28 September 2022
There are numerous reasons why you may consider a transatlantic move – work, love, family. Whatever the driving forces, there are undoubtedly many factors to consider, particularly as a business owner. Business owners must assess both business and personal impacts, especially if operating from both sides of the Atlantic.
There are three articles in our Transatlantic move series. This series of articles will consider the tax impacts of moving between the US & UK as a business owner. They will focus on various tax issues and implications for the individual owner and their business. Thereby, highlighting areas of potential adverse and double taxation for business owners looking to make a transatlantic move.
Each article aims to provide an overall awareness and potential impacts of the highlighted US tax areas. It is not a comprehensive analysis or specific tax advice. They are based on the US tax law in place at the date of the articles.
Each individual situation is unique. You may feel that you potentially fall into the areas discussed within these articles. As such, you are advised to take specialist advice which considers your particular facts and circumstances. At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic.
The first article in our series examines general areas of considerations for a British business owner moving to the US. This article focuses solely on individual tax matters. The remaining articles will focus on the tax matters of the business and the impacts on the business owner.
This article covers the potential US tax implications of a British National moving to the US, exploring the following areas:
When will you become a US resident for tax purposes?
A non-US citizen/non-permanent resident (green card holder) becomes a US tax resident by meeting the substantial presence test.
You will meet this test in one of two scenarios:
(Total days spent in the US in the current calendar year.) +
(1/3 of the days spent in the US in the prior calendar year.) +
(1/6 of the days spent in the US in the second prior calendar year.) = Greater than 183 days.
Quite often, you may have dual status in the year of arrival. A dual status resident is a non-resident for part of the calendar year and a US resident for the remainder. You can elect to be treated as a resident for the entire calendar year if it is deemed beneficial.
When you are eligible, you may consider applying for permanent residency in the US by obtaining a green card. Whilst many consider this a document for immigration purposes, there are tax obligations for green card holders. The tax obligation does not cease after the expiration of the green card for immigration purposes. Even upon leaving the US, your tax obligation continues until you officially surrender your green card for tax purposes. This is satisfied by filing Form I-407 with the appropriate US agency. You may also be subject to an exit tax at the time of surrender. The tax is dependent upon the length of time you held the green card, should one of the following apply:
You are deemed a US resident for tax purposes once you meet the substantial presence test. Your worldwide income, gains and assets will be subject to US tax and annual reporting on a calendar year basis.
The US tax system operates at two levels – Federal and State. Each state governs with their own set of tax laws and tax rates. A US resident is taxed at graduated rates of up to 37% for Federal income tax purposes. Qualifying dividends and capital gains on assets held for more than one year are taxed at rates up to 20%. A further surtax of 3.8% may be assessable on your net investment income should you exceed the applicable threshold. Unlike the UK, it is possible to file a joint tax filing with your spouse.
You may also be subject to state tax on your worldwide income and gains in the state where you reside. If working, conducting business, or receiving income from property in another state, you may also be taxed in that state. State income tax rates vary from 0% to 13.3%. In certain states, such as New York, an additional city or regional tax may also apply.
For any period of non-residence, you will only be subject to US tax on your US sourced income. This can include dividends received from a US company or income received from a US-situs property. Tax may be assessable at fixed or graduated rates of up to 37% for Federal tax purposes on certain income. It may also be subject to state tax at graduated rates of up to 13.3%.
Selling or renting out your home in the UK as a US resident will be reportable for US tax purposes. Income or gains will need to be converted to USD and therefore subject to currency fluctuations. Gain on the sale of your main residence may not receive full tax relief as generally afforded in the UK. The exemption allowance in the US as a single filer is $250K or $500K as a joint filer. To qualify, you must satisfy the ownership and residence period of 2 out of 5 years prior to the sale. Otherwise, the entire gain is likely to be taxable at 23.8%. Therefore, you may consider selling your home prior to moving to the US if you have substantial gains to recognize.
Alternatively, you may choose to rent out your home whilst you are living in the US. Certain expenses associated with the rental of your home, including depreciation and mortgage interest, can be deducted. Tax paid to HMRC on the rental income during the calendar year is eligible to offset the Federal tax due. As states generally disallow credits for taxes paid to a foreign country, you may be subject to state tax.
ISAs enjoy tax-free status in the UK but are not afforded the same treatment for US tax purposes. Any income or gains realised in the accounts are reportable as a US resident. Furthermore, ISAs holding non-US unit trusts or funds will be subject to a punitive taxing regime in the US. These non-US pooled investment vehicles are commonly referred to as Passive Foreign Investment Companies (PFICs) for US tax purposes. It is similar to, but more onerous than the Offshore Income Gain regime in the UK. Therefore, we advise reviewing your investment portfolio prior to your move to the US with a US tax specialist.
US resident beneficiaries of certain types of trusts established outside the US can be attributed income from trust investments. Even if no distributions are made, trust investments in PFICs, as mentioned above, can cause adverse tax implications. Therefore, beneficiaries of any non-US trusts should consult with a US tax trust specialist prior to moving to the US.
US residents receiving distributions from certain types of trusts established outside the US may encounter a punitive taxing regime. Distributions which are deemed to represent accumulated trust income or gains can have complex and adverse US tax implications. Therefore, beneficiaries of any non-US trusts should consult with a US tax trust specialist prior to moving to the US.
US resident trustees or executors of a UK trust or estate may potentially affect the trust or estate’s tax residence. This can have significant tax implications, dependent on the circumstances. Therefore, we recommend that you review any current or potential appointments prior to moving to the US.
The above does not cover every situation that you may encounter upon moving to the US from a tax perspective. However, it highlights the importance of reviewing your overall financial affairs with a US tax specialist prior to your move. This will ensure that any areas of potential risk and exposure to punitive taxing regimes are identified and minimized.
At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic.
Stay tuned for our next article in this owner managed business series. Article 2 will delve into the tax issues of conducting business in the US with an established UK business.
Written by Sara Kim
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