Since 2024, there has been a surge in the number of US citizens applying for British citizenship according to sources such as, The London Daily. It reports that in the last quarter of 2024, more than 1,700 Americans applied for UK citizenship, the highest quarterly total in the last 20 years. Undoubtedly, the number of US citizens that choose to simply reside in the UK without requesting citizenship will be correspondingly high.
- The US is one of the only countries in the world, along with Eritrea, that taxes its citizens regardless of where they live creating significant complexity for US taxpayers living in the UK. From investments and funds to trusts and US limited liability companies, relatively straightforward planning can trigger unexpected UK and US tax consequences. Adam Jefferies, Private Client Director, highlights the key issues US‑UK taxpayers should understand and why specialist advice is essential.
Why US taxpayers living in the UK face unique tax challenges
Individuals born in the US are generally treated as US citizens for tax purposes regardless of where they live. While there has been periodic political debate on this issue, including proposals during President Trump’s previous administration to move towards a residence‑based system, the current position remains unchanged. As a result, the IRS continues to have a broad global taxpayer base and many US citizens living in the UK remain within the scope of the US tax system long after they have relocated.
Here are some of the key tax issues that arise for UK resident US taxpayers.
Investment pitfalls for US taxpayers in the UK
There are a number of areas of complexity when investing as a US citizen living in the UK, most notably:
- The tax advantages of investing through a UK ISA are well known – as long as you only add funds within the annual limit, growth is free of tax. However, whilst beneficial for UK tax purposes, the US has no such exemption. Any tax-free income and gains in the UK, can be fully taxable in the US.
- Similarly, US tax-advantaged investments are, more often than not, fully taxable in the UK (subject to other reliefs, such as the newly introduced Foreign Income & Gains (or ‘FIG’) regime).
Both the UK and US tax implications of investments should always be considered before putting your money to work.
UK and US funds: understanding the PFIC risk
Many mutual funds in the UK fall foul of the US’s draconian Passive Foreign Investment Company, or ‘PFIC’, rules, which can cause significant tax and administrative headaches. When investing in the UK, it is important to take specialist advice that considers the US impact of specific investment funds.
Trusts: different rules, different outcomes in the UK and US
Trusts are an extremely common asset-holding structure in the US which provide benefits such as estate tax and litigation protection. Whilst the UK also has trusts – the concept has been around since the age of the Crusades – there are some significant differences around how they can be structured and importantly, how they are taxed in each jurisdiction.
Why US trust planning should be reviewed before moving to the UK
Ideally, it is preferable to consider a US individual’s interests in trust before they arrive in the UK in order to avoid unintended tax consequences. This is especially relevant where the individual moving to the UK is a trustee, which can lead to the trust itself falling within the UK tax net.
US LLCs and the UK tax mismatch
LLCs are another very common structure in the US due to the simplicity of set up and tax position and, as the name implies, the limited liability the structure affords. In general, LLCs are transparent for US tax purposes, meaning the individual pays tax on the underlying income and gains of the LLC personally (thus avoiding the double tax point that opaque companies usually incur of corporation tax within the company and individual tax once the profits are extracted). However, HMRC’s general opinion is that LLCs are corporate entities (setting aside the case of Anson which found for the taxpayer), which creates an unexpected UK tax exposure.
The impact of HMRC’s stance on LLCs is twofold:
due to the different ‘tax point’ between the US and the UK on the individual (i.e., the US taxes the individual when the income arises to the LLC, whereas the UK only tax distributions from the LLC to the individual), tax credits usually cannot be claimed leading to effective tax rates of over 60%; and
HMRC could argue that the LLC is resident in the UK for tax purposes under the concept of ‘central management and control’. This is particularly common for single-member LLCs, i.e. those set up and run by a single individual. In this case, the LLC falls under the corporate tax regime, adding another layer of tax filing and complexity.
When US LLCs create unexpected UK tax exposure
The impact of this is twofold: firstly, due to the different ‘tax point’ between the US and the UK on the individual (i.e., the US taxes the individual when the income arises to the LLC, whereas the UK only tax distributions from the LLC to the individual), tax credits usually cannot be claimed leading to effective tax rates of over 60%.
Secondly, HMRC could argue that the LLC is resident in the UK for tax purposes under the concept of ‘central management and control’. This is especially in point for single-member LLCs, i.e. those set up and run by a single individual. If this is the case, the LLC falls under the corporate tax regime, adding another layer of tax filing and complexity.
The importance of specialist advice for US‑UK taxpayers
When it comes to UK resident US tax payers, even relatively benign tax planning or asset structuring can lead to unforeseen tax complexities. As such, specialist advice should always be taken.
How PKF and Credo can help
If you have any questions on the itopic of this article, please contact Private Client Tax Director, Adam Jefferies.
Important Notice
This marketing material has been prepared and issued in the United Kingdom by Credo Capital Limited (“Credo”). It is provided to you for discussion purposes only and does not constitute and should not be interpreted as either investment advice (including legal, tax or accounting advice) or a trading recommendation. This marketing material is not a solicitation to buy or sell any financial instruments or commodities, a recommendation to participate in a particular trading strategy or to invest into regulated or unregulated funds. The value of an investment can fall as well as rise and is not guaranteed, your capital may be at risk and you may not receive back your original investment in full.
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