What changes could the Budget bring for US expats in the UK?

New rules for non-domiciled individuals 

The UK government is considering switching to a four-year residence rule for tax purposes, which means US citizens living in the UK may only get tax breaks for the first four years of residency. After that, they would be taxed on worldwide income just like permanent UK residents. 

Trevor says, “This could mean significant changes for US expats who have been relying on the remittance basis for managing UK tax liabilities, particularly those who have been in the UK for more than four years.”

Could the UK-US Estate Tax Treaty mitigate impact to inheritance tax? 

The UK could start applying inheritance tax to worldwide assets after 10 years of residency – and possibly for 10 years after leaving the UK. 

Trevor says that despite this, the UK-US Estate Tax Treaty may help to protect US citizens from some of these changes, depending on how the reforms are structured. “For US expats, understanding the protections offered by this treaty is essential. There may be instances where the treaty disallows the UK from enforcing these new IHT rules, especially for individuals returning to the US.” 

Impact on offshore trusts and asset planning 

“US citizens who use offshore trusts for estate planning may face new challenges under the proposed changes. The UK may seek to limit the use of these trusts for deferring or avoiding UK taxes.” 

“However, the application of these rules will again be subject to the constraints of the UK-US tax treaty, offering potential relief for US citizens.” 

Capital Gains Tax (CGT) considerations 

“With UK and US CGT rates currently aligned at 20%, we’ve seen US citizens considering selling assets before the budget is announced to lock in current rates. Post-budget, changes could see higher CGT liabilities for Americans who have been in the UK for 4-7 years, especially if the new residence rules remove the option to use the remittance basis for CGT after four years.” 

Changes to the 25% tax-free pension lump sum 

There is also speculation that the Chancellor may be considering changes to the 25% tax-free lump sum, currently available under UK pension rules.  

Trevor says, “For US citizens, this could result in a significant tax hit, as the UK-US Income Tax Treaty currently allows this lump sum to be tax-free in both countries. If the UK removes or restricts this benefit, it could result in the lump sum being taxed by both the UK and the US, increasing the overall tax burden for many US expats. The smart move might be to wait, especially for Americans intending to return to the US one day. Then take the pension out as periodic (non lump sum) amounts. Under the treaty there will be no UK tax and built up foreign tax credit surpluses may remove the US tax also. ”

Action before 2025?

Some of the proposed reforms may not come into effect until April 2025, so US citizens would have until the end of this calendar year or early 2025 to make important financial decisions. However, for Americans, tax planning is also influenced by the US tax year and potential changes stemming from the upcoming US election. This potentially shortens the window for action and throws another question into the mix : do I expedite my planning into 2024 or is it better to wait until Quarter 1, 2025?

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