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Top 5 Destinations for U.S. Expats in 2022

Top 5 Destinations for U.S. Expats in 2022

I’ve given myself a fun assignment this time around as we look forward to 2022. No worries about where the stock market may be heading after a great bull run off of the panic lows brought on by the pandemic in early 2020. No wondering what sectors or asset classes look primed to perform, or fizzle, in 2022 in this article. What a relief to not have to worry that my market predictions committed to writing will come back to haunt me next year… Those are all on my mind every day, of course – occupational hazard! On this occasion, I’ve decided to turn my focus to dreams of ideal expat lifestyles instead.

I thought it might be a good time to consider where investors might decide to go and live off of the nest egg they’ve accumulated over their lives, particularly after the good market years we’ve had. Or where they might go after cashing out on the massive appreciation in the U.S. homes. Lately, the employment numbers are suggesting that many, including a surprisingly high number of Americans that are still in their traditional “working” years, have decided not to return to the office and prefer retirement, or some form of quasi/semi-retirement, instead. I talk to such people on a weekly, usually daily basis, so I have at least some perspective to offer on the subject.

As an expat financial advisor, I get the privilege of helping Americans game plan for these types of life-changing moves. This can be incredibly satisfying work, meeting so many different people with diverse backgrounds, financial circumstances, and lifestyle objectives and helping each one of them map out a sustainable long-term plan that allows them to accomplish their dreams of living their new adventure abroad. I thought it might be worth discussing some of the top destinations where Americans, still working or in retirement, seem to be going, and just comment on a few of the considerations that might factor into their planning once they decide on these new residence countries.

This is by no means an exhaustive list of great destinations for expats, and I’ll admit there is a bias toward destinations both within our advisory experience and that offer financial efficiency (bang for the buck) on top of quality of life that will intrigue potential American expats. Additionally, the options needed to include a couple of great places to work (office or remotely) and not just retire. Accordingly, I’ll discuss five top destinations in alphabetical order rather than any particular ranking.

COSTA RICA

When I think about retiring abroad on a tight budget, my mind immediately turns to our southern neighbor (Mexico), and their neighbors (Central and South America). Many of the positives that expats can find in Costa Rica apply to a good deal of the countries in the region. However, we’ve narrowed the list to five countries and the Americas deserve a spot, and it goes to Costa Rica.

One thing that may concern would-be expats is political/military stability. No one wants to buy a property abroad and then find their new residence country embroiled in civil war or border conflicts – talk about disrupting the quality of life! As far as that risk goes, Costa Rica seems like a Latin America best bet in terms of political/military conflict and is often hailed as the “Switzerland” of Latin America. Let’s assume that’s not for the great skiing and hot chocolate and simply because Costa Rica has no military and, instead, focuses on education and healthcare.

From a tax perspective, Costa Rica seems better than Switzerland … by a long shot. If the U.S. expat’s income comes from all U.S. sources, they should not incur Costa Rican income taxes. If the expat is working while resident in Costa Rica, the income tax rates in Costa Rica are usually lower than effective U.S. tax rates. Since U.S. citizens and permanent residents (green card holders) still have to pay income taxes, but can use the foreign earned income exclusion and/or foreign tax credits to offset U.S. tax liabilities, working in a lower-tax country like Costa Rica isn’t likely to increase the overall income tax burden for Americans by much, if at all. Property taxes are also pleasantly low, at 0.25% of the property value.

But what also makes Costa Rica truly attractive is that those after-tax dollars go further than they would in your typical tropical or oceanfront paradise. Costa Rica is famously affordable in terms of good housing (renting or owning) and your other typical expenses to enjoy a suitable quality of life. The healthcare system in Costa Rica is considered quite good and affordable. Once an expat becomes a legal resident of Costa Rica, they can participate in a government-run health system by choosing either to pay cash or purchase private insurance. Either way, expect the prices of good healthcare to be lower – much lower, than here. Finally, Costa Rica is known to have a relatively straightforward residency program for expats, which might check another very important box for Americans looking to venture abroad.

