13 December 2019 - Article
Dear Mr. Johnson
We here at Withers are aware of your recent US tax woes. And while we sympathize with your plight (some of us are US taxpayers ourselves), we also understand that tax compliance is important for everyone, particularly in this new era of FATCA and CRS, and particularly for the Mayor of London. It is in that spirit that we wanted to offer you a refresher of the US tax issues most commonly faced by the US expat community in the UK.
You of course are already aware of the mismatch in the way in which the US and UK tax proceeds from the sale of private residences. The UK offers a complete exemption from tax while the US only gives the benefit of a $250,000 ($500,000 if you happen to file joint returns with your spouse) exclusion, which we know is not enough to cover the gains from the sale of a London property. But there are other discrepancies between the US and UK tax systems that might catch you out. For instance, you may sell a business in the UK and qualify for Entrepreneurs’ Relief, which will greatly reduce your UK Capital Gains Tax bill. However, the US does not have an equivalent relief and so you will pay the difference to the IRS anyway. Similarly, those oh-so-popular ISAs that your bank keeps pestering you to open with promises of tax-free savings will just lead to more complexity and a tax bill when it comes time to file your US tax return. And that’s just for a cash ISA – the situation becomes even more dire if you open a stocks and shares ISA, which is probably invested in PFICs and can land you with punitive US interest charges and onerous reporting.
Lifetime gifts create another problem since the UK inheritance laws allow for potentially exempt transfers if you outlive a gift by at least seven years. Not so in the US where annual gift allowances are capped at $14,000 per year to any one person (or $147,000 to a non-US spouse [more on non-US spouses later]) with any excess eating into your combined US gift and estate tax exemption of $5 million (currently $5.43 million).
As if your lifetime woes were not enough, you must also worry about what will happen to your estate on death. This is where the US tends to be slightly more generous in giving you an estate tax exemption of $5.43m (assuming you have not used any of it during your life), completely eclipsing the UK nil rate band amount of £325,000. If you are like many married men, you intend to leave your entire estate, which we reckon is worth more than $5.43 million, to your lovely non-American wife. In order to avoid a US estate tax charge at the time of your death, your not-so-standard will needs to include special Qualified Domestic Trust provisions for Mrs. Johnson. These onerous trust provisions may leave her wondering why she ever agreed to marry an American.
All this trouble may lead you to conclude, like many Americans living outside the US, that keeping that American passport is simply not worth it. And in fact, we have heard that you have recently come to that conclusion yourself (although you said the same in 2006). For those would-be expatriates like you, the US tax code helpfully includes an expatriation tax regime targeted at those with a net worth over $2 million (as well as those with high income tax liabilities). These lucky ‘covered expatriates’, as they are known, are treated as selling everything they own the day before expatriating and paying US tax on those phantom gains as well as not being able to make gifts to any US people for the rest of their lives (or at death) without attracting a high tax rate. You may not qualify as an ‘accidental American’ under the new Greenbook-proposals-far-from-being-law, but you’re a dual citizen at birth and still residing in the country of your other citizenship, you say? You may be scot-free but you’ll still have to certify tax compliance for the previous five years no matter what so it’s a good thing that you’ve settled that outstanding IRS tax bill.
Of course, if you have any questions, please do not hesitate to contact us. We are here to help.