UK nationals are continuously leaving themselves vulnerable to UK tax liabilities by adopting what is called a “Living Trust”, the popular US tax vehicle, because of changes to the 2006 Finance Tax instated in the UK, according to private client law firm Boodle Hatfield.
In certain circumstances, US nationals residing in the UK are also under potential liability, it says.
Living Trusts are typically taken out during an individual’s lifetime to avoid having to apply for probate in the US. The challenges come from the changes to the UK trust taxation, as part of the 2006 Finance Act, which introduced an automatic 20 per cent charge on the creation of lifetime trusts (with few exceptions), including the US Living Trust.
The UK legislation also includes periodic charges to UK inheritance taxes and exit charges when assets leave the trust, the law firm said.
“Difficulties arise for a UK domiciliary who is resident in the US, as he or she may well fall within both the UK and US estate tax regimes,” said Geoffrey Todd, a partner at law firm Boodle Hatfield, based in London and Oxford, who regularly advises UK nationals living and working in the US and US nationals in the UK.
He noted that UK nationals living in the US fall under false pretensions that they have lost UK domicile just because they have lived in the US for a long period, but it is difficult to loose UK domicile status and the individual is likely to be scrutinized from the Revenue in the UK.
The double-tax treaty between both countries will not prevent the tax charges and will even result in penalties if Living Trusts are not reported to the UK revenue authority.
Rather worryingly, Boodle Hatfield reports that UK nationals and US financial advisers and tax planners are still largely unaware of the changes in UK trust tax legislation and advisors continue to recommend Living Trusts as a sensible option, even to the extent of including UK assets within the vehicle, which Todd deems "disastrous" for the UK nationals.
Likewise, US nationals who hold assets in the UK, or if they become domiciled in the UK by spending many years in the country might also have a UK tax liability from a Living Trust made in the US.
“Not all Living Trusts will be caught and only those created or amended after 22 March 2006 are at risk. Much will depend on how the trust document is worded and the individual circumstances. We would always suggest that an individual considering or holding a Living Trust in the US but living or spending considerable time in the UK take advice," concluded Todd.