Episode 92
PFICs, State Taxes and Costly Mistakes for Americans Moving to Britain
Moving to the UK can be an exciting opportunity, but for Americans abroad, it often comes with a harsh reality: the US tax system doesn’t stay behind. This episode delivers practical advice for expats navigating dual tax UK and US obligations.
Richard Taylor, Chartered Financial Planner and founder of Plan First Wealth, is joined by Sally Hawkins, Tax Partner at Gunnar Cook, to unpack some of the biggest tax mistakes Americans make when relocating to the UK and why so many expats find themselves caught out by rules they never knew existed. As an expat wealth advisor specializing in cross border financial planning, Richard breaks down what British expat and American abroad needs to know.
From citizenship-based taxation and PFIC reporting requirements to ISA pitfalls, foreign investment restrictions and complex filing obligations, Richard and Sally explain why moving overseas rarely simplifies your tax affairs and how innocent mistakes can quickly become expensive problems.
The conversation also explores the challenges faced by internationally mobile professionals, including equity compensation, founder shares, restricted stock units (RSUs) and why a lack of planning before a move can trigger unexpected tax bills long after arriving in the UK. For anyone weighing expat retirement planning, UK pension treatment, or US pensions across borders, the right financial advice makes all the difference.
Richard and Sally also discuss one of the most overlooked issues for Americans abroad: state tax exposure. They explain why states such as New York and California may continue to claim taxing rights even after you’ve left the country and what steps can help break those ties properly and the kind of US tax help that protects your international wealth.
Whether you’re planning a move to Britain, already living in the UK, or advising internationally mobile professionals, this episode offers practical insights into the tax landmines that can derail even the most carefully planned relocation.
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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
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Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.
ABOUT RICHARD:
Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.
As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).
Connect with Richard on LinkedIn
TRANSCRIPT:
00:00:00.000 — 00:00:11.440 · Sally Hawkins
In the examples, though, say you had seven different ETFs that you had invested in and they’re all fixed. The penalty for not filing that would be $70,000. And then you didn’t know about this for four years.
00:00:11.440 — 00:00:16.080 · Richard Taylor
You are not going from the US to the UK. You are taking the US with you to the UK.
00:00:16.120 — 00:00:27.960 · Sally Hawkins
Yeah. That is I think, my biggest fear. Honestly, if I was a, you know, a founder or someone with equity moving over here is not knowing about this before you move.
00:00:29.880 — 00:01:14.710 · Richard Taylor
Welcome to Expat Wealth, a planned first wealth podcast dedicated to helping ambitious expatriates in America and Americans overseas thrive. I’m your host, Richard Taylor, and Plan First Wealth is the business I founded and run today, and we work with successful expatriates, immigrants, and internationally minded Americans to make the most of their opportunity and avoid the expat landmines.
First, a quick disclaimer while Pun First Wealth LLC is an SEC registered investment advisor, the views and opinions expressed in this program are those of the speakers, and do not necessarily reflect the views and positions of planned first wealth. Information presented is for educational purposes only.
Now, if you aren’t already receiving our emails, please go to our website.
00:01:16.950 — 00:02:17.940 · Richard Taylor
And sign up there. It’s free and you’ll be notified every time you drop a new episode. And so much more. Okay, let’s get back to this week’s show. Welcome back to Expat Wealth. Today I am joined by Sally Hawkins, tax partner at Gunner Cook. Sally is an American living and working in London, specialising in working with US citizens, dual nationals and internationally mobile founders navigating the US citizenship based taxation system alongside the UK’s residence and domicile regime.
And boy, is there a lot to navigate there. This is essential listening for any American thinking of moving to the UK, which I apparently is drones right now is lots and lots. And of course any who have already made the move we are going to cover. Why moving to the UK doesn’t end US tax complexity, investment and portfolio structuring issues for US connected clients.
Equity compensation, RSU planning for internationally minded professionals and trailing state tax exposure. After leaving the US, we’ll see that through that. Hi Sally, welcome to Expat Wealth.
00:02:17.980 — 00:02:20.060 · Sally Hawkins
Well, thank you so much for having me know.
00:02:20.060 — 00:02:27.540 · Richard Taylor
You’re very welcome. You’re very welcome. Um, well, look, that was my little intro. But why don’t you tell the folks, uh, tell the folks. Introduce yourself, if you will, please.
00:02:27.580 — 00:03:57.480 · Sally Hawkins
Yeah, definitely. Well, again, as you said. So I’m an expat now. Of course. Something that was not on our radar. Um, you know, our five year plan a few years ago, but the opportunity came for us to move here, um, from North Carolina, from Charlotte, over to London. So, you know, it’s certainly been a very good change, but I think why I got into this line of work is because I was, you know, faced with a lot of these same tax issues.
Right. And so, um, you know, of course, when we moved initially, my biggest concerns were what am I going to do with my dogs? How am I going to get them over here? How is my furniture going to come over here? And you know, tax was always something. Obviously I’m a US CPA and I worked a lot in international tax.
But even I made the mistake, I would say, of thinking, well, it’ll just work itself out or there’s going to be some kind of election that I can make later and, you know, it’ll all be okay. And so I think, you know, went through my first tax season here and went through a lot of, um, the US, UK tax issues. I really found that there’s not a lot of folks, right, that are willing or interested in helping, um, people like myself work across or, you know, pay taxes or comply across both set of rules.
And so a lot of times when you do get the, um, tax advice, you’re only looking at one side of the pond. And I think, you know, really where I had to get into this area was because I needed someone. And, you know, I had to be that myself, who would look at both sides and make sure that I’m not, you know, digging myself a big old hole, right?
00:03:57.520 — 00:04:23.160 · Richard Taylor
It’s not able like it’s the. I mean, there are plenty of people who I think would advise and badly advise or certainly that’s what we see in our practice all the time. But yes, very, very few people have the the knowledge and experience to advise on this because because as we’ll get to, I think it’s extremely telling that you are a CPA in America and even working in, in international matters and even you were bamboozle or not bamboozled, you say, taken by surprise.
00:04:23.200 — 00:04:26.280 · Sally Hawkins
You know, like cotton, totally off guard. Yeah.
00:04:26.880 — 00:04:46.840 · Richard Taylor
Yeah. So you’re you’re in the profession and you were surprised. So there’s no hope for regular people. And because and it’s you’ve got to now you’ve got to now understand not just one system like you did before. Not a new not just another new system. But you’ve got to understand the interaction between the two.
That’s like three levels of learning there. And I think that’s massively underappreciated.
00:04:47.080 — 00:04:48.000 · Sally Hawkins
Oh it is.
00:04:48.000 — 00:05:02.230 · Richard Taylor
You weren’t had no problems to come to to the UK. No plans to be an expert. How would that be without getting into the dark side of things for a second? How has that journey been? How are you enjoying being an expat? Are you enjoying living in another country? Are you? How are you? Tell me a bit about that.
00:05:02.270 — 00:06:20.420 · Sally Hawkins
Yeah. I mean, being an expat has been good. You know, again, there’s always going to be, um, certain downfalls, right? Or certain things that you have to deal with, whether that be cost of living taxes, whether. But I think it’s one of those things where if you have the opportunity and especially I mean, luckily through my husband’s job, you know, we were able to get a corporate transfer, which you have a lot of support from the outside.
Um, but it’s absolutely worth it. I mean, I spend so much more time now outside, you would think, oh, North Carolina, you must, you know, be out there hiking or, you know, it should be an outdoorsy kind of place. But like London, for example, is so much better set up for biking and for hiking and, um, there’s so many parks and whatnot, so, you know, that kind of stuff.