FRANCE

France offers a wide range of lifestyle choices from the bustling cultural epicenter of Europe (Paris) or vibrant Lyon, to less urban, pastoral fare throughout the nation and, of course, the relaxing and sublime Mediterranean southern coast. There is something for everyone’s budget in France in terms of where to live, and great food and wine to make whatever lifestyle the expat wants all the better! The variety of regions within France is truly magnificent, including Spanish influences in the West and German influences in the East. Living in the center of Western Europe also opens the door to affordable and convenient trips to the rest of the continent, too!

French taxes would normally give Americans a fair amount of sticker shock. If you live and work in France, there’s no getting around that issue. However, and to the surprise of many, France can be a very, very attractive option for U.S. expats in retirement. The secret ingredient to an affordable francophile retirement lies in the fine print of the income tax treaty between the U.S. and France. Americans enjoy substantial treaty relief from French income taxes on most of their U.S.-source income – from their pensions and Social Security to their dividends and capital gains on U.S. stocks, their interest payments from U.S. bonds, and their rental income from U.S. properties to boot! A word of caution for affluent Americans who want to spend the entirety of retirement in France: the inheritance tax treaty is not similarly generous. If leaving a legacy to your family is a priority, keep that in mind. If it is not, France is calling you, but perhaps leave your tacky American tourist outfits behind.

MALAYSIA

We’re big fans of diversification at Walkner Condon and it seemed unfair to ignore Asia’s treasure trove of quality expat offerings. If you pursue the publications on best destinations to live, it’s clear that Asia has many quality offerings, including Vietnam, Thailand, Singapore, Hong Kong, Taiwan, and, of course, Malaysia. Based on a sampling of expats that I talk to, the pandemic has altered the atmosphere in Singapore in terms of visa processing and genuine openness to immigration. When it comes to Hong Kong and Taiwan, the current positioning of the Chinese government is hard to ignore. Accordingly, while I have great fondness and familiarity with these destinations, I can’t give them a current top-five ranking. 

Malaysia edges out the neighboring competition for consideration as a top-five expat destination in the world and the Asian representative on our list for 2022. It has a highly educated population with a tremendous healthcare system. Kuala Lumpur may be one of the most underrated (and/or least discussed) cities in the world – a financial/economic powerhouse that offers a high quality of life and great opportunities to work. A recent survey of 15,000 expats ranked Kuala Lumpur as the best city for expats, citing its relative affordability, livability, and ease of settling into life there. For those seeking refuge in natural beauty, from green pastoral hillsides to beaches and unspoiled islands, Malaysia has something unique to offer you.

One of the attractions from our perspective is the territorial approach to income taxation in Malaysia. For a U.S. expat living in Malaysia, this means that income generated outside of its borders will not be subject to Malaysian income tax. This is a recurring theme in our rankings and for good reason – Americans always have to deal with U.S. federal taxes no matter where they live, so why not find a country of residence that does not add to the burden! While those who work in Malaysia will be subject to taxes on their earnings, the Malaysian income tax system is progressive but relatively compatible with U.S. federal income tax rates (30% maximum on income above approximately $500,000), so the net tax burden of Malaysian taxes should be minimal for most expats working there.

Other strengths of Malaysia include the fact that expats give the country high marks for ease of immigration (the visa process) and transition. You can get by with English in most places, too. If you decide to move there, you’ll find a population that is very accepting of expats. It’s been a haven for Americans and Brits in particular for decades, so you may find a social community to help guide you as you transition to life abroad, too!

PORTUGAL

Portugal has a long tradition as a favorite host to European (particularly British) retirees who want to remain in Europe but desire a friendly culture with an attractive budget so they can stretch their pensions further. Over the past couple of years, Americans have finally caught on to the fantastic value and tremendous quality of life that beckons in Portugal. Without any doubt or close second on or off of this list, Portugal has trended higher and higher for Americans looking to move abroad. 

