been, we are going to tax worldwide everything. If you haven’t been, if you’re still in year two or three or four, then we aren’t going to tax the non-UK income or gain sources or at least most of them.
And indeed, we won’t even tax you if you bring and use those funds in the UK. We’d quite like you to bring that money into the UK because that’s good for the UK economy after all. From a US point of view, ⁓ ignoring US citizens or green card holders, you have a test which is called the Substantial Presence Test.
That’s basically what the test you would apply to a non-American who is spending time in America to determine whether they were US tax resident and therefore worldwide taxable in America.
So both countries are looking at a time component as to where you’re spending time. We also have to look at time in the context of employment income. Employment income is deemed to source, belong to the country where you do the work. Not the country who pays you or the company that pays you. Where do you physically do the work? That’s the source of the income.
That can give taxing rights to either country respectively based on where the work is performed. If I spent too much time working in America, I could become US taxable. If you spent too much time working in the UK, you could become UK taxable even though you don’t acquire UK residency. So there’s lots of reasons that you have to look at where people are, how much time they spend in the UK and ultimately for, as you say, our sort of typical average client.
Who’s an American coming to the UK, we’re also interested in this long stop now of, you been here for more than 10 years, or 10 after the last 20 years? Because if so, now you’ve got UK inheritance tax. And again, without giving too many games away, the UK and US have the same rate of estate tax and income tax, 40 % currently, but you guys have got a $13.99 million lifetime estate tax exemption today, and our lifetime.
Not lifetime, but our estate tax exemption, our inheritance tax exemption is £325,000. So top rate still 40%, kicks in a lot earlier. So it’s not just about income tax for the people who were here for quite a long time. And in the olden days, before 6th of April, 2025, that long time was more than 15 out of the last 20 years. Now it’s more than 10 out of the last 20.
So we’ve cut down the length of time that people can spend in the UK without really paying the price of full exposure to double tax. Not on income tax that kicks in earlier, but particularly in relation to estate tax. Now we’ve effectively knocked off a third of the time that somebody can spend in the UK before they have to worry about, what happens if I die? Hey, what happens if I give a bunch of money to the kids?
Frazer Rice (11:49) US/UK Tax Planning
So if you’re an American who may or may not be spending a lot of time in the future going to, ⁓ getting to the UK and becoming a resident for UK purposes and sort of tripping those time trip wires, ⁓ can you do planning ahead of time to let’s say cordon off assets so that they aren’t viewed by the UK as part of the overall inheritance tax regime, especially after this new April 6, 2025 deadline that we’ve leapt over.
Alex Jones (12:21)
I’m kind of now going to say no, but let me explain that. So under the old rule, the domicile remittance basis regime, we had the ability to set up vehicles like trusts. We can still do that, but the rule set, the application is different. So we could have set up a trust. And if we did so before we became domiciled in the UK, and if that trust contained
Frazer Rice (12:28)
Mm-hmm.
Alex Jones (12:54) – US/UK Tax Planning
Exclusively non-U.S. not sorry non-UK property so let’s say the stock portfolio in America then that would be excluded from the UK inheritance tax regime on a subsequent death it would be locked away forever. Now some U.S. trusts might be revocable for U.S. tax purposes particularly living trusts for example
The UK has never had a great relationship with trusts that are revocable. So sometimes you have to be a bit careful about what we mean by when we say the word trust or settlement is a more typically common word to use in the UK. But we used to be able to do that. We create these excluded property trusts, lock the assets outside of UK tax forever. Under the new regime, that’s not necessarily true.
We are now operating a rule set which is much more like the US grant or trust rule set. We would refer to it as a settler interested trust where the settler of the trust is going to be taxable on the trust’s income, whether it’s a UK trust or a foreign trust or whatever, to the extent that they have an interest in it and that might mean either they’re a beneficiary or their kids are a beneficiary and so on.
From an estate tax point of view, we have two ways we can trap folks. in relation to trusts. One is in relation to a trust which has what we call a gift with the reservation of benefit. I’m going to give the money to the trust, but hey, actually, I’m still a beneficiary, so I can get it all back. Maybe I’ve got a revocation power. Maybe I’m the principal beneficiary and I’m going to get things back, in which case the UK is now going to say, well, in that case, you never gave it away properly, and it’s going to be still part of your estate.
So contrast that to the intentionally defective US grant or trust, which is a grantor trust for income tax purposes, but you gave the asset away permanently because you irrevocably transferred to the trust.
