UK Domicile & Tax Changes: What You Need To Know | Ask An Expert with Aidan Grant (We’re The Brits In America S1:E43)

There are tax changes coming in the UK – new rules replacing the domicile system with a tax residency-based system. This could affect your inheritance tax exposure, among others if you’ve been out of the UK for over 10 years.

To find out what it all means, Richard Taylor welcomes back Aidan Grant, a partner specialising in Tax and Trust Estates Planning at the law firm Collier Bristow. Aidan advises cross-border families and expats on navigating complex taxation and estate planning issues. The new rules in the UK are certainly complex.

Plus, for those moving back to the UK or coming for the first time after being abroad for over 10 years, you can leverage the FIG regime; it allows a four-year tax exemption on foreign income and gains. This can be strategically used to manage assets and liquidate investments without UK tax burdens. How do you do it? Aidan and Richard discuss.

We’re the Brits in America 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:

Richard:

[00:00:15 – 00:02:01]

Welcome to the We’re the Brits in America podcast, a Plan First Wealth podcast dedicated to helping ambitious expatriates and first generation immigrants thrive in America. I’m your host Richard Taylor, and Plan First Wealth is the business I founded and run today and we work with successful American and international families living across the US Helping them to make the most of their opportunity living and working in America. However, while Plan 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 Plan First Wealth. Information presented is for educational purposes only. Alright, let’s get back to this week’s show. Welcome to our Ask an expert show where I invite a fellow professional in the US UK cross border space to come in and talk to me about the issues we think Britain America needs to be aware of if they are going to thrive here. My guest today is the returning champion, Mr. Aidan Grant, now a partner in the Tax and Trust estate Planning team at Collier Bristow. So congrats on the move up since we last spoke, Aidan, I’m sure your appearance on whether it’s in America was pivotal in that movement. But anyway, listeners may recall that Aidan came on the show earlier in the year to give us a master class in estate planning for U S UK people. And he did so with the caveat that it may all be changing and change it has. We have a new government in the uk. They have delivered their first budget and it has indeed upended rules and precedents that have been in place in some cases for centuries. And, and these changes can definitely affect us UK people. And so Aidan has very kindly offered to come back and update us on what we need to know. So without further ado, let’s get into this. Hi Aidan, welcome back to we’re the Brits in America podcast.

 

Aidan:

[00:02:01 – 00:02:04]

Thank you so much for having me back. It’s always an absolute pleasure.

 

Richard:

[00:02:04 – 00:02:17]

You’re the first guest where we had to spin out the episode into two, two, two episodes because the content you were throwing at us was so useful and valuable and you are, I think you’re our first returning champion, so well done.

 

Aidan:

[00:02:17 – 00:02:22]

I mean, you might put it that way. You might just say I hog the limelight too much. But let’s go with your explanation.

 

Richard:

[00:02:23 – 00:02:28]

Well, they were great episodes, so yeah, we’ll run with that. Anyway, Aidan, so it’s all changed.

 

Aidan:

[00:02:28 – 00:03:43]

It’s all changed. And the slight hesitation I have to start with is much of what we discussed on our first two episodes about Domicile and all those lovely, complicated things that the UK likes to talk about have slightly receded into the background and faded into irrelevance. So I don’t want to suggest that the time we spent together, Rich, was, was no longer useful, but it is of less use than it was at the time when we recorded it. But I’m here to set the record straight and I think across what will now hopefully be all three episodes, someone is going to have the complete picture. But yes, it is all change. The UK government, the new UK government that was elected in the summer held its first annual budget on 30 October, at which they announced what were going to be widely trailed changes to the taxation of quote, unquote, non domiciliaries, who are people who don’t intend to remain indefinitely in the uk. And it was that domicile concept that we spent quite a lot of time talking about when we first got together, you and me. And what they’ve intended to replace domicile with is a new rule which is based on a pure tax residency based system, which is going to produce lots of good things, particularly for some Brits living in the us. But I’m afraid it is a new set of rules that people need to contend with and it’s my job to explain this to people.

 

Richard:

[00:03:43 – 00:03:51]

So this concept of domicile, I’m right in thinking this has been two, three centuries and you know, law, right, that, that we’ve just been undone.

 

Aidan:

[00:03:51 – 00:04:14]

We like to describe it as sort of Napoleonic law. I mean we are talking centuries of change. It’s not scrapped entirely in the, in UK law, there are still ways in which domicile is going to be a relevant concept. So you can’t, you can’t tear that page out of your textbook. But as far as tax law and tax and estate planning is concerned, it is diminished significantly to the point where it’s probably not going to come up a huge amount anymore.

 

Richard:

[00:04:15 – 00:05:16]

So just to give everyone kind of who’s listening and scratching the head of what we’re talking about here, like a background everyone’s familiar with tax residency, as in, essentially, to oversimplify it, where you’re spending the majority of your time is going to be where you’re primarily taxed. Now there could be other taxation as well, depending on whether a U.S. citizen, depending on where else you spend your time, but largely it comes down to where you spend money most of your time. But when it came to estate planning from a UK perspective, it used to be the case and it was for centuries, as we just mentioned, that the concept of domicile was much more important. And domicile is altogether more permanent than residency and really can attach to you or could attach to you for life, regardless of where you were living and how much time you spent elsewhere. So you had a situation where people could have been outside the UK for a long, long time, yet still considered domiciled in the UK and therefore still subject to UK inheritance tax on their worldwide estates.

 

Aidan:

[00:05:17 – 00:05:18]

Correct.

 

Richard:

[00:05:18 – 00:05:20]

Okay, so that’s as it was.

 

Aidan:

[00:05:20 – 00:05:33]

The first thing to say is that none of these rules have been introduced yet. These have been proposed by the UK government. The expectation is that these rules are going to take effect from the start of the next UK tax year, which will begin on April 6, 2025.