And I think the way that it changed my life in terms of just really enjoying nature and the simple things in life, which again, I didn’t expect, I thought London would move and it would be so fancy and like a Real Housewives episode that, you know, never ended. But it’s really, truly been the exact opposite.
I think I’ve actually found BB America potentially even to be more materialistic or a little bit more, um, flashy. But here everyone just seems so laid back, and it’s a really nice kind of take on life, honestly. And it kind of, it just, it’s made me slow down, I would say a ton. And, um, so we’re really happy.
I mean, I wouldn’t trade it for the world and I would hope to be here for a while.
00:06:20.540 — 00:06:29.980 · Richard Taylor
I want to talk about really important things, what you just made. And that is ten years in. I am still I still can’t comprehend the lack of beer gardens.
00:06:30.020 — 00:06:30.780 · Sally Hawkins
Yeah.
00:06:30.820 — 00:06:44.740 · Richard Taylor
In the one thing we can’t guarantee in the UK is good weather and over summer, the one thing I can pretty much guarantee where I live up in the northeast is good weather and yet they don’t have beer gardens. I just what a wasted opportunity. I miss it.
00:06:44.780 — 00:07:12.450 · Sally Hawkins
It is bizarre. And they are breweries, but it’s not the same, right? They’re not the same. There’s just no, no, you can’t compare brewery to an English pub, right? It’s just you really, I don’t know. I mean, yeah, I mean, maybe even the beer is lighter here, but, um, that is actually one thing where I hated breweries.
Honestly, in America, I had no interested in going, um, now I, you know, take me anywhere. I’d rather go to an English pub than, you know, a fancy five star bar.
00:07:12.770 — 00:07:19.650 · Richard Taylor
Pubs are legit special, aren’t they? A good pub is a is is a wonderful thing. Yeah. Good. I’m glad you appreciate that because I miss it.
00:07:19.770 — 00:07:25.490 · Sally Hawkins
Yeah I know, I wish there was a good pub for you to go to. I think those are definitely few and far between.
00:07:26.530 — 00:07:28.330 · Sally Hawkins
It’s going to bring you back. So one day.
00:07:28.850 — 00:07:42.490 · Richard Taylor
Yeah. Well, I’m looking forward to it. Um, let’s talk about let’s talk about accents. So you’ve you’ve navigated this yourself and that’s led to you I guess. Is that what you can’t this is like a career pivot. You know, from now you’re working in the international space.
00:07:42.490 — 00:09:23.950 · Sally Hawkins
Yeah, definitely. I mean, because, you know, before I worked on the corporate side. So I did do a fair amount of international tax, but it was for corporations for the majority of my, you know, career here. It’s just completely domestic. Right? Or not domestic, but I suppose the individual side. So, um, people like myself who are dual citizens going or not even citizens, but, um, tax residents, I would say, or citizens of America.
But going, you know, coming over here to be a tax resident. Um, that’s where I deal with now. So it’s actually much more narrow, which is also kind of nice too, because there’s, you know, 5 or 6 key concepts that you get really deep into and you realise that those 5 or 6 key concepts, you know, probably impact 80% of the expats like me.
But yeah, so it was somewhat of a career pivot. But again, it’s nice that when you’re actually doing something, it’s applicable to you too, right? So you put a lot of work into learning the little nuances from a very, very meticulous manner because you know, how much how important that is to you. And of course, that would be as important to your clients versus, you know, on the corporate side, there’s a lot more margin for error.
Right. There’s a lot more rounding. There’s a lot more assumptions that you make that just kind of go into a corporate PNL and it, you know, wouldn’t necessarily have the impact. So I think on the individual side, it’s much more meaningful and there’s a lot less room for error. Right. But I appreciate it now because, again, you know, these are issues that I have to.
So all my clients, I put myself in their shoes and think, gosh, you know, how detail oriented what I want someone to be. If this was my money and obviously now this is me dealing with their money. So it’s very, very meaningful.
00:09:23.990 — 00:09:38.510 · Richard Taylor
Is it more people who are thinking of coming to the UK and you’re doing pre-arrival planning, which is obviously the dream, or is it people who are already here and it’s like, okay, I’ve, I realised I need some help and there’s a few landmines buried in those situations generally.
00:09:38.870 — 00:10:43.260 · Sally Hawkins
Yeah. You know, I’ve had some clients that were fortunate enough, um, to be advised to come for plea pre-planning, and I think those have been, you know, whatever they spent on my services is paid off significantly, right, in terms of avoiding some of those big landmines. But the majority of folks, it is people like me, right, who came over.
They kind of just thought it would work itself out or didn’t fully appreciate the nuances. And now it is playing catch up and trying to figure out, you know, hey, how do I get current? But then be do I still have any elections or planning mechanisms that are left, you know, to reduce the tax burden or to make sure that your tax credits offset?
So I do wish again and like myself to that for all the money that was spent on our move and especially, you know, the corporate assistance that we got, if there is just a 1 or 2 hour, even tax planning session to help, you know, think through some of these issues and make sure that you were avoiding the landmines when you came over, or again, preferably before you moved.
That would have been a huge benefit.
00:10:43.300 — 00:11:23.850 · Richard Taylor
You know, Sally, I’m not. That makes total sense. I agree with you wholeheartedly. I can think of a situation where we had a client who came the other way, right? It was a British transfer big bank, and the bank hooked them up with one of the big four. And when we took on this client, the big four was still doing the same team.
And the big four was was still doing the tax return. And there was loads of stuff wrong with it. I mean, including prefix, which we’ll talk about in a second. And, you know, I was struck by, you know, yes, the name brand was great, but you’re not getting the crack team. And I’m not sure how many of these the people working on their returns were familiar with the cross border stuff.
I was I was amazed, to be honest with you, which is why I’m not naming the firm.
00:11:23.890 — 00:12:15.120 · Sally Hawkins
I know well what happened because again, we have even a, um, offshoot of a big name firm that does our taxes, you know, in the US, in the UK. But the issue is that they have their US team doing the US side only, and then their UK team does the UK side only. And these are, you know, almost a lot of the big fours of the top firms.
Um, every country almost is its own franchise, right? Like a subway franchise or, you know, Starbucks. They’re individually owned and operated. So like, there’s liability issues or there’s sometimes cultural issues or there’s just someone that doesn’t, you know, nobody that loss of knowledge. I would say for that little part that thinks about both ends.
But it is really, you know, two separate teams that are focusing on the domestic issues only. And they don’t, you know, there’s not the coordination and it’s frustrating.
00:12:15.360 — 00:12:31.920 · Richard Taylor
You can’t do that in the, in the, in the US connected cross-border space, you cannot operate in a silo for for example, we’re about to talk about. Let’s start with the first one of these points, this citizenship based taxation that just follows you everywhere. So you can’t operate the silo.
00:12:31.960 — 00:15:06.010 · Sally Hawkins
Well yeah. And you said it too, right. Um, because I think a lot of times Americans, you know, we’re used to being mobile around America, right? So we’ll move from New York to Florida and, you know, rejoice that we don’t have to pay those taxes anymore. And so we kind of think a similar concept would happen.
I think when we move abroad that oh, we just, you know, get on that plane. Okay, great. I don’t have to care about US tax anymore, right? It’s just done so that, you know, that’s the first I would say big, um, learning point or one of the first big issues that we figure out when we move abroad is that you are still subject to US taxes on your worldwide income.
And that doesn’t mean your US only income, right? Your worldwide income. So you get a job in the UK, you get a job in, you know, the Middle East. I don’t care where it is, you are still subject to taxes on that income. Um, as well as again, if you’re selling your stocks, you’re selling bonds, you’re making again any other type of income, whether it be through employment or through, you know, selling stuff that is taxable in the US, even if you are still paying taxes abroad.