For UK purposes, if you’ve got one of these trusts that can give you back assets, then that will be part of your estate and we will include it within your taxable estate on death, whether it’s got UK assets or foreign assets or whatever. But we also have a separate regime, which has been around for a long time.
This is what we call a decentennial charge, a 10 year charge in relation to trust assets. That charge didn’t apply to these excluded property trusts in the past, but now does, or rather it didn’t apply to the offshore trusts before, other than in relation to UK situs assets. So you could have had a foreign trust with UK assets and this charge would have applied.
Basically it imposes a 6 % charge every 10 years of the trust’s life. So you look at when it was created, you count 10 years and on that day you have a 6 % charge on the value of the assets in the trust at that point in time. And the reason for that existence, you’d also to be fair, if you made distributions in between those 10 year anniversaries, you would also have a proportionate charge and you would also have a proportionate charge if you had a trust which fell into the rules which you essentially exported from the UK, then you’d have a charge at that point.
And you can do that simply by leaving the UK. You could have a proportionate 6 % charge. So think of it as the 10 year charges. When we as individuals in the UK transfer money to a trust that’s taxable, so if I set up a trust tomorrow and transferred too much money in, I would have a lifetime 20 % charge.
So I would have an inheritance tax charge half of the main rate, half of our 40 % rate during my lifetime. And in addition to that, the trust would suffer this 6 % charge every 10 years. And what the UK is trying to do is over the course of a generation, replicate the 40 % tax charge. So the 6 % charge is basically just the back halves of the 40 % charge I would have got had I just left the asset in my estate.
Frazer Rice (16:42)
Mm-hmm.
Alex Jones (17:07)
Tell switch time as I died or gave otherwise gave them to another individual.
Frazer Rice (17:11) US/UK Tax Planning
So you’re staging and front loading the realization event so that you don’t have to wait generations for the revenue to show up.
Alex Jones (17:21)
But we’re meaning the UK government, correct? Yes. Not that I am obviously the UK government. I wish. Yeah. So yeah, so we trust, it’s just different. It’s different than America. Whenever you’re dealing with things that interact between the US, I’ve kind of said it already that, you everybody’s everything under their rules, their tax year, their currency. They don’t really care what the other country thinks something is. That’s true of… ⁓
Frazer Rice (17:23)
That’s right. Me neither!
Alex Jones (17:50)
Basically everything! I sometimes use the word, would be easier if you guys spoke Dutch. Because when you explain to tax rule, we’d go and get a translation into English. But we both speak English and it’s the old adage separated by the common language. In taxation, we’re talking ever so slightly different languages. And yet it’s so, tempting for us to assume that everything will be the same.
Frazer Rice (17:56)
Ha- That’s right.
Alex Jones (18:18)
But you guys intrinsically know that we drive on the wrong side of the road. You accept that. You know that we mispronounce words like tomato, or in my case, words like bath and grass, because I’m originally from the north of England. Somehow, mysteriously, when it comes to taxation, people say, oh, I just kind of assumed it was the same, and that the same type of exemptions might apply, and the same sort of stuff will be tax exempt, and so on and so forth.
But we’re speaking alien languages. One of my truisms or other truisms is I’m not American. For tax purposes, I’m an alien from a US perspective. I’m an alien. That’s how foreign I am. I’m proper alien. I could be from Mars as far as the US tax system is concerned. I’m really strange. And that’s how you have to think of each other’s taxation. A Brit goes to America, you’ve to think that’s an alien language.
The American comes to the UK in taxation, we’re talking in alien language with alien sets of rules. But what we’re trying to do is get them mapped together so that we can treat the same thing happening at the same time in broadly the same way. Then all we’ve got to argue about is which country has the higher of the two taxes, because probably that’s the one we’re going to end up paying.
Or at least that’s going to be our overall global worldwide cost that we’re aiming for. is don’t pay any more than the higher of the two taxes. If you can do that, you’re doing a good job.
Frazer Rice (19:51)
Right. So if you’re ⁓ doing what’s called pre-immigration planning for a US resident, and I know that ⁓ US citizens, a lot of people are investigating going to the UK and getting citizenship there or otherwise living there. From a pre-immigration planning perspective, maybe take us through your process as to sort of how to analyze things so that you can align your affairs and not get the double taxation or… you can benefit from the lower tax rate if at all possible.