 

Richard:

[00:05:33 – 00:05:40]

So wait, Aiden, can I just. So they’ve been proposed, but then what’s the process for them to become law? Short space of time.

 

Aidan:

[00:05:40 – 00:08:54]

So much like in the us, they have to be passed by our legislature. So the Houses of Parliament, the House of Commons, the House of Lords have to go through the draft legislation. There could be some amendments. I’m going to say I don’t expect any of these rules are going to be hugely changed. It’s not impossible. There could be the odd tweak. But fundamentally I suspect that this is how the new rules are going to take effect. In past years, when the rules have been proposed in these ways, they tend to become formal law in maybe, maybe January, maybe February, with a view to them actually taking effect from the start of the next UK tax year, April 6th. We won’t know for absolute certainty what the new rules are going to be until they are passed by the House of Commons, by the House of Lords and get Royal assent from the King, because that’s still the way the UK does it. But I think it is fairly safe for people to plan on the basis that what we’re going to talk about now is, is going to be the law when it comes to the start of the next UK tax year from April 6. But it does mean we’ve got maybe three or four months left of these new rules that people need to contend with. Fundamentally what is changing in getting rid of the concept of domicile? We are replacing it with a pure tax residency based system whereby someone knows in any given tax year with absolute certainty they either are or are not going to be exposed to UK tax to some degree. And in that respect that’s a really good, positive thing. It is a simplification of the understanding of the tax system in the uk, we are no longer going to be having the discussion that I had with you back earlier this year where I can’t say with certainty whether person X living in the US is or is not going to suffer inheritance tax on a given asset. For example, the way it works, I’ll describe someone coming to the uk, because in that explanation you’ll see how it happens when someone leaves the uk. As a general rule, when you come to the UK from an inheritance tax perspective, which is what we are sort of largely talking about here, you get 10 years before your worldwide estate will become exposed to inheritance tax. So if you’re coming to the uk, or we’ll come back to this later, if you’re returning to the UK after a long period outside the US, such as in, I don’t know, outside the UK, such as in the US, you get 10 years in the UK, during which it’s only your UK assets that will suffer inheritance tax. If you say died in that first 10 year period, but after that 10 year period, you’re then going to suffer inheritance tax on your worldwide estate. So in some respects that is more punitive than the rule we have currently in the UK, because our rule is more like a 15 year rule, it’s been dropped to 10. But for your audience, the key is what happens for those that have left the UK or thinking of living in the UK and are, say, already in the us and we have largely the same rule. Once you’ve left the uk, there is a fixed specified tail is the colloquial term we’re using, during which you will remain exposed to inheritance tax. And once you, once that tail expires, you then cease to be exposed to inheritance tax on your non UK assets, leaving behind the UK rump to be exposed to inheritance tax as it always was. And what you’re going to ask me is, how long is that tail?

 

Richard:

[00:08:55 – 00:08:56]

Indeed, how long is that tail?

 

Aidan:

[00:08:56 – 00:09:09]

Aidan, how long does that tail? To which the answer is. It depends. The classic lawyer’s answer. The minimum tail is three years. The maximum tail is 10 years. We’re going to unpack this a little bit because this is the important point.

 

Richard:

[00:09:09 – 00:09:24]

Before we had this, like, ambiguity of all these determining factors you had to take into account. Whereas now you can say with certainty. And we’ll get into details in a second. With certainty. If you’ve been out of the UK for 10 years, UK inheritance tax no.

 

Aidan:

[00:09:24 – 00:09:26]

Longer applies to you, to your non UK assets.

 

Richard:

[00:09:26 – 00:09:45]

To your non UK assets. Yeah. And this is just to remind everyone why this is so. Important because inheritance tax, estate planning and estate tax in the US and UK are the same at 40%. But what is a big, big, big difference is the, what we call in the UK the nil rate band, what do we call it in the us? The personal exemption, the unified credit allowance.

 

Aidan:

[00:09:45 – 00:09:47]

The combined gift of the state tax in the U.

 

Richard:

[00:09:47 – 00:09:51]

In the US it’s mean, what is it currently? It’s like $12 million.

 

Aidan:

[00:09:51 – 00:09:56]

It’s going, it’s going to be, it’s going to be basically $14 million in 2025.

 

Richard:

[00:09:56 – 00:10:13]

That’s the difference between $14 million and £325,000 pounds is quite significant. And there’s a whole lot of tax that can, that can be paid or not in that difference. So it makes a huge difference on whether you are going to be in that UK net or not. So okay, tell us about the three or 10 years.

 

Aidan:

[00:10:13 – 00:12:26]

If that person has not been living in the UK for 10 years, let’s say they’re only in the UK for five years, there is no tail. You leave the UK, you cease to be tax resident, your assets never became exposed, your assets are never exposed, there is no tail. So these tails only apply for people that have been living in the UK for more than 10 years. Strictly speaking, the rule is actually more than at least 10 of the previous 20 years. So for those that are maybe hopping in and out, you have to be a bit more careful. But fundamentally it’s once you’ve been in the UK for 10 years, once you’ve been in the UK for 10 years, you start with a three year tail. That three year tail applies until you’ve been living in the UK for at least 14 years, at which point it goes up to four years, 15 years, five years, 16 years, six years. And it goes up like that until you’ve been living in the UK for 20 of the last 20 years and then you have a 10 year tail. So once your client knows they’ve been outside the UK non UK tax resident for 10 UK tax years, they have escaped the inheritance tax tale. But during that 10 year period or up to 10 year period, in theory, the UK would say their worldwide estate remains exposed to inheritance tax. And so where we fundamentally changed is whereas I said to you earlier this year, someone who’d been living in the US for seven or eight years, does that person pay inheritance tax on their US assets? I would have said maybe, maybe not. But it depends on what their domicile status is and how well we can attest that it’s not in the uk. Now I’m going to be saying the uk, as far as it is concerned, thinks inheritance tax either is or isn’t payable. So we have crystallized our rules. We have not necessarily made it any more, any shorter a time period, but we have made it clear. And that has a number of consequences for estate planning, which I want to come on and talk about. But fundamentally, that clarity is going to be of use to an American who, for example, has been in the US for 20 years because from the 6th of April next year, they are no longer a domiciliary or what we call a long term resident of the uk. They are outside the inheritance tax net. And if they’ve got no UK assets.

