Navigating the special relationship: Traps and pitfalls for US persons in the UK

The US and the UK are not only two nations divided by a common language, but by equally complex and sometimes frustratingly incompatible tax regimes.

Where individuals find themselves within the scope of both regimes, particularly by virtue of being a US citizen or Green Card holder and becoming UK tax resident or owning property in the UK, it is vital that they obtain advice in both jurisdictions. This is because there are a variety of ways in which these two regimes overlap and, more importantly, a number of potential traps and pitfalls for the unadvised.

We have highlighted below a number of points which should be borne in mind from a UK tax point of view when a US person is considering becoming UK tax resident or purchasing property in the UK, e.g. a UK residential property.

US persons becoming UK resident

It is not necessarily the case that if an individual spends no more than 90 or 182 days in the UK they will remain non-UK resident.  The number of days that an individual can spend in the UK without being UK resident will likely depend upon their “ties” with the UK and there is a statutory residence test which needs careful consideration and bespoke application.

Particular problem areas for US persons who become UK resident include:

• Living or revocable trusts: These are not necessarily transparent in the UK as they commonly are for US tax purposes and can be considered a substantive trust, with implications for the trust’s residence status and tax treatment.  We regularly review these arrangements and work alongside an individual’s US advisors to minimise the risk of any problems in the UK.

• Trusts and trust distributions: Careful thought needs to be given to any trusts with which a US person looking to become UK resident is involved as a trustee, beneficiary or protector/enforcer. This is partly because, in certain circumstances, it is possible inadvertently to make an otherwise non-UK trust UK resident, which has significant UK tax implications. Additionally, trust distributions can often be subject to genuine double tax with no credit available under the US/UK income tax treaty.  Advice should therefore always be taken when a US person is considering receiving a trust distribution whilst UK resident (or in a year in which they may become UK resident).

• LLCs, S-Corps or other entities: US persons often hold assets through entities that are disregarded (or “flow through”) for US tax purposes, e.g. LLCs or S-Corps.  These entities are not disregarded for UK tax purposes, or in some cases the treatment may be uncertain, which can potentially result in income or gains being subject to tax in both the UK and the US with no credit available.  The entity can also be considered UK resident (and therefore subject to UK corporation tax on its profits) if controlled or managed in the UK.

• Residence of companies: A non-UK company is treated as UK resident and subject to UK corporation tax if its “central management and control” takes place in the UK.  If a US person is moving to the UK, advice should therefore be sought in relation to how any companies (including entities that may be disregarded entities for US tax purposes) of which they are director or in respect of which they are otherwise involved should be managed to minimise the risk that the company could inadvertently become UK resident.

• Treatment of certain investments (e.g. mutual funds): The applicable rates of tax on certain investments can differ significantly between the two jurisdictions.  For example, long-term capital gains from US mutual funds may be taxed at preferential federal rates in the US, but they will likely be taxed at 45% in the UK.

• State and city taxes: Where income or gains are subject to tax in both the UK and the US and a credit is available under the income tax treaty, such credit will be available in respect of federal tax only. Credit will not be available in respect of state (or city) level taxes.

• Students: Unlike in the US, there is no exemption from the UK’s residence rules for students who come to the UK to study.  A full-time student in the UK will therefore likely become UK resident for tax purposes and subject to tax in the UK.  The US/UK income tax treaty may provide protection from UK tax for students from the US, but this does not apply automatically and must be claimed.

There are a number of potential planning strategies that US persons can consider, including utilising the foreign income and gains or “FIG” regime for their first four years of residence in the UK or remaining resident in the US for the purposes of the US/UK income tax treaty.  However, these will not protect against all of the issues above and advice should be sought well in advance of becoming UK resident.

UK inheritance tax v US estate tax

UK inheritance tax, like US estate tax, is charged at 40% and is an estate and gift tax (albeit with certain lifetime gifts being exempt).   US persons may therefore be forgiven for thinking that it does not matter if they become subject to UK inheritance tax on all or some of their assets as the rates are the same in both jurisdictions.

However, the exempt amount in the UK is significantly lower than in the US: £325,000 compared with $13.99 million in the US in 2025.  Therefore if a US person becomes subject to UK inheritance tax on their worldwide estate or other holds assets that are within the scope of UK inheritance tax, this can have a significant impact on their overall estate tax exposure.

However, an individual does not become subject to UK inheritance tax on their worldwide estate immediately on becoming UK resident.  Unless and until they become a “long-term resident“, they will be subject to UK inheritance tax on their UK situated assets only (which for these purpose includes indirectly held UK residential property and certain other related assets).

For US persons, the US/UK estate tax treaty can provide valuable protection provided the US person is not / does not become a UK citizen.  Careful consideration should therefore be given before applying for British citizenship.

A typical example of a UK situated asset that will (almost) always be subject to UK inheritance tax is UK residential property.  It is possible to plan efficiently though appropriate use of the available spouse exemptions, debt deductions, life assurance and, potentially, joint family ownership, but it is vital that advice is sought in both the UK and the US.

English wills

We would generally recommend that a US person puts in a place an English will to deal with their assets situated in the UK to make the UK probate process easier.  Again, this is an area where it is important that an individual’s US and UK estate planning documents are considered in tandem. We would not, for instance, recommend a US person holding UK property in their revocable trust.

Marital matters

Additionally, advice should be sought on whether having a property or spending time in the UK could be a sufficient nexus for divorce proceedings to be brought in the UK, as well as the effectiveness of existing pre-nuptial agreements and the approach of the English Courts.

As a firm, we have a specialist team for advising US clients and we are well placed to provide the necessary advice in relation to these and also more esoteric points not summarised above. Please don’t hesitate to get in touch.