So, you know, there are foreign tax credits. And thank God between the US and the UK. We do have a lot of foreign tax credits available, but one thing that they might not appreciate is it’s not just like, oh, you spend or, you know, you have this transaction, you pay these say US taxes and then immediately just like returning something in store, right.
You apply for a refund because you’re also going to be taxed on that in the UK. So, you know, even if the foreign tax credits do offset, you still have to wait until you filed your US tax returns and, you know, determined your taxes, your UK tax returns and determined what your taxes are. And then from there you’ll be, you know, essentially settling up your tax bill, say in one of the countries to get a refund for double taxes paid.
But, you know, as you kind of recall, you file your taxes after year end. It’s usually, you know, four months if you’re on extension, you know, say ten months till after your, your year in. So what that really means for people is even if you do have a good clean foreign tax credit offset, you’re usually still carrying the burden of those dual taxes and floating that for about 12 months, sometimes up to two years, right.
So from a cash flow perspective, I mean, not only tax but even a cash flow perspective too, you have to make sure that you have enough money to pay your taxes until you can apply that foreign tax credit and get a refund.
00:15:06.090 — 00:15:10.610 · Richard Taylor
Do you think this is still catching Americans out? Do you think there are still Americans moving
00:15:11.690 — 00:15:18.050 · Richard Taylor
anywhere but outside the US, unaware of citizenship based taxation, and that this follows them everywhere?
00:15:18.290 — 00:16:35.480 · Sally Hawkins
Absolutely, yeah. I mean, again, you know, I’m a CPA. I worked in international tax. I mean, not completely international tax. Um, we had tax advisors again who will remain unnamed, but nobody ever explained, you know, this and especially with my husband too. I mean, I kind of have this stuff in my head, right?
But, you know, the work people were communicating with him like they never even sat him down and said, and he’s in finance, he’s not in tax. Um, you know, here’s what’s going to happen, right? And here’s like, they they kind of should be recognising that you would have other things besides employment income too.
I mean, a lot of people have their own stocks investments. You know, they might be selling their house. So even just, you know, no one to sit us down, or at least my husband down, you know, they they don’t have the benefit of knowing that I’m a CPA. So, you know, I will start thinking about these kinds of things.
But there’s a lot of a lot of issues and again, a lack of support and a lack of knowledge. It’s and none of it’s intuitive. I mean, I don’t blame any person who doesn’t know about this. It is not intuitive. Um, most people barely can bother deal with their US taxes, right? It’s just I wouldn’t expect someone to know this, but the lack of conversation and potentially support even an employee, you know, employer moves is kind of astounding, to be honest.
I wish there was a better network.
00:16:35.680 — 00:17:32.910 · Richard Taylor
So citizenship based taxation, the American tax system net is going to follow you as an American around wherever you go. So you go, actually, you move to the UK. For the most part, UK taxes are going to be higher. Yeah. And you’re going to get if you’re making earned income, you’ll get a, um a there’s a foreign earned income exclusion right of $100,000 or something.
So yeah, fingers crossed your UK tax burden should, for the most part, be higher than your US tax burden. And most people, I think, will then think, oh great. Well I’ve got no problem. Well US tax systems are gonna follow you everywhere. The nitty gritty is going to come down to the relationship between the US and the country, and the tax treaty between the two countries.
And if someone like the UK and most of Europe, where taxes are generally higher, maybe that mitigates most or all of your taxes, but not necessarily all. There are areas that aren’t covered. Right. So there is double taxation. It is going to be a thing for you.
00:17:32.990 — 00:18:35.140 · Sally Hawkins
It is. Yeah. And there’s some of the big ones you know, we’ll cover today, but even ones that we won’t cover safer capital gains, for example a capital gains. Fortunately, if you’re not talking about state. So we’ll talk about state you know, later. But but say you’re just paying you know, federal capital gains.
And those tend to be about in the 20% range between the US UK. So not bad. And so again that would mean in theory you would have an offsetting foreign tax credit. But in the US too, if you have I think over 250 something thousand in capital gains you also pay this nit NIIT. I forget what it stands for. Um, but it’s an additional tax and it’s another 4.5% say.
And like, for example, that’s not covered by the foreign tax treaties that that wasn’t, you know, included. So you’ll still be out in a case like that to another 4%, which is fine. I mean, again, it’s, you know, your tax on worldwide income, but you still want to know that to as a taxpayer that you know, you’ll be liable, there’s certain taxes that aren’t going to be covered and that will fall outside of the scope.
00:18:35.180 — 00:19:20.210 · Richard Taylor
Totally. Unless let’s also say best case scenario, right. There’s no tax to pay. Other than in the UK. Right. You’re completely covered. There’s no double tax. There’s no extra. There’s still a whole load of reporting requirements. You’re still required to submit a US tax return. You’re still required to submit, uh, forms.
Um, that uh, declaring your non US assets assuming there are of a certain levels and there’s which we’ll get into in a second, there’s a boatload of restrictions. Not to mention you’ll find it hard to open accounts in many places just because you are an American. And to do those reports, you know, we urge every expat to work with a cross-border professional to submit a tax return to do a UK, US tax returns.
For a Brit. It’s not it’s not an it’s not an insignificant sum of money, you know, to do it properly.
00:19:20.290 — 00:20:06.680 · Sally Hawkins
Oh it’s not. No. I mean there’s even yeah. As you said you know obviously you have your US tax or like your, you know, regular personal tax return. So your 1040 and you know those again maybe in theory that’s an H&R block thing. If you were a DIY or um but then what you have to remember too is yeah, you have F Barr reporting, which are your foreign account report, you know, say how much money you have in a foreign bank account.
Um, if you happen to invest and, you know, this is one area that I got caught and I know we’ll talk about fix more, but say, you know, you open your own LLC equivalent here, right? So here it’s called a limited company. And you want to make jewellery I don’t know. You know, your spouse is at work all day. You want to have a side hustle.
You made 200 bucks that year. Um, well, it turns out even for that.
00:20:06.760 — 00:20:11.000 · Richard Taylor
Well, sorry. You can take the other side, but you can’t. You can’t take them out.
00:20:12.320 — 00:20:12.720 · Richard Taylor
Yeah.
00:20:14.160 — 00:21:50.980 · Sally Hawkins
Yeah, exactly. I’m still new here. Um, you know, even that you have to file this report or pick form that you attach to your tax return. I mean, that form, even for something that made a couple hundred bucks, someone would still charge you potentially, say 4 or $5000 to do that form. And so you’re like, oh gosh.
Well, had I known that, I would have never even bothered to. Why would I need a limited company. But yeah, it’s really onerous. And, um, you know, it’s just stuff that, again, we never had to think about. You just think that you have your personal tax return to 1040 and maybe you have a schedule C, you might know that if you, you know, have your own LLC or you might know what a schedule is because you have your real estate.
But again, that’s all in your personal tax return. But now you have these additional forms that are a pain in the butt to fill out. They’re expensive, but if you miss them, that’s the real doozy, because for a lot of them, the IRS will charge you a fine of $10,000 per year per form that you miss. And you know, in that little example of the side hustle, you made 200, say, bucks.
You forgot to file the form. You didn’t know you had to file it. Well, now all of a sudden, four years later, you figure out, oh, I had to file it. Now here’s 4000 plus. Now the IRS has charged me 10,000 of a penalty per year. I mean, that’s how these things really add up fast. And that’s been an unfortunate situation that a lot of us have found us in.
You know ourselves in is not we’re not not trying to comply. We just didn’t know. And there wasn’t, you know, an advisor in the US that was willing to tell you that or advisor in the UK that knew that that was going to cause an issue with your US taxes.