 

Richard:

[00:12:26 – 00:12:50]

I’m sure there’s winners and losers in this, as there always are in tax changes. But I got to, I always welcome clarity. They’re relying on the ambiguity and the kind of putting forward a best case to a taxing authority, which you then never even get a response to, a definitive response to, until someone’s long gone. That’s not an ideal situation. So clarity is to be welcomed. I’m interested to hear the winners and the losers, but overall clarity is a thumbs up.

 

Aidan:

[00:12:50 – 00:13:10]

Everyone wins because we have clarity. Everyone wins because we can all say with certainty what the rules are going to be. To some degree we get clarity that some people might be a winner and some people might be a loser, but at least we know, and that has to be applauded and recognized at the outset because that’s not what we had before and that did annoy and confuse people.

 

Richard:

[00:13:10 – 00:13:25]

And with estate planning, especially even if you’re on, on paper at the start, a lose, quote, unquote loser from this change. There’s so much planning that can be undertaken with estate, with estate planning that can help mitigate and avoid a lot of this stuff.

 

Aidan:

[00:13:25 – 00:14:54]

Let’s think about that, estate planning, because in that, in that realm, we’re going to start to come across who some of the winners and the losers are here. What this does mean is that if I am someone who has moved from the UK to the us, and let’s say I’ve been in the US for seven or eight years, and, and I’m thinking about my estate planning, it means that I, the UK tax lawyer, am going to be a lot more bullish about saying, please be careful what form of estate planning you carry out, because I am now going to say with absolute clarity, you might still be inside the UK tax net. Whereas when you and I had this discussion previously and we were talking about Transferring assets into living trusts. And you asked me about does someone’s domicile status affect that? You know, one of the things I said was maybe we could look at the terms of the living trust and is it tax transparent, et cetera. What we don’t want to be doing is having anyone who is in any way exposed to UK inheritance tax, putting assets into a trust. Now, I know possibly up to 10 years after someone has left the UK, that sort of planning is going to give rise to adverse inheritance tax consequences. And what that in effect means is that during that tail, however long that tail for that person is, their estate planning needs to be sophisticated to the point of making sure UK advice has been taken. It is no longer possible to just assume I’m going to be here the rest of my life. I’m sure I’ve shaken off my domicile tail. I’m just going to take US advice to heck with the UK consequences. We have the clarity that that won’t work anymore.

 

Richard:

[00:14:54 – 00:15:01]

This means I can now do a living trust. I’ve been out in the UK for 10 years, but what if I came back to the UK?

 

Aidan:

[00:15:02 – 00:17:31]

You have preempted me. So this is one of the absolute winners out of this, these rules. So currently, and I think we discussed these when I this topic when I came on for the first time, we have, within UK tax law at the moment, the concept of a formally domiciled resident or an FDR who are Brits who go overseas and then come back to the uk, and the act of coming back to the UK makes you a formerly domiciled resident. And in effect that individual, on returning to the uk, was brought back inside the UK tax net at a much quicker rate than any other foreign person who would come to the UK. Rather than getting this 15 year period on, say, a pure inheritance tax question, rather than getting 15 years before your worldwide estate became exposed to inheritance tax, you’d have at best two, and so you’d be brought back inside the inheritance tax net really quickly. Formerly domiciled residents, as the name suggests, relies on a concept of domicile. And because we are chucking out the concept of domicile, we are also washing away the concept of a formerly domiciled resident. And so what that means is for your clients, rich or you who have been in the US for a long time, and let’s just say for the sake of argument, more than 10 years, if they decide they want to come back to the uk, they are now going to be treated the same as everyone else. You’re going to get that same 10 year period as everyone else coming to the UK would get, as well as, for what it’s worth, some of the wider benefits to the revisions to income tax and capital gains tax, et cetera. There is no longer going to be a distinction between returning Brits and foreigners coming to the uk. So let’s say you are someone who is going to return to the motherland and you’re in your early 80s and you think, I’ve had my time in Florida, I’ve had my time in the us, I want to come back to the UK now to be near, I don’t know, my grandkids, near the end of my life or whatever. I would have said to that person under the current law and we would have said to that person for a long time. In the estate planning context, you coming back to the UK and spending the last couple of years here and then ultimately dying here is going to have a really material effect on whether we can say that you are a UK domiciliary at your death or not. Now I’m going to say you didn’t survive 10 years. You only were in the UK for three years before you passed away. You are not a person who pays tax on your foreign assets. So if you kept all your wealth in the us, the consequences of you coming back to the UK are largely inconsequential in that sort of frame of reference.

 

Richard:

[00:17:31 – 00:17:50]

Does this mean that I, just to use that example, I started before I could maintain a living trust arrangement while I was in the uk, Could I? Next question, Would I want to? And third question, if I could and I’d want to, would I want to be very mindful of that 10 year date though, and make sure I’d modified it or ditched it before that 10 years was up?

