How U.S. Citizens With Double Citizenship Can Deal With Their Tax Challenge

How U.S. Citizens With Double Citizenship Can Deal With Their Tax Challenge

US citizens in the UK no longer on the remittance basis of taxation there and who had been in the UK for more than seven years will be taxed by both the US and the UK tax authorities on a worldwide basis. In terms of the US/UK tax treaties allows the US and the UK to tax foreign investments under their own domestic rules. Whenever you deal with cross-border issues, it is crucial to take advice in both jurisdictions. What might be an opportunity in one domain might cause a severe liability in another.

If you invest in non-US collective schemes like unit trusts or ETFs (exchange-traded funds), which are classified as “passive foreign investment companies,” your investments will be liable to unfavorable US tax and interest charges. In the UK, these investments will make you responsible for UK offshore income gains taxes at a rate of either forty or forty-five percent.

  • You and your children a liable to all UK taxes on your worldwide estates, including your universal income and all capital gains.
  • This is the case because you are domiciled in the UK, or sometimes if you have been a UK resident for more than 15 consecutive years and are deemed to be UK domiciled.
  • As US citizens, you are liable to all US taxes on a worldwide basis too.
  • When you do submit your US and UK tax returns, you should remember to apply for all the foreign tax credits you might be eligible for.

Dual Compliant Investment Options

If you want to avoid these pitfalls, you have to invest only in dual compliant investment options like shares in publicly traded companies, individual bonds and US mutual funds and ETFs that have UK reporting status. A problem you are likely to encounter when you attempt the same is resistance from both US and UK investment managers and brokerage firms who might decline to work with Americans that live in the UK because of regulatory restrictions and complexities.

To avoid any such resistance, you should work with one of the small group of UK investment specialists in providing dual investment services to Americans in the UK. This specialty will most likely be advertised on their websites but you have to make very sure that they do provide a dual compliant information reporting package.

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Dual Compliant Information Reporting Package?

In the US, reports must be according to the calendar year, while in the UK, it must conform to the tax year. In the US, statements must be made in the dollar while in the UK, of course, the pound sterling. If you give your accountant dual compliant information, it will significantly reduce his rate for producing your annual tax returns.

What About savings Accounts?

You can freely open a savings or investment account in the UK. In terms of FBAR accounts with more than $10,000 in it must be reported on the particular FBAR form as part of your annual US tax return, it does not create any adverse tax consequences.

Now For The Good News

  • In terms of the unified credit exemption amount, Americans can pass up to $11.4 million in assets free from gift or estate taxes.
  • As for the UK, no inheritance taxes should be due there except if your Dad has holdings in the UK.
  • Your inheritance can come to the UK as so-called “clean capital” free from any income-or capital gain taxes although any subsequent income or gain would be taxable in both jurisdictions – if you did not invest dual compliant from day one.
  • What is more, your Dad can make exclusion gifts of up to $15,000 per annum to every one of your daughters without affecting his unified credit exemption amount in any manner at all.
  • Alternatively, he could make more substantial gifts that would reduce his exemption amount at the time of his death. Of course, the same goes in terms of dual compliant investments to protect your daughters against adverse tax consequences.

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More Detail

In the UK, your individual retirement accounts (IRAs) will be treated as pensions under the US/UK double tax treaty, so you and your daughters will be liable to the UK tax on distributions from the IRA.

You will have to hold your IRA account in the US through a custody bank, but your IRA could be managed by a qualified UK investment manager.

If your dad has holdings that are not in his own name but through a US living trust, he does risk a potential UK tax charge when the assets are distributed to you after his death.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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