00:21:51.140 — 00:22:12.780 · Richard Taylor
Brutal, brutal. And a lot of times this is hitting people who just they can’t afford this sort of, you know, it’s it’s the person making $200 as a side hustle. They don’t have the they don’t have the thousands required to just correct it with a professional, let alone to bat off the IRS and try and get them to be reasonable.
Um, although we shouldn’t say it’s not. It’s not the IRS who.
00:22:12.780 — 00:22:13.300 · Sally Hawkins
Forces.
00:22:13.340 — 00:23:04.930 · Richard Taylor
They they enforce it, but they, you know, the these penalties were enacted by Congress, right? That’s part of the legislation. So yeah, folks go get your get your get your representatives to see reason. One thing you said to me, which I absolutely love and I’m going to start using is the way to look at this is two systems interacting, not replacing each other.
I love that framing that people think they’re going from the US to the UK or in my world, from the UK to the US. Um, and it’s much actually it’s much more so when you’re going from the US somewhere else. As a citizen, you are not going from the US to the UK. You are taking the US with you to the UK. Yeah. And then to my point before about having to understand three systems the US, the UK and the interaction.
That’s that it’s the relationship, it’s the interaction between the two that you really that’s where, that’s where a lot of the mistakes happen.
00:23:04.970 — 00:23:36.560 · Sally Hawkins
Oh definitely. And again it’s not intentional right. It’s people are not trying to defraud the government. They most people want to comply. I mean I you know I’m used to them with IRS. So um, and you know, I used to complying but also I wouldn’t necessarily be as scared. But most folks, I mean, are, you know, God fearing, IRS fearing, you know, individuals that just, you know, they don’t want to come back to the US in five years and find out that they’ve incurred, you know, hundreds of thousands of penalties and fees just for the for the silliest things.
Right?
00:23:36.600 — 00:23:49.360 · Richard Taylor
So yes, what I call innocent non-compliance. You know, no one’s trying to. Yeah. No one’s trying to pull the wool over their eyes. It’s just so convoluted and complex. And then when you do find yourself in that, it’s terrifying because the penalties are so draconian.
00:23:49.360 — 00:23:50.400 · Sally Hawkins
Oh, yeah.
00:23:50.480 — 00:23:50.840 · Richard Taylor
Yeah.
00:23:50.880 — 00:24:04.040 · Sally Hawkins
And those will follow you forever. You know, it’s like, I mean, there’s I mean, you can negotiate with IRS and you know, but then again, what is that. That’s more accountant fees. That’s attorney fees. So none of it’s going to be cheap to unwind. But it’ll catch up with you eventually.
00:24:04.080 — 00:24:18.760 · Richard Taylor
And I can imagine someone listen to this. We’re putting the fear of God into them. But the lesson is one if you can take advice before you leave, don’t fall prey to any of this stuff in advance if you can do. But if you’re in, if you’re outside of the US right now, if you’re in the UK listening to this thinking, Crikey, what am I going to do?
00:24:19.960 — 00:24:52.670 · Richard Taylor
Bite the bullet? Don’t. This does not get better. It does not go away. It festers, it metastasise it gets worse. Bite the bullet, face it down. Uh, there are there are solutions. There are routes into compliance. There are you do have options and it’s worth. Getting into compliance and then staying in compliance and moving on with your life rather than which we sometimes I, we don’t work with people like this, but we sometimes see it is people will just bury their head in the sand out of fear, inertia, denial, whatever you want to call it.
Hope. And I thought the worst possible way forward in my opinion.
00:24:52.710 — 00:25:14.190 · Sally Hawkins
Yeah, but it’s true. And again, you know, these are all human elements, right? Very. It seems like an inhumane taxing system. But yeah, it’s like we’re all doing the best that we can, you know? But at a certain point, you have to face the music. What is it? Death and taxes is, they always say, and I think those are two things that will never go away.
So, you know, you got you got to be prudent.
00:25:14.710 — 00:25:42.260 · Richard Taylor
My I know someone at my kid’s school, a Brit who’s just he’s just on his first US tax return and with the help of one of the big four because he hits another intercompany transfer. He is like, blown away. Like what is he like what is going on? I mean, I got used to it after 1011 years. But he is like, what have I just done?
Like, what have I just signed? I have no idea what’s going on in this thing. I was like, my dude, it’s been here 11 years and I. And I’m in the tax. Jason. I barely understand it. It’s just so complicated. It is crazy.
00:25:42.300 — 00:26:01.180 · Sally Hawkins
Even for me to. Yeah. Because, like, the way that things are written, right. It doesn’t like, just write it in plain English, you know, it’s like instead of saying, how much income did you make from your job? It’s like how much blah, blah, blah, blah, blah did you make from these weird things? Except for those five things.
And, I mean, I don’t know how an average person honestly would figure this out.
00:26:01.220 — 00:26:55.410 · Richard Taylor
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00:26:58.770 — 00:27:10.570 · Richard Taylor
Institute. You will be glad you did and I hope to see you there soon. Um, right. Let’s talk about, uh, investments and how this can trick people up investments. I also I’m going to log into that what you mentioned before, limiting because.
00:27:11.050 — 00:27:12.370 · Sally Hawkins
This is your link to.
00:27:12.410 — 00:27:27.810 · Richard Taylor
Structures, you know, like what what American coming to the UK. Um, how can they get themselves into a pickle because of these citizenship based taxation? But how can they get themselves into a pickle with investments and structures and formations like that kind of thing?
00:27:27.810 — 00:28:10.280 · Sally Hawkins
Yeah, well, there’s a few different buckets. Right. So one of them that I’m seeing coming up a lot and it’s sort of actually in some ways for Brits, for example, who are moving back to and so, you know, a little bit different. But of course, like for myself, if I invested in a Isa, again, I always want to call it an Isa because I’m used to IRA for but an Isa.
So like the ISAs for example. Right. So um, and these are, you know, when I help Brits who are in the US with their taxes and help them kind of deal with the US tax system, this is one that does come up quite a bit because, you know, in the UK, um, you contribute to your eyesight. It’s an individual savings account.
Again, this is not necessarily a retirement account in the sense that we would think in the US.
00:28:10.680 — 00:28:13.200 · Richard Taylor
Well, there therein lies the problem, right.
00:28:13.600 — 00:28:14.640 · Sally Hawkins
Yeah, exactly.
00:28:14.680 — 00:28:18.000 · Richard Taylor
Not a retirement account. So it doesn’t fall under the treaty as a retirement account.
00:28:18.120 — 00:30:11.860 · Sally Hawkins
Exactly. Yeah. And I’m sure you see this all the time because, you know, Brits who are in the US. Yeah. And so, you know, it’s a surprise, right, that in the UK you could, you know, the earnings that you make on your Isa are tax free, the withdrawals are tax free. Then you come to America and you would think, oh gosh, you know, wouldn’t the US tax system just consider it in the same way.
And they don’t. So all of a sudden now you know they’re selling stocks. They’re day trading for example they’re getting dividends interest. And oh what do you know that is taxable in the US. Right. Where they would have been completely tax free in the UK. So that is one issue I see a lot. And I think that’s an awareness issue.
And of course there’s planning items that I’m sure you help your clients with before they come over. But the other is that the IRS kind of looks at this almost as like a Schwab account or a, you know, fidelity account where they care about what you’re holding to. So what I see also come up and kind of back to these punitive filing requirements is so say, you know, you come to the US and you’re still holding in your Isa UK stocks and you know ETFs or whatnot, but UK based investments.