 

Aidan:

[00:17:51 – 00:19:45]

So from an inheritance tax perspective, yes, fundamentally you are correct, because we aren’t going to mind what happens with that living trust from an inheritance tax perspective during that 10 year period. From an income tax and capital gains tax perspective, one of the other changes that’s coming in is that people coming to the UK are going to be taxed on an arising basis. So they’re taxed the same way as American is currently taxed on the income gains as they arise much earlier. And on something like a living trust, the way the US and the UK tax is, to cut a long story short, is going to become aligned more quickly. And so in the grand scheme of things, someone coming to the UK with a living trust is less consequential is less problematic from April next year than it would be currently where people will have to be careful. And I sort of, I flag this, and this is, this is a technical point, but this is something that could be impactful is if you come back to the UK with your living trust and you survive past that 10 year period, the nature of the living trust may prevent the UK inheritance tax spouse exemption from applying to the assets in that living trust. So let’s say Rich, you come back and, or a Brit comes back to the UK and comes back with their wife and their kids and they come back with the living trust with $10 million of assets in that living trust. Unless they’ve taken really, really specific UK advice at the time, the likelihood is that that living trust is going to block the inheritance tax spouse exemption applying to those assets and you’ve just given yourself a 40% charge on those assets at your death. So to answer your question directly rather than going about it in a roundabout way, yes, at that 10 year mark, or even better in advance of that 10 year mark, that would be the point at which we need to take a really hard look at that living trust to say, is that something that should be dismantled or are you for example, going to go back to the US and so you can keep your existing estate planning?

 

Richard:

[00:19:45 – 00:21:03]

You know, this is good because as much as we bleat on about it, I don’t know if you’d echo this, but not as many people as I, as I hope and I wish will happen do pre planning. You know, so we often encounter situations where someone has already moved or has been, things have already happened and we’re looking backwards and there’s, there’s, there’s fewer options often when you’re looking backwards. And as I understood it with estate planning, if you moved with a living trust to the uk, oftentimes that was immediately problematic. And if you’d already moved to the uk, a lot of damage had already been done and you could, you could try and repair some of it, but the preventative options were, were, were off the table and some of the options that left weren’t that palatable. Whereas now we have a bit of breathing space for people to inadvertently return to the uk. You know, you got, when you, when you’re emigrating you got so much going on. I can imagine this is something that off very often falls down. I bet it just doesn’t even occur to most people. I know it doesn’t because I’ve had these conversations and later on when they’ve got settled in the new country, they have a conversation with you and you’re like, oh dear, we have a problem, Houston, we have a problem. Whereas now you can say, look, this is not a problem right now, we’ll be in the future. And it just, it just, that’s, that sounds like a very positive thing to me. If I’m, if I’m right, going to.

 

Aidan:

[00:21:03 – 00:22:01]

See your tax advisor is not the high list on your priority, is not high on your priorities list. When you’re thinking moving, it’s where are my kids going to go to school, where am I going to live? Have I got my visa status sorted? Rather than I must make sure I go and visit my accountant or my lawyer before I come. I can actually be even more positive about that returning person, provided they’ve been outside the UK for 10 years, which is the income tax and the capital gains tax treatment that alleviates some of that initial returning burden and the risk or the cost of getting it wrong before you come because of what the UK is going to give someone when they come to the UK for the first couple of years after they come here. So this is not an inheritance tax question, this is an income tax and a capital gains tax question for this person coming to the UK or returning to the UK after 10 years. For the first four years, the first four tax years that they’re in the UK, they will have access to a regime that we haven’t really thought of a name of yet, but we are calling it the Foreign Income and Gain regime, or the FIG regime.

 

Richard:

[00:22:02 – 00:22:06]

Of course it needs an acronym. We should call up the acronyms first and then come up with the tax regime behind it.

 

Aidan:

[00:22:06 – 00:22:38]

Oh, I can throw the acronyms. There’s a lot more acronyms out here than I’ve already described. But during that first four year period, during this FIG regime you can elect, you can designate as much of your overseas wealth as you want and you will not pay any UK tax on it at all. That’s a returning person who’s a Brit. After 10 years, that’s a new person in the UK. You will get a four year period during which all of your foreign wealth, if you so designate it, is exempt from UK taxation and you can remit it to the UK as much as you want. There’s no consequence during those four years.

 

Richard:

[00:22:38 – 00:23:07]

Wait, Aiden, So I’m an American citizen, so that’s like, nice, but I’m still getting taxed as an American, correct? If I’ve been on a visa and I’ve built substantial wealth in America and I return to the uk, give up my visa. I’ve been, I’ve been there in America for over 10 years. Are you telling me that for the first four years, any income and gains on that American wealth, it’s not gonna get taxed in America because I’m no longer a US person and no longer get taxed in the uk?

 

Aidan:

[00:23:07 – 00:23:44]

Correct. So you have to actively designate it. You have to say to hmrc, this income over here, I’m designating that as avoiding tax. It is not a designation free or reporting free regime. It is a tax free regime. So you still have to tell the revenue about all of the income, the gains that you’re not paying tax on. But during that four year period, you can elect into this regime and say, none of this is going to get taxed. That is quite powerful for those first four years. After those four years, you’re then going to pay income tax and capital gains tax on everything like the US has for its citizens, for example.

 

Richard:

[00:23:44 – 00:24:13]

Yeah, but Aidan, that’s, that is, that’s massive. And this is another reason why people coming over here on a visa shouldn’t just automatically start to seek out a green card. There’s other reasons for the, you know, the covered expat and the exit tax regime, that’s the main one right now, frankly. But also if you’re going to come over here, if you, you know, people come over here and start, they’ll expand their companies over here and they can be here for 10, 15 years and make some serious money over here and then go back and protect a large chunk of it for four years. That’s massive.

 

Aidan:

[00:24:13 – 00:24:55]

So what we have been joking about, you know, my colleagues and I and those in the industry have all been talking about, you know, what, what do these rules mean? And who are the winners of the news are going to be, to use our previous expression. And what, what we had slightly flippantly or jokingly thought as an accountant who said this to me, was that there is a risk that the UK kind of becomes the gas station, the service station of the world, where people stop off in the UK for four years en route to somewhere else. So they, coming from one jurisdiction, don’t quite yet want to land in another jurisdiction, but we’re going to stop off, have a break, have a comfort break halfway on our journey, stop off in the uk, realize a load of money, maybe sell some assets, you know, sell the business and then move on to the US for example.