Portugal offers one of Europe’s greatest concentrations of English-speaking expats along the southern coastline (especially the Algarve region). But Americans seem to be moving in droves to Lisbon, the beautiful coastal area of Cascais just to the north of Lisbon, Coimbra and Porto as you journey further north, and Setubal should you prefer to live just West of the capital. Moreover, Portugal has become more than a retirement destination for Americans, but also for younger families that have careers that allow them to perform their work from anywhere (e.g., consultants and “digital nomads”). Portugal ranks high on Europe’s relative affordability scale, with very reasonable and good health care. Like France, Portugal has a relatively laid-back culture where people enjoy long, relaxing meals with good wine and a general zest for life.

This infusion of expats to Portugal is no accident. Rather, it is the byproduct of a concerted effort by the Portuguese government to inject their economy with affluent foreigners. At the heart of that effort is an immigration policy that includes a Golden Visa program, whereby foreigners wanting to live in Portugal make investments in property or Portuguese-based funds that are committed to developing the country. The other important component is, not surprisingly, very friendly taxation policies to make living in Portugal more financially attractive. First, Portugal has abandoned death taxes and has neither an estate tax nor an inheritance tax. Retirees looking to leave a legacy to their families will find this advantageous to the estate planning dilemma presented in most western European countries. Second, and perhaps more significantly, Portugal has rolled a tax regime that is wildly popular with expats known as the “non-habitual resident” (NHR) program.

Originally, Portugal’s NHR program enabled expats to avoid Portuguese income taxes on almost all non-Portugal source income. There are exceptions beyond the scope of this discussion. It is noteworthy that the NHR program was slightly modified in 2020 to place a 10% flat tax in Portugal on foreign pension (e.g., 401k, defined benefit pensions, IRAs, and Social Security) distributions. However, for Americans, who pay U.S. income tax on their income from all worldwide sources, the 10% Portuguese income tax on pensions produces a foreign tax credit that reduces U.S. income liability by the amount paid to Portugal, so this is usually not a true fiscal burden for U.S. expats that wish to retire in Portugal. The tax break also extends to those who wish to live and work in Portugal, because the NHR program will lower the Portuguese tax on wages/earned income that is Portuguese-sourced to an attractive flat rate of 20%. 

The NHR program is available to be claimed during your initial year of Portuguese tax residency and extends for the first 10 years of tax residency. Thereafter, expats remaining for longer will be subject to normal Portuguese tax rates on income from all worldwide sources. Those tax rates currently run progressively higher than comparable U.S. federal income tax rates, so plan accordingly. For those envisioning a retirement that begins with an overseas adventure and plenty of travel around the European continent, Portugal and its NHR program are more than worthy of further investigation!

UNITED KINGDOM (UK)

Dreaming of retirement in a tropical paradise? Looking to learn a new language and immerse yourself in a completely different culture? If the answer to these questions is a “hard no,” then the United Kingdom may be your best bet as the overseas destination of choice. Besides the kinship with America, if you were concerned over the last few years that Brexit would destroy the nation … so far, it hasn’t.

It’s no surprise that the United Kingdom remains, as always, a haven for U.S. expats. It’s simply an easier cultural transition, and the amount of business transacted between the former colonies and Britain means that immigration between the two allies solidifies the UK as an attractive landing spot for Americans abroad. Of all the residence countries that my clients call home, it is also the one where the “dual national” status – holding both the U.S. and residence country passports – is most common. Much like the United States, the United Kingdom offers a diversity of urban, suburban, and rural locations, and the cost of living can vary dramatically depending on the lifestyle that best suits the expatriate. 

The United Kingdom also offers the expat adventurer some potential tax relief through the remittance basis of taxation. That’s sometimes helpful because UK income taxes are usually more onerous than American expats may be accustomed to. However, this tax status is complex with a myriad of special rules. To be brief and overly general about the remittance basis of taxation, expats can elect freely in any of their first seven years as a UK tax resident to pay UK income taxes on only (1) their UK-source income, and (2) the income that they remit (bring over) to the UK. If an expat is either (a) planning on staying in the UK for a relatively short period, and/or (b) has the bulk of their income coming from non-UK sources, this can be an attractive incentive indeed. Otherwise, if you are (a) working in the UK, and/or (b) planning to remain in the UK longer term, the remittance basis of taxation may not be your cup of tea. Be sure to work with a very good tax expert that can advise on your U.S. and UK income taxes before deciding on whether to make that election and how to navigate your money movement across the Atlantic thereafter!