And so these are considered foreign investments right in the US. And so now you’re back into that whole perfect territory where the IRS says, oh, you’re, you know, a US tax resident and you are holding foreign investments. Therefore you have a pick. And that’s when you have those onerous and expensive requirements for filing and to report your foreign company investments.
But then you also have a more punitive tax regime on those two. And that’s another area where I see again, Brits that come to the US and now their US tax residents get in a world of hurt. And I’m sure you probably have a lot more, you know, stories or horror stories probably on this than I do, but that’s a really big one as well.
00:30:12.220 — 00:31:43.879 · Richard Taylor
We see this all the time because no one comes to the US forever. I mean, obviously they do, but for the most part it’s an intercompany transfer. Someone thinks, oh, you know what, I’ll go or I’ll try it for two years. I’ll see how I get on. Uh, two years turns into 20 years. But when you go in for two years in your mid 30s or your early 40s, whatever it is, and you’ve spent ten, 15, 20 years building up an allowance, they’ve often, often got hundreds of thousands of pounds in an Isa and quite possibly in other accounts as well.
But but the more attached the Isa because they’ve spent 20 years, uh, paying into it and they think, well, look, it’s so great. I don’t want to I don’t want to give this up, especially if I end up coming back to the UK. So they just think, oh, I’ll, I’ll maintain my isa and I’ll deal with it later. Then they move to the US.
And to your point the Isa then stops being tax free. The US looks right through it. They look right through it to the underlying holdings. The underlying holdings are P6, which are foreign collective investments which attract a punitive rate of tax and require annual filing per form. So if you’ve got ten ETFs in an Isa, that’s ten forms per year.
So now you and they’re not doing that because they’re not aware of it. So now you’ve got a compliance issue. So you’ve taken a super tax efficient vehicle that’s then become taxable. But then it’s then it’s worse than just becoming taxable. It’s putatively taxed. Oh, and because there’s a boat, there’s these, uh, forms attached to it.
You now also have a compliance problem. It’s just a horrible, horrible situation. And we’re already talking hundreds of thousands of pounds. Yeah. And it gets worse. It doesn’t get better the longer they’re here. So
00:31:45.000 — 00:32:00.880 · Richard Taylor
I imagine the flipside to that for Americans is they they land in the UK and everyone says to them, oh, you need to open an ice. They get you 20 grand a year in there straight away. Um, and hopefully by the time they find you, uh, and realise they shouldn’t be doing that, it’s, it’s less expensive than to unwind, but still be nice to be avoided.
00:32:00.920 — 00:33:09.670 · Sally Hawkins
Well, and the thing I think here too, is, I believe because, you know, in the US at least, like Fidelity or Schwab, if you opened an account there, they would lock you, for the most part from investing in foreign corporations, probably for this issue. But I believe if you’d opened it with a UK broker, you’re not going to have that same kind of control too, right?
So you could unknowingly be like, oh, this is so great. I’m so excited to be able to invest in foreign companies. I know Schwab used to block it, you know, when I was back in America and then again, not realising that, oh, well, here we go. Right. This was why it was blocked in the first place. This is not the investment opportunity that you had thought.
Um, so yeah, again, you know, none of these are necessarily bad to I mean, they can certainly still be good vehicles and it could be worthwhile contributing to but kind of similar with the tax advice. Will you definitely need to also be engaging someone like yourself, right. Who knows about the US and the UK regulations and rules and you know what’s allowed.
What’s reportable. Because UK advisor who doesn’t have any knowledge on what the US rules are and vice versa, they’re not going to tell you these types of things. They’re not going to be flagging these types of issues for you.
00:33:09.710 — 00:33:56.300 · Richard Taylor
It’s just this whole thing puts people in such a tight spot. So you’re you’re you’re you’re American. You moved to the to London or wherever in the UK. You’re earning in pounds, you’re building wealth in pounds, you’re spending in pounds. You want to be invested in pounds? Well, you can’t do an Isa real well.
You can’t do an Icer. I guess if you did well, you can’t do nice if you do individual stocks, but you’re not, you’re still gonna get taxed in the US on your US tax returns. What’s the point? So yeah, you can’t use, um, what we call a brokerage account in the UK as a Gea. Um, you can use that to buy individual stocks and shares, I guess.
But you can’t buy ETFs because they’re fixed. Yeah. I mean, I suppose you can you can make elections. Right. But then doesn’t that require that does not require um, uh, cooperation from the fund. So it’s not really an option that I see very often.
00:33:56.420 — 00:34:36.690 · Sally Hawkins
Exactly. Yeah, exactly. I think where I do see elections be somewhat helpful, um, is back to that whole limited company thing where you can at least make elections to have your limited company essentially be like a pass through entity. So it would sort of go similar to an LLC, so it would flow straight directly to you.
And but you still have to, you know, file extra forms with the IRS for that. And that’s really more for the limited company for us because, you know, potentially you’re the director of the corporation. So you’d have, you know, the optionality to be able to determine how it’s taxed. But yeah, with the stocks and, and whatnot and ETF holdings, I think it’s a lot more difficult.
Kind of like from what you’re you’ve experienced to solve those.
00:34:36.730 — 00:35:05.290 · Richard Taylor
You just make it basically impossible for an American, uh, to invest in anything other than dollars in the US. I mean, it is doable. Don’t be wrong there. You can jerry rig it, but, you know, you’re gonna have a problem. Diversification. You’re going to be massively concentrated in stocks to manage portfolio.
The way we manage portfolios and the way most people manage portfolios nowadays. Um, you just make it almost impossible. And that’s. Yeah, that, that that’s kind of annoying. Frustrating.
00:35:06.010 — 00:35:46.320 · Sally Hawkins
Pretty much. Well, I think I guess it all goes back because I was like, why is it so hard? Right? I mean, of course, um, it’s all the bureaucracy, I suppose. But back to the concept of, you know, you, you, you get taxed on worldwide income as a US citizen. So for people who move abroad or who are trying to park money abroad, it’s part of the government’s, you know, crackdown to make sure that you’re not skirting income, you know, or any of your income from worldwide from US tax.
So I guess it is intentionally punitive, and I suppose it does its job, but it doesn’t make it easier. Right, I guess, and maybe they’re not necessarily trying to support people who live abroad. I guess that’s probably the why they want you to keep your money in the US.
00:35:46.440 — 00:35:55.160 · Richard Taylor
Yeah, Roth IRAs are do benefit though in the from the continued tax status in the UK. That’s right. Correct.
00:35:55.200 — 00:36:09.960 · Sally Hawkins
Yeah. The traditional I think there were some recent cases where if you take lump sums you could potentially get taxed. But I think with yeah the Roth I believe it should be, they would follow more closely than um the ISAs to the US.
00:36:10.000 — 00:37:12.790 · Richard Taylor
And explain everyone why this is. I alluded to it before. Everything comes down to the UK, US tax treaty and yeah, under the UK US Tax Treaty. There is a section dealing with retirement accounts and they benefit from reciprocal reciprocal treatment. There are some exceptions for UK pensions, but we won’t get into that now.
But broadly the benefit from reciprocal treatment. So that’s why a Roth, which is a retirement account in America, um, is considered under this retirement account section of the treaty. And, and it benefits from the reciprocal treatment in the UK. Wonderful. An Isa though whilst it looks and behaves like a Roth you know, post post-tax money goes in growth tax free comes out tax free.
It looks and behaves like a Roth. It isn’t a retirement account. It’s an index. It’s names and individual savings account. It is not a retirement account. It does not therefore, um, sit under that part of the tax treaty. Therefore it doesn’t benefit from that protection, which is why it gets this kind of punitive unfortunate.
Let’s let’s call unfortunate tax treatment by the US which catches out so many people.