Alex Jones (20:24) – US/UK Tax Planning
So slightly different game sets based on the direction you’re heading, UK to US is different than US to UK. But it can be quite simple things, like you would look at your stock portfolio or your investment portfolio absent this four year period where we in the UK don’t care about your foreign investments. let’s put that to a side. We’d look at your investment portfolio and go,
OK, well, you’ve got you know, some direct stocks, that’s fine. Direct stocks are easy to measure. We actually measure them in slightly different ways. The UK pools stocks together. We don’t look at individual stock sales and treat on a FIFO basis. Britain pools them together and take average cost basis. And we obviously do it in sterling, not in dollars. So there are differences even with things as simple as a direct stock.
But then you might say, well, I’ve got a whole bunch of ETFs and mutual funds because I want diversification and that’s kind of important. We would look at them and go, well, they’re not UK funds, they’re foreign ones. And why would a Brit, why would a UK tax resident invest in foreign funds? That’s a bit strange.
Should be said that exactly the same is true in America. You would look at a Brit coming to America with what we call unit trusts, unitized funds or open-ended investment companies. And you go, why the heck would an American invest in that foreign stuff? That’s not going to benefit the US fund management industry.
So we would look at US mutual funds and say, That’s not benefiting the UK firm management industry. We don’t like that. We don’t want to encourage that. So what we’ll do is we’ll tax them in a slightly penal way. So one of the things if somebody’s moving to the UK and was going to be here a long time, it’s at some point you want to get out of investments, which the UK is going to view negatively. You don’t really want to be in a tax exempt bond if you can get a better rate of yield from a taxable bond because the US Mutual Fund is going to be taxable in the UK, even if it’s not in America.
So you’re always dealing with the after-tax yield. So if you can get a higher coupon, albeit taxable, that’s better for you if you’re going to be taxable in both countries, albeit America isn’t taxing that. Same with US mutual funds. You don’t want to be in a US mutual fund that when you sell it, we’re going to tax it as income tax rates of 45 % up to, as opposed to treating it as a capital gain as you would in America.
You want to be in a fund that both countries view in broadly the same way and ideally both as a capital gain on exit because you have a 20 % long-term capital gains tax rate of course, albeit plus the 3.8 % net investment income tax. And we now have, as a result of the changes that happened last October, we now have a 24 % rate of capital gains tax. And you might curiously say, and that will lead you through a whole different cul-de-sac of tax,
Frazer Rice (23:01)
Mm-hmm.
Alex Jones (23:18)
You might go, that’s coincidental, isn’t it? That 20 plus 3.8 is pretty flipping close to 24. Okay, so am I paying 24 plus 3.8 if I live in the UK as an American, or am I paying 24 in the UK and I’m going to cover off the 20 % and maybe can I cover off that 3.8 net investment income tax as well? That’s a very current question in the world of UK and US taxation.
So yeah, so you want to look at things like that. You also do want to look at, you know, slightly more exotic investments than simply direct stocks and funds. You might look at insurance backed contracts and think that’s fine. it’s an insurance policy. It’s going to lock things away, I’ll only pay tax when they exit. While that is true, the insurance contracts can park investment growth while it’s in the contract.
Don’t for a second think that the UK looks at US insurance contracts and says, we’re gonna tax it like a UK insurance contract. We’re not. If you exit, we’re gonna tax it. And exit includes death. That’s for what we in the UK would term whole of life type policies, policies that have an investment component. On death, that’s a chargeable event. That’s not true of term insurance policies. It’s literally if you die in the next year, you’ll get a payout, but the contract otherwise is worth nothing.
Those term insurance policies, both countries will… we’ll look at and go, yeah, death benefits tax free. However, insurance contracts can lock away the investment growth until you exit. But if you exit, when you’re in the UK, we’re taxing the whole lot. If it’s not a UK qualified contract. So.
Frazer Rice (24:58) US/UK Tax Planning
As you mentioned about the municipal bond income, if you’re a US person, you’re on autopilot that has preferential tax treatment. Again, same thing like some of these other concepts. Look it over because the UK doesn’t care that the US states are getting a benefit. They’re going to tax it as regular income.
Alex Jones (25:22) – US/UK Tax Planning
When we sell an offshore fund, as we would call it, a US mutual fund typically, we will treat the gain that you generate on the disposal of the contract as though it is income. Technically, it is a gain, but we tax income tax rates. And so often with US individuals that haven’t planned or thought about this, we’ll see quite kooky results.
