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Considering moving back to UK from USA - Question about US/UK Taxes

Considering moving back to UK from USA - Question about US/UK Taxes

Old Jul 24th 2014, 4:54 pm
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Default Considering moving back to UK from USA - Question about US/UK Taxes

I have read all that I could find on this site re this but want to summarize what I think I know as the answers will form the basis for my decision. I am 78, male, retired, single and a UK national (that is with passport). I have lived and worked (for 19 years) in the USA for 36 years.

My total assets are less than $2m with the majority in a traditional IRA from which I receive the annual required minimum distributions (RMDs) I draw Social Security benefits.

My heirs to my will (including IRA) are here in the USA. Questions:

I think I understand the basics of the UK/USA reciprocal tax agreement but ....... .

- As far as I can tell the IRA withdrawals are subject to UK taxes NOT USA True? (I find this counter intuitive!)
- Social Security incomes are subject to UK NOT USA taxes - True?
- If I give up my resident alien status (and green card) the additional exit tax will NOT be applied - True?
- My death in the UK does NOT complicate my USA written and only will given that I have a USA resident executrix. - True?

Answers and any other advice from folks who know and/or have done this with a similar profile are appreciated.

Geoff
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Old Jul 25th 2014, 9:06 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Hi Geoff,

I can't help with your query, but wanted to stop by and welcome you to the forum. Hopefully someone will be along soon who has experience of this and will be able to share their experiences.

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Old Jul 26th 2014, 1:55 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Originally Posted by limeyzen
I have read all that I could find on this site re this but want to summarize what I think I know as the answers will form the basis for my decision. I am 78, male, retired, single and a UK national (that is with passport). I have lived and worked (for 19 years) in the USA for 36 years.

My total assets are less than $2m with the majority in a traditional IRA from which I receive the annual required minimum distributions (RMDs) I draw Social Security benefits.

My heirs to my will (including IRA) are here in the USA. Questions:

I think I understand the basics of the UK/USA reciprocal tax agreement but ....... .

- As far as I can tell the IRA withdrawals are subject to UK taxes NOT USA True? (I find this counter intuitive!)
- Social Security incomes are subject to UK NOT USA taxes - True?
- If I give up my resident alien status (and green card) the additional exit tax will NOT be applied - True?
- My death in the UK does NOT complicate my USA written and only will given that I have a USA resident executrix. - True?

Answers and any other advice from folks who know and/or have done this with a similar profile are appreciated.

Geoff
Hello and welcome,
I am UK born, US Naturalized, lived and worked in US for 18 yrs and now back in UK permanently. Not quite the same situation as you Geoff but similar enough that I can make a start on your questions.
This is not legal advice, just what I know and discovered.

As a USC I have to file an annual Tax Report to the USA. I believe it is the same for Resident Aliens (Green card holders) whether you are in US or abroad. U.S. Citizens and Resident Aliens Abroad

As a USC my IRA withdrawals are subject to US witholding tax, the holder of my account deducts tax at 20% before paying me my funds. I get this back by filing tax report in UK for the whole amount including the 20%, not claiming for foreign US tax paid, paying UK tax on it. Then I file US tax report and claim foreign tax paid and hence there is zero due in US and I get the original 20% refunded. I suspect it would be the same for a Long Term Resident.
If I were to renounce my USC, and I suspect you renounce your LTR, then there is Form W-8ben to send to the holder of IRA to instruct no tax withholding but I cannot do this while USC and I suspect nor you as LTR.

There is no US tax witholding on US Social Security. It is taxable income, it is paid in full and you declare it to UK and then to US claiming Tax Treaty exclusion from US liability. By the by, US SS can be sent directly to UK bank account converted into ££'s at the rate of the day of sending.

As USC if I renounce then I am potentially considered for the so-called exit tax. I say potentially because if one is flying under certain limits then there is no exit tax due. I have worked through the forms and I am in the no exit tax bracket.
From what I have read a LTR Green card holder must comply with the same tax assessment procedure upon abandoning the GC. I found this High Cost To Go Green: Giving Up A Green Card - Forbes
If you want to assess the potential of exit tax may I suggest making a dummy run on Form 8854 to figure if you will be liable to tax or not. Simplied, you will not fall into the exit-taxable bracket if your average over 5 years US Tax liability is less than $155,000 AND your net worth is less than $2,000,000 AND if you comply with all the paperwork filing. If you do fall within the exit tax bracket then there is still an exclusion amount of $626,000 capital gains before tax is levied.

