Client Affairs

American Expatriates Warned on Tax & Legal Pitfalls

Stephen Harris 26 July 2005

American Expatriates Warned on Tax & Legal Pitfalls

The costly legal and financial mistakes that Americans can make when relocating to live or work in the UK have been brought into sharp focus...

The costly legal and financial mistakes that Americans can make when relocating to live or work in the UK have been brought into sharp focus by a new study by Withers, the specialist private client law firm. Mistakes made by Americans include paying double taxation on income, facing substantial taxes on the purchase and sale of UK property, failing to negotiate critical non-salary compensation prior to relocation and relying on US pre-nuptial agreements when divorcing in the UK. The new report, Opening Doors in London: Legal Do’s and Don’ts for Americans Living and Working in London provides Americans and their advisors with major legal and tax planning advice, and offers practical guidance for the some 17,000 or so Americans who enter the UK on a work permit living and working in the UK every year. “One of the most common regrets voiced by Americans posted to the UK is that they did not take legal advice before leaving the US. The UK has a generally benevolent tax system for non-domiciliaries but there are some pitfalls that can be avoided with proper planning. Day-to-day practicalities such as buying property or negotiating employment contracts will proceed more successfully if individuals are fully informed on the UK legal system,” said Erik Wallace a US/UK tax and trusts specialist at Withers. Here are Wither’s top ten common errors made by Americans owing to a lack of knowledge of the UK legal and tax systems: 1 Paying tax twice on UK income Paying tax twice (in the US and UK) on UK income or gains is unnecessary in most circumstances, but a common mistake. For example, if certain residency tests are met, Americans can exclude up to $80,000 of UK earned income from US taxes and UK tax payments can be deducted from the amount subject to US income tax. 2 Being unaware of your tax obligations Confusion over UK tax rules is widespread but will not be a defence against late or unpaid tax. UK tax returns must be filed by 31 January as opposed to April 15 in the US. Missing the deadline will result in penalties and interest charges. Individuals who have established and are also serving as trustee of a funded revocable trust (a common American estate planning vehicle), are often unaware that they must pay UK income taxes on the annual income and gains if they continue to serve as trustee once they move to the UK. 3 Falling foul of tax if you marry a non-US citizen Marrying a non-US citizen can result in unexpected US tax liabilities if excessive gifts are made to that spouse in any one year. Non-US spouses do not qualify for the unlimited US gift tax marital deduction. Instead, only a set amount each year ($117,000 in 2005) may be gifted free from US gift tax to a non-US spouse. There are also special rules required to be met in order to qualify for the US federal estate tax marital deduction when the surviving spouse is not a US citizen. 4 Facing unexpected tax bills on UK property If you buy property in the UK and sell it at a profit, you are still liable for 15 per cent US capital gains tax on a share of the profit after a $250,000 offset ($500,000 per couple if jointly owned). However, if your spouse is British and owns the property, capital gains tax is avoided altogether. If you rent out a property in the UK when you return home, you must pay UK tax on the rental income and continue to file a UK tax return. 5 Neglecting your employment contract Failure to negotiate appropriate terms for a work assignment is the most common mistake made by Americans on postings to the UK. There are significant differences between UK and US payment schemes, packages and benefits and overlooking these contractual terms could leave you at financial risk if you change job or wish to return home. Your employer has no obligation to assist you in your relocation expenses or other issues unless you have a formal employment contract drawn up in the UK. 6 Overlooking work permit requirements Any American in the UK on a work permit must have four years uninterrupted work in the UK before applying for permanent residence. If you change your job before the time is up, you will have to persuade a new employer to apply on your behalf for a new permit, which could be particularly problematic if you change sector. 7 Divorcing in the wrong jurisdiction Choosing to start divorce proceedings in the UK, rather than the US, could have a major impact on how assets are split and financial support is granted. Following a pivotal divorce ruling in 2000 in the UK, it is more likely for a couple’s assets to be split 50/50 – but there is still no automatic right to equal shares as there is in many US states. 8 Relying on your US pre-nuptial Pre-nuptial agreements are not binding in the UK, although they could be influential in divorce courts. Do not rely on your US pre-nup for financial protection in the UK courts. 9 Failing to take responsibility for domestic staff Americans must pay income tax for all UK domestic staff such as nannies and gardeners and obtain work permits for them to enter the UK if they also relocate. Failure to pay income tax and National Insurance contributions on staff will incur substantial fines on top of the unpaid tax. UK employment law requires a statement of terms and conditions for staff to be written within two months of them starting work. 10 Ignoring directors' liability A director will not be held financially liable by a UK court if he/she has been considered to have acted honestly and reasonably. However, a company itself can be held responsible and, in a time of crisis, shareholders can reasonably assume an entitlement to recover their losses from any director involved at that time. It is essential for US citizens to seek advice on personal liability issues before taking on a directorship role.

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