Sorry if the last paragraph made your head hurt or put you to sleep … the financial advisor in me precludes an article fit for a travel magazine. At the end of the day, our international team loves learning about our clients’ collective and unique experiences living abroad and we aim to help them stretch their accumulated wealth as far as possible wherever they may settle. Taxes, housing costs, general cost of living, healthcare quality, and cost all should factor into the analysis. There are so many great choices to consider for an American contemplating a move overseas, so we recommend both an open mind and that the would-be expat does their homework ahead of time. Let us know if we can help in that regard.

This piece is part of Walkner Condon Financial Advisors’ 2022 Investment & Market Outlook Guide. You can read the entire guide by clicking the image above or by clicking here.

Five Things for Americans to Know Before Moving to the United Kingdom

Five Things for Americans to Know Before Moving to the United Kingdom

With our historical links and common language, it is no surprise that hundreds of thousands (at least 200,000) American citizens reside in the United Kingdom. London has long been a truly international city and many Americans live and work in the greater metropolitan area. In my professional experience, more U.S. expats in the United Kingdom choose to remain in the UK than may be the case in any other foreign country. In fact, many clients come to identify as Brits and hold U.S./UK dual citizenship. 

However, whether you are considering a short, intermediate, or long-term move to the United Kingdom, there are a variety of planning topics that are best considered prior to making the move. In this blog, I discuss five key issues, but there are many, many more unique tax, estate planning, and investment issues that Americans in the United Kingdom may have to deal with once they become a resident in the United Kingdom. Each one of these issues below would merit a separate article, so consider this a cursory examination of these five topics that hopefully lead to further inquiry and discussion with your accountants, attorneys, and/or financial planners.

UNDERSTAND THE DIFFERENCE BETWEEN REMITTANCE BASIS AND ARISING BASIS TAXATION

Unlike the United States tax policy of taxing its citizens on their global income regardless of where they reside, most countries, including the UK, subject only those who are tax residents of that country to income taxes on both their country-sourced and non-country-sourced income (i.e., their worldwide income). To attract affluent foreigners and foreign companies to the UK, the UK has created a temporary tax status for non-UK nationals who chose to become residents of the UK called the “remittance-based” election. 

Accordingly, during the first seven years of UK tax residency, a non-UK national may elect the remittance basis on their UK income tax return, and thereby pay UK income tax only on two types of income: (1) UK-sourced income, and (2) non-UK-sourced income that is remitted to the United Kingdom. Remitting generally means that the funds are physically moved to the UK or used to pay UK obligations or purchase goods, services, or other assets in the United Kingdom. This election can be freely made for the first seven years; but, there are substantial fees/taxes paid to the HMRC (Her Majesty’s Revenue & Customs) to extend that privilege for a limited period (up to eight more years) thereafter. For those that do not elect the remittance basis, or for those whose remittance-basis term has expired, UK taxes income on the “arising basis,” meaning simply that all income from all sources (foreign and abroad) is taxed in the year in which it is received by the taxpayer.

At first blush, remittance basis sounds like a proverbial no-brainer for any expatriate that will derive any income from outside of the UK, whether that income is earned through business conducted outside of the UK, earned through passive investments in real estate, stocks, bonds, etc., or otherwise is characterized as non-UK-sourced income. However, the decision to elect the remittance basis in any of those initial seven years of UK tax residency is one that should be very carefully considered. Without going into considerable detail (and the rules surrounding remittance taxation contain meticulous details) the remittance basis can create accounting headaches, perhaps even nightmares, whenever funds are eventually remitted to the UK and the UK taxes come due on that part of the remitted funds that are attributable to income earned during the period in which remittance basis was claimed. The process of attribution involves what has come to be known as the “clean capital ordering rules,” and pitfalls abound when trying to track and trace the underlying UK tax characteristics of offshore funds (in particular investment accounts) when some of those resources are remitted to the UK. 