So for example, you have a typical US broker account portfolio with a mix of direct stocks and funds. You might quite naturally think, okay, what we’ll do is we’ll have sold some stuff early in the year. We’ve generated gains and we’ve come to the end of the calendar year. What we’ll do is we’ll cash out on some lost stocks. We’ll get rid of some stuff that generate losses. We want to try and balance the capital gain and the capital loss for US tax purposes. That makes utter sense from a US perspective.
You’ve had some gains, you want to kill the tax on those gains by realizing some losses that you’ve got in the portfolio.Tthen you can go buy something else with the net proceeds. But if you do that the wrong way, the stuff that you sell at gain could be those mutual funds. And then UK will look at the gain and go, okay, well, that’s actually taxable as income tax. And then the stuff you sell at the end of the year, the loss stuff, maybe that’s direct stocks. Well, that’s a capital loss.
In the UK capital losses are offset against capital gains. They’re not genuinely offsetable against income tax and they’re not offsetable against offshore income gains. You would have a perfect zero position in America. You’ve got no gain or loss because you’ve offset the two perfectly. For UK purposes you’ve got a whole bunch of income taxable fund gains. You’ve got a capital loss you can’t do anything with other than carry forward till next year.
So these differences can cause real timing issues and differences between the two countries. When you get differences, you get unexpected tax results. That’s normally going to be bad and something that you don’t want.
The reverse is also true. And I should say before even thinking about the reverse, am an American investing in UK unitized funds. That’s where you create a four letter word in America called the PFIC. Passive foreign investment company is just bad.
Don’t do it, please avoid. There are some non-UK funds and this includes many US mutual funds that have a special status. We call it reporting status. Reporting status fund is a typically a US mutual fund that gives HMRC, our tax authority, information on what’s going on underneath.
Frazer Rice (27:47)
Right. Yes.
Alex Jones (28:16)
It tells the UK how much income and gain that the fund is generating. The individual, if they’re UK residents, is taxable on their proportion of that underlying income or gain. As it happens, which is basically the same as a US mutual fund. Therefore, you’ve got an alignment between the two countries. Both countries try to tax the same growth in the same way at the same time.
Then you don’t get these differential rules where one country is treating it as a capital gain. You’re just treating it as a completely different type of income event. You get both countries looking at it and going you’ve got underlying income of 100, we’re going to tax that.
The UK says, yeah, yeah, we agree. We’ve got underlying income of 100, we’re going to tax it too. Now you’re just arguing which country wins. Who gets to tax it first? And you’re, look, you’ve also got some underlying capital gains and we’ll tax those at the same time too. Again, who gets to tax them first is your question. And that’s when things… get complicated.
He says after having made things sound complicated!
Where things are complicated is how you offset the two taxes. And it’s worth just pausing on that because it’s, again, that is itself an alien concept to most people. It’s not about who you pay the tax to first. The two countries sat down and agreed which country would win if there was double taxation. And we call that the income tax treaty.
Frazer Rice (29:16)
Ha!
Alex Jones (29:42)
So the treaty between the two countries dictates who has the primary taxing right. That’s who should get the money first, even if they don’t. That country is never going to give a credit on that item of income for tax pay to the other country. You could have a situation where you pay US tax on a gain in November. The UK tax year ends in April and therefore we’re going to tax it in the year to 5th April 2026, let’s say. And then you owe the UK tax, the UK 24 % tax. So you file your 2025 US return, reporting this gain in November 2025.Yyou pay your US tax on the 15th of April, and then you’re going to file the UK tax return to 5th April 2026. And we’re going to say 24 % tax please.
Now any sensible person is going to go, hold on a second, I’ve just paid 20 % to the IRS. Surely you’ll give me a credit. And the UK would say, did you sell the US real property? No. Oh, that’s a shame. Because if you did, we would have given you a credit. Did you sell the US trade or business property? No. Oh, that’s a shame too, because if you had, we would have given you a credit. What you saw, did you sell US stocks? Yes. Okay. Well in that case we win. So we’re not going to pay any attention to the 20 % in America.
What you need to do is get the UK tax back from America. you need to claim a credit on the US return. Of course you can’t do that in 2025. You’re not paying the UK tax until you file the UK tax return, which could be in 2026 or could actually be in early 2027. And so there’s a timing mismatch. The US foreign tax credit system as we call it works, is the US will say we’ll let you put the tax on the tax return in the year you pay it.
Frazer Rice (31:16) US/UK Tax Planning
Gosh.