00:37:12.870 — 00:37:21.060 · Sally Hawkins
Um, yeah. Because I guess with like the Isa, I mean, you can take it out right. anytime though. Obviously the IRA is retirement, so you can only take it out when you’re wet.
00:37:21.100 — 00:37:22.780 · Richard Taylor
59 59.5.
00:37:22.780 — 00:37:23.820 · Sally Hawkins
Is that. Yeah.
00:37:23.820 — 00:37:26.620 · Richard Taylor
It’s just it’s just not a retirement account. You know, it just doesn’t sit under.
00:37:26.660 — 00:38:13.780 · Sally Hawkins
Right. But, you know, they sound like when I first moved here, too, I was like, oh, they kind of just sound similar. I kind of thought it was. Yeah. Yeah. So I actually had mistaken it to for a retirement account until I do. Um, I saw this come up right. And I was like, well, how the heck am I supposed to save for retirement, too, as a, you know, tax preferred as a US citizen.
And that’s something to where you want to bring in professional advice, because it is a lot harder if you’re living in the UK and you’re trying to save for retirement and taking into account, again the US rules and what’s actually considered, you know, pre-tax or tax deferred or tax preferential like you again, you need someone like yourself, a financial planner, um, who knows both sides so that you’re not just put into all these investments that sound great in the UK, but then in the US, you know, they’re completely taxable.
So what was the point of that?
00:38:13.820 — 00:38:56.810 · Richard Taylor
Yeah. And I understand as well I think I think Americans can get into trouble when when they do join a company abroad in the UK and they start contributing to this pension plan. I think there can be trouble there as well. I’m out of my depth a little bit. This one, I just know, I know it has. I know it can cause I know very, very small amounts of contributions and balances can cause it can cause complications.
But let’s pivot from that into this one. This is this is an area I know there’s a big issue here. I’ve heard a couple of war stories, but this is not really my, uh, my area of expertise, equity, compensation, complexity. So a lot of people going over like your husband are intercompany transfers, uh, finance, tech and equity conversations.
A big part of that. So how can what what what should people be aware of here?
00:38:56.850 — 00:40:40.390 · Sally Hawkins
Yeah. So this is actually a very big one. There’s two different components to this too. So one is that more traditional. You know your founder early stage equity. Um, and this actually to be honest, it’s probably more problematic than the second one that we’ll talk about, which is the restricted stock units.
But for founder equity right. So in the in the US you have this great election. And so say you have a Start-Up. You’re trying to give again your founders equity to make sure that they are invested, that they’re going to be, you know, staying around for a while. So when you give them the stock, you make this 83 B election, which just says, essentially, I’m going to pay ordinary income taxes on this stock right now.
And then, you know, as it vests, there’s not going to be any taxable event. It’s just going to be once I sell it now, I’ll pay capital gains, which is great for so many. Start-Ups. Because say you give, you know, the founder say a value of 10,000 a stock, right. But your hope, of course, is that in ten years it’s going to be worth 50 million.
So you pay ordinary income on 10,000. Who cares? Right? It’s a couple thousand bucks. And then, you know, from there you just pay 20% capital gains when you actually sell the stock, which is great because then also your capital gains would line up with when you actually get the income. And again, sounds wonderful.
Works perfect in the US. But when you move to the UK, if you still have, you know, the invested stock, well, the UK doesn’t care about that 83 by election, so they’re just going to tax you. As, as that stock fests, which is even worse because the stock vest doesn’t mean that you’re going to be selling it. Right.
And of course there’s still a lot of lock up provisions too, for these Start-Ups that say, all right, well, this is vesting, but you still can’t sell it. So you can be stuck in that situation without getting anywhere.
00:40:40.430 — 00:40:41.950 · Richard Taylor
You can hit with UK tax.
00:40:42.150 — 00:40:50.350 · Sally Hawkins
Yes, UK, but on ordinary income tax when it vests. So you don’t even get any cash. Right. So you don’t have cash to pay that tax.
00:40:50.390 — 00:40:51.830 · Richard Taylor
What you do in that situation.
00:40:51.830 — 00:41:15.980 · Sally Hawkins
Well yeah. So that’s one where thank God I’ve had some folks who have actually come and planned beforehand because, you know, what would happen to you is that in the US, say if you sold them after you were here, you would take capital gains in the US, you would pay ordinary income in the UK, but then you’d have.
No. Yeah. No, there’s not an offsetting credit, so that’s painful. Um, so again, there are.
00:41:16.220 — 00:41:21.900 · Richard Taylor
Well, just to keep you in context here. That’s that that’s going to be like a I don’t know what 70% burden.
00:41:22.380 — 00:42:44.010 · Sally Hawkins
Yeah. And again, the biggest one the UN or the UK income tax. You know that’s what 45% most likely. And I mean and that’s why you don’t actually have any cash to. Right. So yeah. So what you know you would do here is I mean the first thing is can you accelerate the vesting on your stock? And, you know, in the Start-Up context, you know, if you go to the board, right, and you say, well, gosh, I’m going to be moving over here with the company.
Um, I know you guys have to approve accelerated vesting, but here’s what’s going to happen. Not only am I going to pay 45% taxes, but you have the national insurance tax. And what is that about 16%. So, you know, there’s of course going to be a, um, incentive in here for you, right, to avoid those taxes on my, you know, my invested shares.
So that is one option. I mean, that’s usually the cleanest, right, is at least to accelerate the vesting on the stock. So then therefore, you know, even if once you sell then it’s just capital gains in both countries. And of course you’d have the foreign tax credit offset. But that’s obviously the cleanest right.
And the recommended. But if you didn’t plan for it or again, I guess, I suppose if the board said no, for example, we’re not going to accelerate vesting, then yeah, that is a situation where you do consider delaying your move, um, until after your shares have vesting.
00:42:44.010 — 00:42:56.770 · Richard Taylor
Have you had it though, where like someone’s got a bill from this is someone’s moved to the US. At the UK. Yeah. It’s vested. They’ve got a bill from HMRC. They’re like what WTF. Uh yeah they’ve already moved. It’s too late. Like what then.
00:42:56.810 — 00:43:25.920 · Sally Hawkins
Yeah. Then at that point I mean well I guess you could try to do an analysis and see, you know, are there certain provisions in your agreement that says these are not necessary? This is not necessarily compensation, It’s something else. And you try to make that argument. But again, that’s you know, you’re getting attorneys in here and lawyers and, you know, CPAs, um, the UK equivalent of um, chartered accountants.
So I mean, that’s expensive. I mean, otherwise I mean for them, unless you.
00:43:25.920 — 00:43:28.160 · Richard Taylor
Can basically you’re basically screwed. Yeah.
00:43:28.200 — 00:44:15.350 · Sally Hawkins
You’re you’re eating it. You you are eating it and. Yeah. And that’s a big one, you know, because again, a lot of these times like the shares that you would get in the Start-Up, I mean they’re volatile in some situations. Right. So it would be pretty darn unlucky if you happen to have them vest in the UK when they’re up top.
And then, you know, you haven’t sold anything yet. So, you know, later when you sell them they’re worth a fraction of that. But yeah, it’s it’s a really big issue. And a lot of I mean, again, most Start-Ups aren’t really aware of this. They don’t have a tax team. They just have a CFO, for example. But why would the CFO know?
And they’re, you know, they’re not getting even if they brought in, say, an accounting firm that was a US accounting firm. Um, or a UK one. They don’t. They might not pick up on those nuances.
00:44:15.390 — 00:44:31.030 · Richard Taylor
It is amazing. And I’m as guilty of this as everyone else is. We just assume that because it’s the way we know, that’s the way it will be everywhere. Yeah, pretty much that that assumption. Yeah, we’re all guilty of it. That assumption can get you into so much trouble. Yeah, well, that’s kind of terrifying.