Accordingly, there are circumstances where remittance basis makes perfect sense. To the extent that:

  • The U.S. expat is confident that the UK stay will not evolve into something longer-term or even permanent, and/or;
  • The U.S. expat has considerable non-UK-sourced income (e.g., from a very large investment within a U.S. taxable brokerage account, or perhaps through partnership income in a global concern where only a fraction of earned income is attributed to UK sources);

then remittance basis should be very seriously considered to lessen the UK income tax burden. Conversely, where the U.S. expat has modest income from non-UK sources or where the UK tax residency may become longer-term or even permanent, then the calculus may well favor UK income taxation on the arising basis from the onset of becoming a UK tax resident. In all cases, this is a decision facing all Americans moving to the UK and should be carefully contemplated with the advice of experienced professionals.

PFIC AND UK TAX RULES FOR “OFFSHORE FUNDS”

It is fundamental that American expats, who obviously live and transact outside of the United States, understand the perils of “offshoring” their taxable investments. By offshoring, I mean owning foreign-registered pooled investments, such as ETFs that are not registered with the SEC and trade predominantly on foreign securities exchanges, mutual funds that are registered with foreign financial regulators and are not subject to U.S. laws and regulations, as well as foreign private equity funds and hedge funds (both of which are usually organized as limited partnerships). The IRS has created special regulations regarding the tax treatment of such foreign pooled investments, known as the “passive foreign investment company” (or “PFIC”) rules. 

A detailed discussion of how these offshore funds are taxed in the U.S. is beyond the scope of this article. For our purposes, it is simply important to understand that “offshore” funds lose their capital gains character because of the PFIC rules, and, therefore, all gains are taxed as ordinary income. That’s for starters – with income recharacterization to prior years in the holding period, interest, and penalties, the tax rate could be 50% and, in some cases, even higher! The bottom line: buying foreign mutual funds, ETFs and other pooled investments outside of a treaty-recognized foreign pension is usually tax toxic to U.S. tax residents.

So an American living in the UK would do well to avoid the temptation to “go native” and open brokerage accounts in the UK and invest in non-U.S.-registered funds. Can the American expat then avoid offshore tax rules by just keeping their investments in the U.S. and purchasing U.S. mutual funds or ETFs? For the American expat in the UK, the answer is usually “NO,” because the UK has similar tax rules with regards to offshore funds and, from a UK perspective, U.S. mutual funds and ETFs are offshore funds. The general HMRC tax rules in the UK therefore would deprive gains on the sale of these offshore funds of the lower and more favorable capital gains rates and instead levy taxes on realized gains at ordinary income tax rates, which tend to be higher than U.S. ordinary income tax rates. What a mess the U.S. expat investor might find themselves in trying to navigate the offshore funds rules of two different national tax authorities!

One way the U.S. expat might avoid these onerous tax rates would be to avoid “pooled” investments by just buying individual securities and building a fund-free portfolio of individual stocks and bonds. Naturally, this may be an imperfect solution at best for investors that don’t have the capital to adequately diversify such a portfolio. Moreover, even with ample capital to do so, most investors have their own careers, families, and social lives to manage and don’t want to be their own portfolio managers. 

Fortunately, the HMRC’s offshore funds tax rules do provide an important exception: where the foreign fund provides adequate accounting through reports sent annually to the HMRC, investors in these offshore “reporting funds” will be exempted from the special tax rules and will be entitled to capital gains treatment on gains generated from these reporting funds. Although the vast majority of U.S. mutual funds and U.S. ETFs do not qualify as reporting funds in the UK, there are enough decent U.S. funds that are in fact UK reporting funds that a fairly quality, low cost, and well-diversified portfolio can in fact be constructed. The main challenge is scouring the HMRC’s spreadsheet with thousands of reporting funds and identifying those that are indeed U.S.-registered. Beware the foreign “clones” of U.S.-registered funds that carry the same names of their U.S. counterparts but are, in fact, PFICs!