Alex Jones (31:31)
Physically pay it. There’s another term we use called accrue, which is a little bit more complicated, but basically the foreign tax year ending within the US tax year. We’ll allow you to put it on the tax return.
Now that doesn’t mean you get to offset against US tax in that year. It just means we’ve identified it exists. Then they ask a second question.” Do you have any US tax on the same type of stuff in that year?” Against which you can offset it. Let’s say you don’t. Let’s say you didn’t have any more capital gains in that 2026 year or 2027 year. Then they would say, okay, well.
That doesn’t seem entirely right or fair. What we’ll do is if you’ve paid UK tax in calendar 2026 and you can’t use it against the same type of income, US tax on the same type of income or gain, we’ll allow you to carry it back to the previous year, one year only, to use against US tax on the same stuff in the previous tax year. If you can’t use it in that one year carry back, then you can carry it forward for another 10 years to see if you can use it anytime in the next 10 years.
But remember I said, we file our UK tax returns for the year to 5th April, 2026. We don’t have to file the UK return until 31st January, 2027. So we might not be paying the UK tax until 2027 for gain that happened in November, 2025. Yeah, yeah, that’s two years different. I said you could carry back one year only.
Frazer Rice (33:02)
So have a nice deep cash position. ⁓
Alex Jones (33:10) – US/ UK Tax Planning
So I can get UK taxes back into 2026 calendar year. I can never get them back to 2025. You can generate double taxation just, so it’s not just about a deep cashflow position as you said, that’s absolutely true. Actually you can create double taxation just through that passage of time. Hence you can see when I say this is when things get complicated is how you play that foreign tax credit game.
Frazer Rice (33:30)
Crazy.
Alex Jones (33:38)
It’s absolutely critical if you are fully embedded in both systems. But to some degree, that’s simpler than the situation we have today or had before 6th of April, 2025, when we had this non-domiciled remittance basis regime where the UK said, we won’t tax the offshore stuff unless or until you bring or use the money in the UK.
So you could have an American who’s deliberately in the past structured their affairs to keep non-UK stuff outside the VUK tax regime. And five, 10, whatever years later decides to buy the big house in the UK and bring the US funds into the UK to help fund that purchase. And all of a sudden, under the old rules, we were going to go, hey, that’s the stuff that we could have taxed had you brought it into the UK back in the day. Well, we’re going to try and tax it today because you brought it and used it in the UK.
And then you’ve got this multi-multi-year gap in taxes between when the US taxed it in the past and when the UK is taxing it in the future. So the good news about the new rules, if we’re looking for silver linings on tax changes, is that other than stuff that happened before 6th of April 2025, that’s less likely to happen because either we’re taxing an American who’s here today on worldwide income or they’re in this first four years of being in the UK regime, in which case we don’t care whether there’s any foreign income at all.
We’re not taxing it, whether they bring it in the UK or not. So although we’ve sort of done with the remittance basis regime and the non-domicile domicile rules as we have them, in reality, if anybody’s already here, if anybody’s been here for the last few years, they’re still stuck in this regime where they may have had income will gain outside of the United Kingdom. It’s never suffered UK tax, but it will if they ever bring it to the United Kingdom.
So we’re kind of stuck with the thinking of this remittance issue, maybe for the next generation. But in parallel, we’ve got this new go forward rule set, which is simpler, that basically says first four years, US income, we don’t care. We’re not going to pay any attention to it and we’re not going to tax it in the main. But once you hear from Auden,
Frazer Rice (35:47)
Oh my-
Alex Jones (36:02) – US/UK Tax Planning
Four years we’re going to tax worldwide income. Then it’s basically full double tax in both countries at the same time go figure it out. Nice and simple, nice and comparatively black and white compared to the present situation. Great for people who arrive in the UK now, perhaps nice, simple, planable. Not so much help for the individual who may have been here for 20 years or certainly less than 15 years.
They may have all sorts of offshore income and gains and funds and private equity interests and, you know, real estate funds back in America. And they’ve never been analyzed for UK purposes because nobody’s ever thought the money’s going to come to the UK. But maybe now the person’s been here for 15 years. So it’s kind of thinking, I like the UK, maybe I won’t go home. Maybe I’ll stay. And if I’m going to stay, then at some point I’m probably going to start thinking about bringing that offshore stuff into the UK. So,
Anybody in the space I operate in has got to think about those things and has got to think about the, if somebody is here for a long time, what about the old stuff? The nice thing about the way the UK operated the changes is that for a few years, for three years, we invented or created a temporary repatriation facility, as we call it. The temporary repatriation facility is basically, if you’ve got any of that bad stuff, this remittable things outside the UK that you were benefiting from under the old rules. If you want to bring it to the UK, what we’ll do is we’ll apply a flat rate of tax and for first two years, that’s a 12 % rate of tax.