 

Richard:

[00:24:55 – 00:25:06]

Aidan, I was thinking of this from a, from an investment perspective. You know, like my portfolio with Schwab goes up a little bit. You mean like you could sell the business tax free in that four years? Holy cow.

 

Aidan:

[00:25:06 – 00:25:16]

I’ll give you one for your scenario. Richard, you will be familiar, I assume, with why we don’t want clients to be invested in US mutual funds because of all the UK tax complications that can arise.

 

Richard:

[00:25:16 – 00:25:17]

Reporting.

 

Aidan:

[00:25:17 – 00:25:27]

So. Right, yeah, correct. Before someone comes to the uk, we could make sure that we have those four years to unwind all of their US mutual funds free from tax without generating offshore income gains.

 

Richard:

[00:25:27 – 00:25:29]

Yeah, yeah.

 

Aidan:

[00:25:29 – 00:25:57]

So for those coming to the uk, which I appreciate is not the title of your podcast, but for those coming to the uk, it can be quite useful. You have to plan properly and as ever, I would say as an advisor, you need to take advice. But there are some tools there that are quite powerful and how they’re going to work is something that those of us in the industry are still grappling with. But it is without a shadow of a doubt a new regime that is going to have some absolute winners without certainty in them.

 

Richard:

[00:25:57 – 00:26:14]

Brits in the UK need to think about setting up in the us, coming over here for a period of time, making very successful, not getting a green card, returning after 10 years and selling it in that four year window and not paying any tax. That is a. That’s a huge. That is, that’s a huge opportunity. I can’t believe that was intentional.

 

Aidan:

[00:26:14 – 00:26:38]

I think it is. It is intentional because it’s what they’ve said expressed in their legislation. I will also say, for what it’s worth, flippantly, I mean, look, you and I are recording this in the middle of December. I’d like to think it’s a coincidence that the length of time that this four year regime is going to be there for is almost exactly the same length of time as a US Presidential term. So if anyone wants to leave the US for the. For four years, hypothetically, let’s say we’ve got a lovely regime you can come and spend time in the UK under.

 

Richard:

[00:26:39 – 00:26:58]

Yeah. Although I tell you, talking about regime changes, I mean, I’ve been doing this now for nearly 20 years. I’ve seen a lot of budgets in that time. I have never witnessed the hysteria that preceded this budget. The UK lost its mind over what was coming.

 

Aidan:

[00:26:58 – 00:28:11]

So there’s a couple of things to say about that which I think are absolutely true here. This is a budget. This is quite clearly a political budget and it has been met with varying degrees of acceptance and hostility. I think it is an understatement to say that this budget and these rules were proposed by the Labour government back when they were in opposition. They were proposed by the Conservative government back when they were in government. So in theory there is a degree of insulation and longevity about these rules because both of the two parties that would form a government in the UK are both on paper as having backed this. However, you can conceive of a way in four or five years time when the UK starts ramping up towards its next election, if there continues to be an undercounter of disruption disquiet towards some of these rules, an opposition party like the Conservative Party could make waves trying to scale back some of these rules or tweak some of these rules. So we shouldn’t look too far into the future, but there is not currently any serious challenge to the current government. And so we have to assume that for at least the next couple of years this is how the rules are going to interact. And people, I think it is understandable for people to sort of make plans on that basis.

 

Richard:

[00:28:12 – 00:28:35]

Yeah, you mentioned before as well. Our podcast is mainly aimed at and people in the us but we have plenty of people who will return to the UK who have returned to the uk, who swear down they’ll never return to the UK but will return to the UK because the life of an expat is inherently changeable. And of course other expats from from elsewhere in the world, some of whom might have an eye on the UK one day. So just international people and the the considerations we’ve got.

 

Aidan:

[00:28:35 – 00:30:12]

I will say one other thing about the budget which is there were lots of other changes in the budget that aren’t to do with non domiciliaries that will affect people like for example the retraction or the scaling back of business. Property relief, which is the relief, the relief you get from inheritance tax on shares you own in a trading business for example that was very useful and very impactful. There was a similar one for agricultural property farmland which is what caused a lot of farmers in the UK to protest in the streets of London. There’s always kind of changes. The one I think that is going to be most impactful outside of the non dom changes. This may be something that you’ve started to grapple with with your clients. But the one change that is going is the sleeper is the dark horse here is that from 6th April 2027 UK pensions will no longer be exempt from inheritance tax. That is already fundamentally changing the way in which IFAs, wealth managers, financial planners etc. Discuss how clients invest and withdraw and use funds to support themselves. Because whereas it has been the case for time immemorial that in the uk UK registered pensions are outside the scope of inheritance tax. That is going to change in two and a half years time. And that pension and building up a pension pot is going to be much less effective as a planning tool as it is right now. And that is going to be impactful for all of those Brits living in the US who maybe had spent a career or some time in the UK with a UK pension, have come to the US and sort of left behind their UK pension thinking, eh, what does it matter it’s exempt from inheritance tax anyway. They need to be aware that’s not going to be the case in two years time.

 

Richard:

[00:30:12 – 00:30:24]

Yeah, we have loads of clients like this. So let’s talk about this. This is, I’m glad you brought this up. I’d actually forgotten about that. And the reason I forgot about it is because I’m kind of ideologically, I’m okay with it, like, oh, you mean you’re gonna have to use your pension to provide a pension now, which is.

 

Aidan:

[00:30:24 – 00:30:25]

What it’s looking for.

 

Richard:

[00:30:25 – 00:30:42]

Yeah, yeah, but that I have seen some of the unhappiness, should we say online. I’m in the US, I’m long time out of the UK, so way past that 10 year mark, I’ve got a couple of million in a sip. Does it still make a difference if I’m Pre or post 75?

 

Aidan:

[00:30:42 – 00:30:57]

They’re not changing those rules. So I think as far as I’m aware, if you’re pre 75, the same rules still apply. This is about over 75 and what would otherwise have been taxable at your death being chargeable to inheritance tax.