UNDERSTAND THE INTERPLAY OF U.S. AND UK RULES REGARDING RETIREMENT ACCOUNTS, INCLUDING THE INCOME TAX TREATY

There are some advantageous and truly cooperative nuggets in the income tax treaty (and the technical explanation thereof) between the United States and the United Kingdom, particularly in the area of retirement accounts or “pensions.” For example, because of the treaty, distributions from a U.S. Roth IRA in retirement will enjoy the same tax-free qualities for a UK tax resident (expat or otherwise) as they do for domestic American taxpayers. Additionally, those horrid PFIC and Reporting Fund rules discussed in the previous section will be irrelevant to investments in retirement accounts in either country so long as the treaty benefit is claimed. There are other special rules regarding the special tax-free 25% lump-sum distribution from a UK pension that may benefit a former U.S. expat that participated in a UK pension scheme but thereafter returns to the U.S. before taking the lump-sum distribution. It is critical to work with advisors that can help the U.S. expat position their accounts to truly navigate the tax rules and take full advantage of these types of beneficial treaty provisions.

Unfortunately, for high-net-worth individuals, there have been severe limits put in place in the UK in recent years on how much can be contributed in tax-advantaged pension schemes. These newer rules tend to severely limit the contributions by and on behalf of higher earners in the UK to their company pension and even personal pension (SIPP) accounts. Interestingly, these rules will also dramatically affect the tax deductibility on UK tax returns of contributions to U.S. qualified retirement plans as well. Therefore, for Americans working and earning in the United Kingdom, it is particularly crucial to get the input of a UK tax accountant to assist in determining how much should or can be contributed to retirement plans and pensions regardless of where they are held for each and every UK tax year. Moreover, U.S. retirement contribution eligibility rules, rules on the deductibility of retirement plan contributions, and so forth require the U.S. expat to also discuss all (not just domestic) retirement plan contributions with their U.S. accountant to ensure that the investor’s strategy is tax optimal under U.S. tax rules, too. 

“COMMON LAW?” – CAUTION WHEN BRINGING A U.S. TRUST WITH YOU TO THE UK

Trusts, like most estate planning issues and tools, are a creature of local law. It is a common folly of many expats, and even domestic U.S. attorneys, to believe that an estate plan carefully crafted under the laws of a particular state in the U.S. can be taken abroad and continue to operate as intended. It usually won’t, and, in some instances, a good domestic estate plan may well backfire spectacularly when the family, or one or more of its members, moves abroad. That’s a very broad and general statement, but consider it is based on my experiences as an expat advisor who has witnessed the unintended consequences materialize from a domestic estate plan when the legal and tax issues unfold in the cross-border/expat environment. To put it bluntly: when you move somewhere else, new rules apply, and it is highly unlikely that the original estate plan was crafted with any of the new rules in mind.

Another broad and general statement can be made about trusts: The more sophisticated an estate plan, the more likely that it will backfire in the cross-border environment and the more costly the unintended consequences that will materialize. However, we’re talking about moving to the United Kingdom – the birthplace of trust instruments– and one might think that a U.S. trust would always work just as well in the UK as it would in the domestic U.S. scenario, but one could pay a dear price for such an innocent assumption. 

For example, a U.S. expat family has utilized trusts that provide that one or more of the expat family members who serve as trustee. If the trustees of a U.S. trust become UK tax residents, the trust becomes a UK tax resident. From the UK perspective, the trust has been “on-shored” so to speak, and the trust is now a UK tax resident. Things can get even more complicated from there: what if the trustee(s) returns to the United States thereafter? From the UK legal and tax perspective, this could represent an “off-shoring” of the trust – the trust will no longer be characterized as a UK domestic trust, but as an offshore trust. The tax implications that flow from offshoring a trust are usually that an “exit tax” must be paid, which means that all unrealized gains from trust property are thereby realized and capital gains from the recognition of gain are now owed to the HMRC. 

Quite often, a few minor (or less minor, depending on the trust) changes to the trust could have been made before the trustee(s) moved to the UK, which may have prevented this issue from ever materializing. If minor changes do not suffice, the trust might need to be dissolved prior to the move. Accordingly, when family wealth is in any manner managed or protected by trusts, some legal advice (i.e., an estate plan review) from an estate planning expert in the future country of residency (in this case, the United Kingdom) can be critically important.

