TaxMar 15 2021

How the US and UK tax systems work together

  • Describe how the US and UK tax system works for US residents living in the UK
  • Identify some of the tax challenges Harry, Duke of Sussex might be facing
  • Explain how the remittance basis works
  • Describe how the US and UK tax system works for US residents living in the UK
  • Identify some of the tax challenges Harry, Duke of Sussex might be facing
  • Explain how the remittance basis works
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How the US and UK tax systems work together
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P may be able to claim a foreign tax credit under the US/UK double tax treaty for the US tax already paid, however this is generally only available if the funds are remitted in the UK tax year in which the funds arise and, even then, usually only on certain categories of income and gains (such as those linked directly to US real estate and US dividends).

Given the above, P may be better off simply falling back on the default arising basis, since US and UK tax would both be levied as the funds arose and so the likelihood of obtaining a foreign tax credit is usually greater. 

Additionally, once P has been UK resident for seven of the previous nine tax years, they must pay the annual remittance basis charge (starting at £30,000 and later rising to £60,000), further decreasing the potential efficiency of the remittance basis.

Inheritance tax 

If P is either UK domiciled or deemed domiciled, then they are liable to IHT on their worldwide assets. 

Conversely, if P is neither UK domiciled nor deemed domiciled then generally only their UK assets are exposed to IHT.  In almost all cases P’s residency status is irrelevant for IHT purposes.

However, as a US citizen P’s worldwide assets are also exposed to US gift and estate tax. Where both jurisdictions would each levy tax, a foreign tax credit may be provided by the US/UK gift and estate tax treaty. 

Whether a credit is available and which country retains primary taxing rights both depend on a number of factors, including the location of the taxed asset, whether P also holds UK citizenship and (if P is UK domiciled or deemed domiciled) to which country P has the closer ties.

That said, as a US citizen P currently has a US gift and estate tax lifetime allowance of $11.7m, and so it is only those individuals with estates in excess of this figure that realistically need be concerned about US gift or estate tax. 

However, US citizens should be aware that the Biden administration has mooted cutting this allowance significantly, ahead of a statutory halving of the allowance in 2026 anyway. For this reason many US citizens are currently stuck in a 'use it or lose it' conundrum.

Leaving the UK

In order to explain how, why and when an individual ceases to be exposed to UK tax, it is useful to refer to a real-life example.

Here we can turn to two of the most high-profile individuals to leave the UK recently: the Duke and Duchess of Sussex, Harry and Meghan.

Income tax and CGT 

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