 

Richard:

[00:30:57 – 00:31:02]

Okay, so what happens? I’ve got 2 million in my pension, I’m 80 years old, what then happens?

 

Aidan:

[00:31:02 – 00:32:07]

So you’ve got two options. The money stays in your pension and it is taxable as part of your estate like anything else. Or you take the money out of your pension, you spend it down, or you take it out and give it away or do something else with it on a lifetime basis that we can talk about, but that which is in your estate, unless the pension passes to a surviving spouse, which it can do, it’s going to be chargeable to inheritance tax. What they haven’t said and where the rubber really hits the road in an unattractive way, and I have to assume at some point someone in the government is going to grapple with this, they have not made any provision for the fact that when you take money out of a pension, you pay income tax or, you know, an American will pay income tax in one of the US or the uk, there is currently no provision for a credit for the inheritance tax paid. When you then subsequently come to take the money out and also pay income tax and you can end up with a. Someone somewhere has done some calculation and you can end up with a marginal blended rate of tax at like 68 to 72% once you take a 40% inheritance tax hit on the pension and then also pay income tax when you take the money out. So it’s going to be potentially impactful.

 

Richard:

[00:32:07 – 00:32:36]

Oh, so the 2 million becomes part of your estate and you pay inheritance tax on it. I just assumed that meant the, the pension wrapper essentially dissolved at that point and you were only subject to inheritance tax. It’s still in. So, so in this example, the 2 million gets added to your, to your UK state. You pay inheritance tax at 40, but it’s still in a sip. So whoever then, then you’re no longer here. So whoever then, then draws this money out is going to pay income tax on it as well.

 

Aidan:

[00:32:37 – 00:32:47]

Because you’re still getting this, it’s still a tax deferred account, you’re still getting the, the tax free roll up. And so the government, like with a, you know, traditional IRA is going to say we’re going to have the tax and you take the money out instead.

 

Richard:

[00:32:47 – 00:32:50]

What do you think the solution? Is that intentional or do you think the solution will be here?

 

Aidan:

[00:32:50 – 00:33:52]

We’ve been talking in the office here saying at some point someone in the government is going to have to reckon with this when they start to see how high that, that blended rate of tax is. Because it is ludicrous, the idea that you’d expect someone to pay inheritance tax and also to pay income tax. There are planning solutions. You can leave, like I said, you can leave assets to a spouse, you can take money out and, you know, take advantage of the UK lifetime giving rules to pass assets down to the next generation. But fundamentally speaking, you are going to be treating that pension like almost any other asset. I mean, if you think about it, that pension, other than the fact that you get the income tax, pension relief when it goes in, from that point onwards, fundamentally speaking, there’s not that much difference between that pension and say an isa, you know, you’re getting tax free roll up, but then there’s just tax at your debt as well as you pay tax and you take the money out. So it is quite a big change. And it’s going to change quite fundamentally how wealth managers and financial advisors talk to their clients about the order in which they use their funds.

 

Richard:

[00:33:52 – 00:34:08]

In the US, I’m 10 years out of the UK, so I’m not a UK domicile, I’m not UK resident or whatever. For this, for inheritance tax purposes, I have 2 million pounds in a UK pension. So that UK pension is subject to UK inheritance tax. Even though I’m not there. I’m not. But my UK pension is subject to.

 

Aidan:

[00:34:09 – 00:34:11]

Something else by mention later. Yes, fundamentally that is the case.

 

Richard:

[00:34:11 – 00:34:29]

But if I wanted to. You made a point then about gifting it away. Subject to Ukraine gift rules. Am I. Which are, which are much lower than US gifting rules. Right. So would I, am I subject to US or UK gifting rules?

 

Aidan:

[00:34:29 – 00:34:33]

The UK is much more generous in terms of lifetime giving than the US is. Because the UK does.

 

Richard:

[00:34:33 – 00:34:34]

Oh, the seven year rule.

 

Aidan:

[00:34:34 – 00:35:22]

Correct. The UK doesn’t have a gift tax allowance like the US does. In the uk under inheritance tax rules, fundamentally, if you give assets away and survive by seven years, you don’t pay any inheritance tax, provided you don’t retain any benefit in the assets. You could also, for what it’s worth, take advantage of an exemption known as the normal expenditure out of income exemption, where if you’re giving away what is effectively your surplus income every year, that is not a potentially exempt transfer, you don’t have to survive seven years. So in theory, if you take money out of a pension, which is income and you don’t need that income and you give it away, it ought to, in theory be completely exempt from inheritance tax. You do still have to pay the income tax when you take the money out. So it’s not exactly a tax free transfer. And of course, if you’re a US citizen, you are still subject to the US gift tax rules. The more fundamental.

 

Richard:

[00:35:22 – 00:35:32]

But am I subject to both? Am I, am I, am I subject to both the US as a US person and the uk because it’s a UK asset. The gifting stuff.

 

Aidan:

[00:35:32 – 00:35:35]

Inheritance tax or income tax?

 

Richard:

[00:35:36 – 00:35:41]

Inheritance tax. From, from, from a, from a making gifts perspective. Making gifts of British domiciled property.

 

Aidan:

[00:35:41 – 00:37:26]

Yes. If you are an American citizen giving away assets in the uk, you are going to have to think about both your US gifts tax and your UK inheritance tax consequences. I mean, if tax were payable, you’d get a credit against one for the taxpayer than the other. But the problem is you’ve got a $14 million exemption in the US, so you’re probably not going to pay tax in the us. But the reason why that exemption or the reason why that credit is available goes back to the point I was going to make, which is one of the places where we lawyers and the tax accountants are going to reside. Much more frequently is in the tax treaty that we have with the us, the US UK Gift and Estate Tax Treaty, or as the Capital Taxes treaty occasionally, because there are certain provisions in that treaty that alleviate inheritance tax in certain circumstances. For example, if you have someone in the US who is a US national in the US domiciliary under US law, and critically they are not a UK citizen, then we can exempt that person from almost all UK inheritance tax because the UK has the right to tax the assets first, rather than the UK. And even if the US doesn’t tax the assets because they fall within the $14 million exemption, the UK still doesn’t necessarily get the right to tax, with the exception of certain assets like UK real estate, which are always taxable in the uk. But I think my hope is a UK pension might fall under those default rules. And so someone in the US may still be able to get their pension outside the scope of inheritance tax, but it is going to make continuing UK citizenship potentially a bigger issue for clients because citizenship is the thing that will drag it back into charge to inheritance tax because of the way the treaty works.

