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

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 

Non-resident individuals are generally only liable to UK income tax on UK source income and on CGT on disposals of UK land (or companies holding UK land). 

However, the UK has anti-avoidance rules broadly stating that if an individual leaves the UK for a period of fewer than five tax years, and while non-resident receives income or gains on which they pay no UK tax, that tax may be clawed back when they return. 

Harry and Meghan should be aware therefore that a short secondment to the US would not be enough if they want to avoid these rules.