So anyway, yeah.
00:44:31.830 — 00:45:27.740 · Sally Hawkins
I know that’s a big one, right? That is, I think, my biggest fear, honestly, if I was a, you know, a founder or someone with equity, uh, moving over here is not knowing about this before you moved. And because you, you know, you have like a Hail Mary potentially or, you know, maybe you can find an argument that this was not compensation or, you know, for services rendered.
And sometimes that works, sometimes it doesn’t. Or perhaps if, you know, there could be elections if you were able to again, plan ahead of time. Right. So elections in the UK that you could make to treat it differently, but that would, you know, tend to have you planning at least a year plus in advance. So you don’t want this is one where you don’t want to wing it, and you can be in a world of trouble if I mean, yeah, 60, 70% taxes and not even having the cash to pay it, I mean, that seems unworkable.
I don’t I don’t know who survives that.
00:45:27.780 — 00:45:33.340 · Richard Taylor
What about shoes? I imagine this is more common, right? This is this is for the the the employees.
00:45:33.380 — 00:47:02.490 · Sally Hawkins
And shoes aren’t as bad. I think these are ones where, you know, essentially both sides are trying. So. So say if you got some shoes when you’re in the US or continue to vest and then you move to London, say halfway through. So this is one where, you know, in theory the foreign tax credits will offset. But the problem is that both countries kind of want to tax you on both amounts.
So, you know, they’re both kind of making the argument that they have the right to tax. So in in essence, sometimes you can be double taxed on these. You should be able to get the money back. But that you know, It involves, you know, filing their returns or changing your withholdings or, you know, applying for refunds.
So in a lot of these situations, kind of similar to where, you know, other foreign tax credits can become problematic is even if they do offset, you’re still potentially floating that double tax for, you know, a period of, say, 1 to 2 years. And I think, you know, that’s just, again, a big cash flow planning item for a lot of folks where I think you’d much rather, you know, have that money in the bank.
Right. I mean, movie is expensive and life is expensive. So it doesn’t make you feel good to, you know, have both countries taxing and then you’re kind of having to prove it back to them. You know why they only get only one country gets the tax. And therefore you should be receiving a refund from another one.
It’s again not automatic. And it it takes a bit of work, but I mean at least it’s a better outcome of course, than the other where um, you might just be double taxed at, you know, absorbing.
00:47:02.530 — 00:47:03.610 · Richard Taylor
Oh that’s terrible.
00:47:04.370 — 00:47:10.520 · Sally Hawkins
Yeah. that one makes me want to cry. They just want to throw up, I don’t know. You know, it terrifies me. Yeah.
00:47:11.200 — 00:47:21.000 · Richard Taylor
Should we talk about states as well? Um, yeah. The the one that, uh, no one thinks about that. Your state’s going to leave its claws in you as well.
00:47:21.560 — 00:48:08.110 · Sally Hawkins
States are tough. Yeah, and, you know, I mean, it’s kind of similar to the concept is similar to where. I mean, I know, you know, you’re on the East Coast, so I’m sure you deal with a lot of snowbirds. Um, so they live in New York, right? For the, I guess, for the summer, the Hamptons. Wouldn’t that be nice and then go back to Florida for the winter?
And, you know, they all kind of claim, oh, we don’t have to pay state income tax. And sometimes that’s true. Sometimes there’s nuances to it. But I think in all these scenarios there’s a you know, it’s it’s very similar planning exercise when you’re moving to the UK to make sure that you’re not still paying state taxes because state taxes are not covered too, by the foreign tax credits.
So that’s just going to be a tax that you’re going to eat if you’re not you know, careful about it. So like New York is a good example. And there’s, you know, only a few a handful of states.
00:48:08.150 — 00:48:11.190 · Richard Taylor
State taxes are not covered by the foreign tax credit. So you.
00:48:11.430 — 00:48:11.750 · Sally Hawkins
Know.
00:48:12.550 — 00:48:27.710 · Richard Taylor
So let’s say let’s use your example, your right to use New York. And the other you know, the other one is California. Right. But there are plenty of there are other states that will, um, fight tooth and nail to, uh, to claim you’re still a tax resident despite having long left.
00:48:27.830 — 00:48:28.990 · Sally Hawkins
Um, yeah.
00:48:29.310 — 00:48:45.710 · Richard Taylor
That you you could go somewhere like the UK. You get taxed in the UK because the tax is higher in the UK. There’s no tax to pay in the US, but that doesn’t matter from a state perspective. They still going to say no, no we want our 8% whatever. It’s going to be higher in California. Really. Well okay.
00:48:45.750 — 00:48:55.470 · Sally Hawkins
Yeah that’s right. Isn’t that it’s funny. Yeah that’s crazy I, I know that’s a tough one. I mean in some states it doesn’t matter. But yeah. New York what is it, 10%. Um.
00:48:55.790 — 00:48:56.230 · Richard Taylor
I mean.
00:48:56.270 — 00:49:50.260 · Sally Hawkins
That’s why you gotta break up with your state essentially. Yeah, yeah. And I think from a practical perspective, right? So of course, even if you were to have a clean break from your state and I can kind of talk about how you do that. But, you know, if you do still have New York or say, for example, in this example, New York sourced income, so say you still have employment income or again, you move mid-year and you got a bonus for the entire year, or you have a rental property like in those in this, you know, in New York, you’ll still have to pay New York taxes on those regardless.
Right? But I think the goal when you move is to make sure that you do have a clean break from kind of a residency, domicile or whatever. You know, the latest terminology is so that you’re not your worldwide income. Kind of similar to, you know, the concept of how foreign or federal taxes go, but so that your worldwide income is not also subject to U.S. or to to New York tax.
00:49:50.500 — 00:49:54.940 · Richard Taylor
So is it just New York and California that I need to worry about for this, or is it is it other states as well?
00:49:54.980 — 00:50:31.330 · Sally Hawkins
I mean, those are the big ones. Arizona too. But Arizona, it’s only like a 2% tax, so that doesn’t really matter quite as much, but New York and California. I think from what I’ve experienced in New York especially, are probably two of the bigger ones for this, because, again, they’re kind of used to having people to.
Right? I mean, the weather is nice at certain points in time or, you know, there’s good jobs. They’re used to having people who are trying to only live into the state part time to try to avoid the state taxes, obviously, because they have some of the highest taxes right, in the US. So, um, these are probably two of the biggest offenders, I would say offenders.
I don’t know how.
00:50:32.130 — 00:50:32.490 · Richard Taylor
I’m.
00:50:32.730 — 00:50:45.530 · Sally Hawkins
Most aggressive. Yeah. The most aggressive. Yeah. That tried to sort of crack down on the people who, you know, want to keep a full life in New York, say, but then also live in Florida and try to kind of play the game well.
00:50:45.610 — 00:51:00.600 · Richard Taylor
Well, let’s say I’m, I’m in New York. I want to go and live in the UK. Um, or I’ll get an opportunity to go and work in the UK. How do I make sure I server my New York residency? So I’ve not got them. I’ve not got New York pounding at my door, wanting me, wanting my 12% or whatever it is.
00:51:01.280 — 00:53:18.980 · Sally Hawkins
Yeah. Yeah. So for everything that’s left. Um, so I think, I mean, of course there’s like the number of day rolls, right? So to make sure that you’re not in there, what was it, more than 183 days and that you, you know, in general in any year. So that’s kind of a given, which makes sense. I mean, if you’re moving to the UK, uh, you know, don’t also live in New York, but then there’s another a domicile test, which is a lot more subjective.