 

Richard:

[00:37:27 – 00:37:38]

So this would be the American who’s worked in the UK for a number of years and built up a big pension but returned to America, or the European who ended up in America via London, or the Australia. I could go on and on.

 

Aidan:

[00:37:38 – 00:37:40]

Or the Brit who’s given up their citizenship.

 

Richard:

[00:37:40 – 00:37:41]

Why would a Brit give up the citizenship?

 

Aidan:

[00:37:41 – 00:38:32]

They might start doing it now. No, I don’t think they will. I think because I don’t think most people are, you know, other than your dedicated subscribers. I don’t know if many people are engaging with these rules, or at least I don’t think they are currently. But when people ask me, is there a UK tax impact to citizenship, to UK citizenship, my answer has always been yes, but tangentially or yes, but on the periphery, that has not increased. The amount of tax exposure is still the same. But because of the way that inheritance tax now works, more people will be looking at that consequence of citizenship more keenly. And so I have to be more acute in how I say to people, your continuing exposure to UK citizenship might be the difference between inheritance tax and no inheritance tax. And, you know, I need to have that conversation with people.

 

Richard:

[00:38:32 – 00:38:40]

Is there anything else that we think Brits in America or, you know, anyone needs to be aware of in this UK US space with these new rules.

 

Aidan:

[00:38:40 – 00:39:18]

So the only other thing that I need to mention, which is a big topic but I suspect we probably don’t need to worry about here, is that the inheritance tax treatment or the tax treatment of trusts fundamentally is also going to change, particularly from an inheritance tax perspective. This is one of the things that has caused some consternation in the uk, I think would be an understated way of saying it. If you are a foreign person in the uk, currently a resident non domiciliary, and you create a trust, you can put assets permanently outside the scope of the inheritance tax, even if you had stayed in the UK long enough to become what we would currently refer to as a deemed UK domiciliary after 15 years.

 

Richard:

[00:39:18 – 00:39:21]

Is this excluded property trusts?

 

Aidan:

[00:39:21 – 00:40:52]

Correct? We would describe that as an excluded property trust because the trust is excluded from the scope of inheritance tax. What the UK government is saying from 6th of April next year is that any trust that has a UK resident sett law, a UK resident grantor, is going to be exposed to inheritance tax to some degree as well as if the SETT law can benefit income tax and capital gains tax on the income and gains of that trust as they arise. That is of diminishing consequence for Brits in America, who are your primary audience. But if we have people coming back to the UK and they’ve set up completed gift trusts or credit shelter trusts, or irrevocable non grantor trusts or all these sorts of more sort of estate planning style trusts, those trusts could become significantly less tax efficient under the new UK rules from the 6th of April compared to how they are now. So absent that four year period where I said you can designate your income and gains overseas to avoid UK tax, after that point, those people need to take advice on what the consequences are for their trusts. And so estate planners who are setting up trusts for their clients in the US, yes, fantastic, fine, we get this nice new 10 year period. But if someone is coming back not with living trusts but with other forms of trusts, those trusts probably do need a health check and ideally, I would say probably before they come back still, just so we’ve got enough time to.

 

Richard:

[00:40:52 – 00:41:20]

Think about them, are US trusts in general for people in the UK just a nightmare or do solutions exist where you can kind of, you can achieve what you’re aiming to do by setting up a trust, whether it’s to avoid probate living trusts or get out of your get out your estate and protect it from creditors and whoever else. Irrevocable trusts. Is it possible to achieve what you want if you live this cross border life or is it just give it up? It’s too much, it’s too hard.

 

Aidan:

[00:41:20 – 00:43:10]

I always say to people there is a place for trusts and planning, provided you plan carefully. Fundamentally, one of the areas which has not changed under UK tax law as a result of the budget, but by virtue of not changing it suddenly appears more efficient, is that inherited wealth is still tax efficient. So if, let’s say, for example, one of your clients, Richard, is in the us, but they’ve got kids in the UK and they leave wealth to them. We discussed on the second episode of the ones we did earlier in the year about how we think about estate planning on a transatlantic basis. Money left in trust for someone in the UK by a parent who’s outside the UK is still fundamentally a tax efficient thing to do. That trust is still an excluded property trust. While the assets remain in trust and the trust is not invested in UK assets. That trust is entirely outside the scope of inheritance tax and that’s really powerful. What we spend a lot of time talking to clients about is how valuable is that inheritance tax protection? Because let’s say, for example, this client, this child in the UK has 40 years left to live. Fantastic. We’re going to avoid a 40% charge to inheritance tax in 40 years time. In the meantime, there is heightened administration and tax consequence of running a trust that has both US and UK tax exposure. How much annual tax and administrative inconvenience are you prepared to go through in that scenario for a 40% inheritance tax saving at your death? And for every client that is going to be somewhere on the spectrum different to everyone else compared to, for example, if we are concerned about that inheritance tax exposure insuring the risk taking out a life insurance policy equivalent to the amount that I would otherwise pay in inheritance tax. So I would say it’s not, no, don’t use trusts. And it’s not, yes, absolutely use trusts. It’s the right trusts for the right people.

 

Richard:

[00:43:10 – 00:43:16]

I actually think one of the main reasons the driver behind people establishing irrevocable trusts is asset protection.