UNDERSTAND UK “DOMICILE” AND IT’S IMPLICATIONS

U.S. and UK income taxes differ in a variety of ways (e.g., the tax liability on the sale of a primary or secondary residence) and there may be a substantial income tax-rate divergence between the two countries for a given U.S. expat living in the United Kingdom, depending on the expat’s current income. However, the taxation of wealth transfers (gifts during your lifetime, or bequests/transfers upon death) should also be considered as the expat accumulates wealth. Like the U.S, the UK may tax gifts made during the life of the donor and will also tax the estate of a decedent before their wealth is transferred via their estate plan. Unlike the U.S., there may be income tax owed by the donor (known as a “deemed disposition”). Here, the opportunity for divergence between U.S. and UK tax exposure can be quite profound, due largely (but not exclusively) to the different exemption levels under the current tax laws of both countries. 

For example, in 2021, the United States provides a very generous lifetime personal exemption for gift and estate taxes of $11.7 million ($23.4 million for a U.S. married citizen couple). In stark contrast, the UK individual estate (IHT) exemption is only £325,000 (£650k for a UK domiciled couple), with possibly an additional allowance of £125,000 for the decedent’s primary residence. That differential puts a tremendous premium on estate tax planning and financial planning in general. 

A crucial part of determining the current and future UK IHT tax exposures for a U.S. expat family centers on whether the family, or individual members thereof, have voluntarily or involuntarily attained the status of a UK domicile. If a person is determined to be domiciled in the UK, then their worldwide estate would be subject to IHT. If tax residency and entrenchment have not yet crossed the threshold of domicile, then only the UK situs property will be subject to potential IHT tax liability. Domicile is a common law term that combines residency and long-term intention. Accordingly, there is a degree of subjectivity when determining whether an American expat has become entrenched in the UK to the point that this key threshold has been breached. 

It can be difficult to ascertain in close cases whether an expat’s behavior demonstrates enough intent to assure an HMRC finding that the expat is a UK domicile. On the one hand, if an expat moves to the UK on a work assignment (secondment) and spends five years living with family in a home that is rented by the company, it is certainly less likely that the status of domicile has been achieved. However, if that expat and family buy a home, apply for citizenship, sell their U.S. home, and effectively cut most ties with their old American community, the probabilities increase dramatically that the family would be considered UK domiciles. 

To combat the efforts for long-term UK tax residents to evade domicile status, the UK has created a “deemed-domicile” status or threshold based on the more objective criteria of how many years an individual has held UK tax resident status. Under the rules that went into effect in 2017, once the expat has held UK tax residency for 15 years of a 20-year period, that expat is thereafter deemed a domicile of the United Kingdom, regardless of any other circumstances. Beyond IHT exposure, this will also mean that the expat can no longer utilize the remittance basis of taxation (which requires substantial payments beyond year seven but is now unavailable at any cost after year 15).

Prior to obtaining domicile, steps can be taken to protect non-UK wealth from IHT exposure, but such planning is going to require retaining very specialized estate planning counsel. Given that the deemed domicile status is, in a temporal sense, the maximum but by no means a minimum time within which domicile can occur, an important first step for such planning would be to have counsel conduct what is sometimes referred to as a “domicile audit,” which may be a series of meetings and/or detailed questionnaires to first determine the current status of an expat, as well as determine what, if any, wealth might be strategically sheltered from the expat’s taxable (IHT) estate.

PLANNING AND INVESTMENT ISSUES ABOUND

Please consider this a very cursory examination of five key issues that should be considered and incorporated into your financial planning and your portfolios before completing the journey to live in the United Kingdom. This is by no means an exhaustive inventory, nor a complete examination of the financial, tax and legal issues within each area. It is our intention at Walkner Condon to enrich the expat communities around the world through sharing knowledge about such topics and to assist Americans who are or may be contemplating a move abroad in the near term or in the future. Through a little pre-move planning and strategic positioning, we believe that the transition to a new home can be less stressful and, ultimately, more rewarding. If you find these issues resonating with your personal situation, I, or one of my team members here at Walkner Condon, would be happy to schedule an introductory meeting with you.

Stan Farmer, J.D., CFP®️

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