We’ll just, you bring it in, you point at it and go, that’s what I’m bringing in that Apple, Abbot Labs, Google, Tesla stock sale from a couple of years ago, I’m bringing that into the UK and the UK will go, okay, that’s great. It’s your temporary repatriation tax is 12, but flat 12 % on whatever that income or gain was.
And we’re not going to pay any attention to foreign tax credits. We’ll just hit you with 12%. So you can do that. So for the next couple of years, we’ve got a really interesting regime, is when is it beneficial for me to pay that 12 % rate? After year three, it goes up to like 14%. When is it beneficial to pay that 12 % rate? Or when is it beneficial to just pay, just to remit the thing directly to the UK and pay UK tax? And just to give you an example of that quickly.
I mentioned earlier that if a question which was, you sell US real property? Did you get, did you have a gain on US real property? US always wins on US real property. You always get, you America gets its tax first. So if you had a US real property gain and you brought that into the UK and you go identify it and point to it and prove what it was, we would say, okay, well, we’re going to tax the gain too. Sure, we’ll convert it into sterling and we’ll do some, there’ll be some foreign currency differences with, you know, to determine the gain or loss in sterling.
Basically it’s the same gain and we’ll give you a credit for the US tax you’ve already paid. So in the UK, we’re going to tax real property gains now at 24%. We used to tax them for a short period at 28, but that fell back last year to 24. We’re going to tax at 24%, but you paid 20 % maybe to the US on that real property gain. So we’ll give you a credit for the 20%.
You also potentially or likely paid a 3.8 % net investment income tax because you probably had too much net investment income or gains. Therefore you paid 23.8. Well, our rate’s 24%. So if we give you credit for both of those, the incremental UK tax might only be 0.2. And that’s before I asked the question, did you pay any state taxes on the gain? Because we’d give a credit for those too. So potentially you could have wiped out all of the UK tax on that US real property gain.
Or, you could pay 12%. Which would you rather have zero or 12 %? Well, obviously that’s a rhetorical question. The answer is I’d like to pay zero please. But you may have to do some work in order to be able to get to that level of identification where you can basically go, am remitting and I can prove it that gain. And therefore that’s what I want to use. And on that I may pay zero. So this temporary repatriation facility is great on certain type of income.
Frazer Rice (40:05)
Right.
Alex Jones (40:28)
If you had US municipal bond interest, which I’ve said exempt in America taxable in the UK, the UK rate could be up to 45%. That’s our top rate in the UK. But if somebody said to you, well, if you bring that qualified foreign stuff that you haven’t paid tax on so far in the UK, you’re going to bring that to the UK and we’ll let you pay 12, if the answer is would you like to pay 45 or 12, that’s also a rhetorical question. No, the answer.
So we’ve got this really interesting regime for the next two, three years of if an American has been in the UK for an extended period of time and likely wants to stay for a good deal longer and wants funds in the UK to invest in businesses, buy property, do normal life stuff, then actually there’s an opportunity to get a lower tax rate than you might otherwise get either in the future or that you would have got had you paid tax on it in the UK at the same time.
But it’s going to be quite specific and it’s going to involve lots of looking and it’s going to involve lots of being able to evidence what things are to get the best tax result. But it can make these differences where you can have a swing from zero to 45 just based on what it is, whether you can identify it, and whether you’re using this new temporary repatriation rule to try and clean up the past. or whether you’re just basically saying, no, no, no, the direction of credits that the two countries have agreed on happens to work in my favor in this case, so I’m going to take advantage of it.
Frazer Rice (42:07) US/UK Tax Planning
Really cool stuff. Alex, we could go on for another two hours plus just ⁓ ducking and weaving all of these different tiger traps here. ⁓ How do we find you? How do people who might have this situation get in touch?
Alex Jones (42:11) US/UK Tax Planning
Easy, easy. So I can be found at the Rawlinson and Hunter website. Name is Alex Jones. We have a team here of 18 people that practice both UK and US taxation. All of us are qualified in both UK and US taxation. And therefore, we live and breathe these interactions. So I’m forgetting the email address. www.rawlinsonandhunter.com. is the email address. Rolnton-hunter.com is the email address and you can find me there.