 

Aidan:

[00:43:17 – 00:43:17]

Yes.

 

Richard:

[00:43:17 – 00:43:27]

You know, you just are constantly aware that everything you’ve worked so hard for can, can go up in smoke here. Contentious litigation and people would in the.

 

Aidan:

[00:43:27 – 00:43:55]

Same way, in the same way as a lot of people hold their properties through LLCs for the limited liability protection that it provides. Not because there’s any sort of tax wheeze, but because it just provides the owner of that property with protection if there’s any chance of them being litigated against because someone trips and hurts themselves in their property. We don’t do that in the UK because we aren’t, generally speaking, as ideologically litigious. So yeah, I fundamentally agree with you. I think that is a mindset in US asset management that just doesn’t exist in the uk.

 

Richard:

[00:43:55 – 00:44:08]

But if you’ve set up an irrevocable trust in the U.S. for that reason, asset protection, and you’re not really thinking about inheritance tax, honestly, it’s just about having have you’ve done well, you want to protect it and you, you or some of your family beneficiaries move to the uk. Can this still work?

 

Aidan:

[00:44:09 – 00:44:33]

It can work. You, the grantor Moving to the UK is much LE will be much less tax efficient from the 6th of April as it is currently. That, I think is the fundamental your kids move to the uk. Yes, it can be made to work, you’ve got to watch it, we’ve got to manage it carefully. But yes, it can be made to work if you, the grantor, with your irrevocable trust move to the uk. That is now the scenario where we need to be much more careful and.

 

Richard:

[00:44:33 – 00:44:51]

Presumably, you know, given the name, is irrevocable. If you do that, there’s not much you can do. Right. As a grantor. If I did, if I established put 5 million to an irrevocable trust, I later decided I was an 80 year old in Florida who decided I want to go back to the UK and I do that am I just. Do I just have to accept that this is kind of going to stink or.

 

Aidan:

[00:44:51 – 00:45:19]

It’s not necessarily. It’s not going to stink, it’s going. You’re going to have more tax to pay in the UK than you would have paid in the current scenario. But don’t forget, they’ve still got that 10 year period. And from an inheritance tax perspective, that might be the principal thing they’re concerned about. There might be some income tax and capital gains tax to pay. But you know what, there are probably quite a lot of people that can kind of get on board with that. It’s the reinclusion of those trust assets within the inheritance tax system after 10 years, that’s what stinks. But if your client is 80, that may well never happen.

 

Richard:

[00:45:19 – 00:45:30]

But Aidan. So if I do that, I still get the 10. So even though the trust is a distinct separate entity to me, because I’m the grantor, the trust gets a 10 year, I can exclude the trust for 10 years as well.

 

Aidan:

[00:45:30 – 00:45:38]

The status of the trust relates to the status of the grantor. So if the grantor is not in the UK for more than 10 years, the trust remains outside the scope of inheritance tax.

 

Richard:

[00:45:39 – 00:46:01]

And I feel we’re getting overly technical here. I keep going. I’ve held back at various points here as well, but I feel getting too technical. So as we wrap up, just summarize the situation. Things have changed. There’s. There’s clarity now, which is, which is for the most part a good thing. And even if you’re quote unquote one of the losers, generally the fact we have clarity is a good thing because we can plan around that.

 

Aidan:

[00:46:01 – 00:46:19]

There is clarity. If you are someone who’s been outside the UK for less than 10 years, for fewer than 10 years, you may still be inside the inheritance tax net for your foreign assets. If you’ve been outside the UK for more than 10 years, you can rest more easily. Now, the UK government is not going to come for your foreign assets, but watch that UK pension.

 

Richard:

[00:46:19 – 00:46:23]

And when do people need to be thinking about speaking with someone like yourself?

 

Aidan:

[00:46:24 – 00:46:54]

I would say in that first 10 year period, your estate planning or any discussion you have with your US advisors still needs to involve UK advisors. After that 10 year period, it’s about the residual UK estate. So are you keeping back a UK pension? Do you still have a UK home? So we still need to be involved in that estate planning discussion. But for those clients that have been in the US for 30 or 40 years, my involvement now is probably a lighter touch than it or it will be after the 6th of April, a lighter touch than it is currently.

 

Richard:

[00:46:54 – 00:46:55]

And I’ll add to that, if you’re.

 

Aidan:

[00:46:55 – 00:47:11]

Going back, and if we’re going back, if you’re coming back, you might find yourself with a better regime. But with that better regime come some opportunities that we can take advantage of and some new pitfalls that we need to take advantage of as well. So my mantra is always going to be take advice before you do it.

 

Richard:

[00:47:11 – 00:47:12]

It’s better to prepare than to repair.

 

Aidan:

[00:47:13 – 00:47:16]

I have used that phrase quite a few times since you used it last time.

 

Richard:

[00:47:16 – 00:47:20]

It’s a good one, isn’t it? I can’t take credit for it. Aiden. Where can people find you?

 

Aidan:

[00:47:20 – 00:47:35]

My name is Aidan Grant. I am a partner in the firm of Collier Bristow here in London. You can visit our website@collierbristo.com I also have a podcast as well looking at US and UK planning called UK USA. If you Google it. I’m sure you’ll find it if you google my name. I hope you’ll find me as well.

 

Richard:

[00:47:35 – 00:47:46]

Yeah, well look, thanks for coming on. Again, as we mentioned before, you have a standing invite to go on this podcast whenever you think you have something relevant and interesting to share with our audience. I really appreciate it. Thank you.

 

Aidan:

[00:47:46 – 00:47:47]

It not at all.

 

Richard:

[00:47:49 – 00:48:48]

All right folks, that’s another episode of we’re the Brits in America 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 and immigrants thrive in America, I’d ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it. I your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US Based lifestyle financial planner and Wealth Manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you can find us on our website www.planfirstwealth. 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 time.