What You Need to Know as a U.S. Expat Living in the United Kingdom
The Labour Party announced its autumn budget on October 30, 2024, and it contained some sweeping tax law changes that will impact U.S. expats living in the United Kingdom. Here we offer a reminder about how non-domiciled residents are currently taxed, then we highlight how that tax treatment will soon change.
Current non-domiciled resident tax obligations
Under current tax laws, UK residents that aren’t domiciled in the UK may elect to utilize special income tax provisions, referred to as the remittance basis of taxation. Under this regime, they can choose to pay UK income and capital gains taxes on only the income and gains generated within or brought to the United Kingdom. Any income earned and gains generated outside the United Kingdom are only subject to UK taxation if remitted to the UK. Similarly, for these non-domiciled persons, inheritance taxes (IHT) only apply to assets situated in the United Kingdom.
UK residents can claim non-domiciled (non-dom) status for up to 15 years. After 15 years of being a UK resident, they lose non-dom status and need to begin paying taxes on their worldwide income. In addition, worldwide assets become subject to IHT and remain within the scope of IHT for six years after the individual moves outside the United Kingdom.
The October 30 budget announcement made significant changes to these tax provisions.
Remittance basis – abolished
The remittance basis of taxation will be abolished beginning on April 6, 2025. Those currently utilizing that method of taxation who have been resident in the UK for more than four years will then become taxable on their worldwide income. Anyone residing in the UK for less than four years will be able to apply the new residency-based system through their fourth year of UK residency. This is a simpler system, as there is no tax during that period — or in the future — on income earned outside the UK during this period.
For a new arrival to the UK, there’s no tax on foreign income and gains earned during the first four years of UK residency, and no taxation should such income be brought to the UK at any time.
For taxpayers who were formerly on remittance basis taxation and have offshore income they never remitted to the UK, there’s a new temporary repatriation facility (TRF). For UK tax years 2025/26, 2026/27 and 2027/28, income and gains can be declared to the UK authorities and taxed at preferential rates of 12% and 15%. Such funds need not be brought to the UK but can in the future be brought to the UK free of any additional tax. It’s important to note the UK won’t give credits for taxes paid overseas on the same income when using the TRF.
Inheritance tax (IHT)
Starting April 6, 2025, inheritance tax will shift from a domicile-based system to a residency-based system. For the first 10 years of an individual’s residence, IHT will only apply to UK-based assets. After 10 years of residency, the individual will be deemed a long-term resident (LTR) subject to IHT on all worldwide assets. On the death of a long-term resident, his or her worldwide estate will be subject to IHT at a 40% tax on amounts in excess of the nil rate bands.
It’s important to note that after an LTR moves away from the United Kingdom, IHT will continue to apply to all worldwide assets for a number of years, depending on how long they were a UK resident. If the individual lived in the United Kingdom for 10 to 13 of the previous 20 UK tax years, they’ll be subject to IHT on worldwide assets for three additional years. If the individual resided in the United Kingdom for 20 years or more, they may be subject to IHT for up to 10 years.
The new system also specifies that effective April 6, 2027, unused pension funds (including death benefits payable by a pension) will be added to an individual’s estate for IHT purposes.
There have also been significant changes to the taxation of trusts that are too complex to enumerate here.
Capital gains tax rates
The Labour Party also announced an increase in capital gains tax rates, effective October 30, 2024, as follows:
- For UK basic rate taxpayers with taxable income and gains up to £37,700 per year, the capital gains tax rate will increase from 10% to 18%.
- For UK higher rate taxpayers with taxable income and gains greater than £37,700 per year, the capital gains tax rate will increase from 20% to 24%.
- No changes were made to the 18% and 24% capital gains tax rates that currently apply to residential property gains.
What this could mean for you
Assuming you have no plans to move back to the United States, these tax law changes will likely have little impact on your long-term financial security. If you’re not planning on staying in the UK, while there’s no exit tax to consider, the changes in the way IHT tax is applied may impact the taxation of your estate.
Could you use help understanding the new UK tax laws? Creative Planning International is here for you. We specialize in helping U.S. expats and cross-border families navigate the complex interaction of multi-jurisdictional tax and regulatory regimes and develop custom wealth management strategies to meet their unique needs. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.