And I think this is the one where people can get caught up if they’re not, you know, careful. Um, but I mean, for whatever reason. Right. So say you as a husband, you moved to the UK, but. Oh, you’re you’re wife and your children stayed in New York. Well, that’s not going to pass. You know, the sniff test. So of course, now the government is going or not the government, I guess New York State is going to say, well, you didn’t really move.
You’re just happening to work somewhere else. So but your family’s here, your kids here, you know, you have a permanent residence here, whether that’s owned or that’s rented. It doesn’t matter that your job, like you personally are living in the US. If your family’s still here, so that’s one. Another would be sort of if you, you know, say your family had moved and you had three relocated, but again, you had still an apartment here that you came back to a lot.
You potentially were still going to an office here quite frequently. And so then they would kind of look at the facts and circumstances thing too, and say, did this person really move or did they just pretend to move? And now they’re trying to avoid state taxes. So I think for the, you know, the average folk, right, who maybe we wouldn’t be able to afford to maintain a completely, you know, full New York life and also a London life and be coming back, you know, and forth all the time.
I think if you truly moved and you took your family with you, you rented out your house, you know, that’s a pretty clear indicator that you are no longer a New York resident and you should not have to be worried about taxes. But I think it’s for, you know, the folks who potentially are very affluent. And they might be, you know, living in one country and working in another or visiting all the time.
Right. And flying back and forth. And I think those are the folks who need to start, um, keeping the calendar right and keeping all the documentation and getting rid of their cars and stop, you know, voting and all that kind of stuff. So that sort of if the government were to look at facts and circumstances, they wouldn’t say, you’ve kind of fake your move.
00:53:19.020 — 00:54:04.410 · Richard Taylor
We had a client who, um, who was a Brit returning to the UK as an American and with their American partner, and they were living in Brooklyn and their tax advisor suggested, uh, going living in Florida for a year before moving to the UK to really break the, the New York dot, because we were going to keep the New York apartment to really break the, um, the New York domicile, that I don’t know if that’s overkill, but they said if you just if you moved direct from New York to London, uh, it wasn’t London somewhere in the UK.
Uh, and you can turn a place of residence here. They might say you’re still in New York. Tax resident. Even spending well under the 183 days here, you still are domiciled in New York. Therefore, we’re going to want to continue taxing you. So they said, go and spend a year in Florida.
00:54:04.450 — 00:54:43.290 · Sally Hawkins
I could see that. Yeah. And there must have been something to, you know, some certain fact in there that also really had them worried whether it would be maybe he still had his business in New York. Right. Or something like that. So yeah, I’m not surprised to hear that. And I’m glad that again, he did seek, you know, counsel.
Right. Or guidance on that because again, it sounds extreme, but also potentially having to pay another 1,012% on all of your income worldwide. I mean, you know, who can afford to do that. You’re already paying 45%, say, in the UK. So now you know, what is that 55% plus total. And that’s it’s a tough pill to swallow for a lot of people.
So I’m glad that he did do that.
00:54:43.290 — 00:54:55.410 · Richard Taylor
Especially when you’re not living there when you’re not leaving the house. Yeah, I can handle tax when I’m living somewhere, but not when I’m not. Right, right. So this has been fun. Anything else you want to add or where can people find you?
00:54:55.440 — 00:55:38.920 · Sally Hawkins
Yeah, I mean, those are big ones, I think. Yeah. So you can find me on LinkedIn. I think that’s probably the easiest. And if you have questions, you know, my DMs are always open. So I, you know, I’m happy to schedule a 30 minute call, see what’s going on and see if you know what we should be or what kinds of issues you should be paying attention to.
But I would say, you know, for anyone that’s listening to this, of course, if you’ve already moved over and some of these things are making you a little queasy, um, then you know, that’s the way you would talk. But if you’re also thinking about moving to the UK, right? And say, maybe it’s not immediate, but it’s in one year or two years from now.
I mean, this is the best time for you to plan. And there’s, as we’ve been saying, there’s so much of this that’s fixable or that’s avoidable, avoidable. If you had just known. Yeah. Yeah.
00:55:38.920 — 00:56:33.630 · Richard Taylor
And and you know we sorry we talk about the financial cost, the financial savings. Just the by avoiding these which which is frustrating because let’s be honest, Sally, people don’t really appreciate the landmines. They dodge that they don’t know about. Know like we know. We know the the world of financial pain that’s been that’s been sold by taking pre advice.
But know what. People don’t really realise this. Yeah. But what is massively underestimated in my opinion or not even factored in is the emotional toll. Yeah. When you have like stepped on some like mine to carry on my metaphor or you’ve left these undesignated landmines in your affairs and you know that you’re you’ve got a problem.
Or even worse, the IRS have alerted you to that fact that they know there’s a problem. Yeah. By which time your options are less. Um, the emotional toll of that is enormous. It’s horrible.
00:56:33.670 — 00:57:19.780 · Sally Hawkins
Oh, God. I mean, yeah, I mean, like a weight on your chest, right? I don’t and there’s. Yeah, it’s like. And it’s not like you’re talking about. Oh, I owe 5000 here. I mean, even in the example. So say you had, you know, a you had seven different ETFs that you had invested in and they’re all prefix. That means that you actually have seven different 54 over 5471 that you need to file.
So if you miss all those per year, just in this example, the penalty for not filing that would be $70,000. And then you didn’t know about this for four years. I mean, like it’s you know, it’s unfathomable. And you don’t think that it just doesn’t seem like it should add up that fast. Right? But it does. And yeah, it’s but you know, the IRS, it doesn’t go away.
You can’t just say sorry.
00:57:20.420 — 00:57:33.180 · Richard Taylor
There are options to come into compliance. Right. But especially before they contact you, there are there are ways to like hold your hand up and say, sorry gov, I wasn’t aware about this. Please, please be gentle with me especially especially if you’re living outside the US.
00:57:33.220 — 00:58:17.770 · Sally Hawkins
Yeah, exactly. And again, the prevention is good obviously at a certain point too, if you do find yourself having made these mistakes. I mean, yeah, there is ways to apply for panel to really from the government to explain the circumstances. And, you know, they do tend to look more fondly upon that if you quote unquote, turn yourself in versus if they find you, but it’s still going to cost something.
Right. Yeah. And again. And just even to get to that point, you’re still paying CPA attorneys and you know, all the like. So nothing nothing is cheap to get out of. It’s, you know, just like a lot of things. Right. It’s a lot. Was it practice makes perfect or something. You know that that similar vein. So the prevention aspect of it I think is what I wish more people were clued in upon and that, you know, had the proper guidance.
00:58:17.970 — 00:58:33.730 · Richard Taylor
Okay, Sally. Well, listen, thank you so much for coming on. Uh, expert wealth people can find you on LinkedIn if you’re thinking of moving to the UK go go finder. If you are in the UK, go find her. Um, get yourself get your house in order and make the most of your time living in wonderful Europe.
00:58:33.730 — 00:58:44.650 · Sally Hawkins
So we can appreciate it. Like we talked about earlier, right? It’s a fun place to live. Doesn’t need to be bogged down by tax issues and, you know, being worried about going home. So yeah, please do reach out. I’d be happy to chat.
00:58:44.690 — 00:58:46.050 · Richard Taylor
Super. Thanks, Ellie.
00:58:46.090 — 00:58:47.210 · Sally Hawkins
Thank you Richard.
00:58:47.490 — 00:59:33.720 · Richard Taylor
All right, folks, that’s another episode of Expat Wealth under our belts. Thank you for listening. I appreciate it and I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats thrive in America and ask you to subscribe to the pod wherever you listen.
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00:59:34.880 — 00:59:45.320 · Richard Taylor
Com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week!
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