The UK tax rules are notoriously complex, and the recent shift from the remittance basis to the Foreign Income and Gains (FIG) regime has added to this complexity. Meanwhile, the US Internal Revenue Code with its 51 jurisdictional peculiarities presents additional challenges. It is therefore little wonder that UK residents often feel overwhelmed when crafting a tax-efficient strategy for US investments.
US real estate investments
For UK long-term residents investing in US real estate, the main taxation goals are:
- Income tax neutrality: Achieving a similar tax position as with UK real estate investments.
- Estate tax neutrality: Ensuring US estate tax exposure is no worse than UK estate tax exposure.
Achieving these requires a coordinated approach across jurisdictions to avoid common pitfalls:
- US counsel often recommends a non-US corporation holding a US corporation or LLC for real estate investments. While beneficial for US estate tax, this structure may not suit UK residents due to potential double charges to capital gains tax and pre-existing IHT exposure.
- LLCs are treated as partnerships in the US but as companies in the UK, leading to a combined tax rate of over 62% for UK residents. A partnership structure recognised in both jurisdictions is usually preferable.
The key takeaway is that tax-efficient US-UK investing requires alignment in tax treatment to ensure tax in one country is creditable against the other. A unilateral approach can disrupt after-tax return projections.
US non-real estate investments
For UK residents investing in non-real estate assets like US equities, similar taxation goals apply, with additional considerations:
- US source dividends face a 30% withholding tax, but UK investors can claim a reduced 15% rate under the US-UK Income Tax Treaty by completing Form W-8BEN.
- Generally, US capital gains tax does not apply to non-resident aliens holding US quoted equities.
- However, US estate tax at 40% applies to non-resident aliens with only a $60,000 exemption. The US-UK Estate Tax Treaty may help manage this by granting exclusive taxing rights to the UK.
Conclusion
While it is never sensible to let the tax tail wag the investment dog, the cross-border tax treatment of a US investment is a key factor that will drive after-tax investment returns for UK investors over time. Careful planning and a holistic understanding of both the UK and US tax systems is therefore vital.
Note: This article reflects the authors' understanding of US tax and legal matters and should not replace specific legal advice.