If you are considering giving up or lapsing your Green card then here is official advice Filing I-407 | Embassy of the United States

As for death and Wills, there was little definite advice and much diversity of opinions when I researched it couple yrs ago. For US 401(k), IRA and Stocks/Bonds we made sure they had designated beneficiary which functions outside of any Will. We couldn't do this for a joint US bank account but since it is joint chances are there will be a survivor and besides we keep little in it. We have no other UK property
Then in UK we wrote a UK Will through a solicitor (best recall is it was only £200 for us both). We detailed all as if it was our only Will and mentioned the contacts for holders of IRA/401(k)/etc and supplied copy of our US Will.
The US lawyer that we used to update our US Will before we left US later declined to make any further updates when we contacted him as foreign residents - check this with your US lawyer before you leave US Geoff.

I don't recall the rules on Inheritance Tax UK or US but suggest this is something that you Geoff (and I for my own benefit) look into.

I hope this helps.
John

Last edited by J.JsOH; Jul 26th 2014 at 2:02 pm.
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Old Jul 26th 2014, 2:21 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

I believe another thing to be considered, in terms of deciding whether to relocate to the UK or not, is the UK Inheritance Tax. The threshold is £325,000 for 2014/2015. So if you die as a UK resident and your estate is still over that amount, your estate pays 40% in IHT. Naturally, if one had annuitized or spent down in retirement, that may not be an issue.

Just to add: 40% of the balance over £325,000, that is...
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Old Jul 26th 2014, 3:02 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Thank you John - very useful especially the links. Given Robin's response re IHT I will do the research and post.

Geoff
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Old Jul 26th 2014, 3:06 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Originally Posted by robin1234
I believe another thing to be considered, in terms of deciding whether to relocate to the UK or not, is the UK Inheritance Tax. The threshold is £325,000 for 2014/2015. So if you die as a UK resident and your estate is still over that amount, your estate pays 40% in IHT.
It's based on having a U.K. domicile (or deemed domicile) rather than being resident. It's possible to be resident without being domiciled, and vice versa.

That said, a British born person who moves back to the United Kingdom, will normally be considered to have re-acquired any U.K. domicile held (if in fact, domicile was lost in the first place).
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Old Jul 26th 2014, 3:07 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Thank you Robin. Does this mean that even though the IRA is not taxed until withdrawal and I have in effect a US will that names beneficiaries that are currently very young (and US citizens) and will not be subject to anywhere near as high RMDs as I never the less UK will tax that account?

Geoff
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Old Jul 26th 2014, 3:11 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

JAJ, can you define (or refer me to a source) domicile and resident?

Geoff
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Old Jul 26th 2014, 3:43 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Originally Posted by limeyzen
JAJ, can you define (or refer me to a source) domicile and resident?
HM Revenue & Customs: Home Page

Not sure why there is any ambiguity in your case. If you return to the U.K. permanently you would normally be both domiciled and resident.

In fact, if you've never permanently settled in the United States, then you likely maintained your English domicile all along. Unless you grew up in, or had parents from, another country, in which case your domicile (under English law) might be in that country.

If you are going to give up your green card, make sure you take steps to avoid being a "covered expatriate". Especially if you intend to leave assets to U.S. beneficiaries.

Last edited by JAJ; Jul 26th 2014 at 3:46 pm.
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Old Jul 26th 2014, 4:13 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

JAJ, not implying there is ambiguity just did not understand the terminology. Given that I have in the IRA amount way in excess of 325,00 pounds (but less than $2m) and will leave it here in US can I avoid UK Inheritance Tax on it? And what is a "covered expatriate"?

Again, I find it odd that an IRA (not taxed until withdrawals are made, and as result of earning in USA before taxes) would be subject to UK income taxes on withdrawals and not USA. Different than IHT I know but ... . Tx.

Geoff
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Old Jul 26th 2014, 5:30 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

JAJ, not implying there is ambiguity just did not understand the terminology. Given that I have in the IRA amount way in excess of 325,00 pounds (but less than $2m) and will leave it here in US can I avoid UK Inheritance Tax on it?
Perhaps research at:
HM Revenue & Customs: How to value the estate of someone who has died - the basics

If an IRA passes to beneficiaries, the U.S. will likely still levy federal income tax or withholding on it. How this interacts with Inheritance Tax is complex and you may need to seek professional advice and/or consult the U.K./U.S. tax treaty.

Also, if you become a covered expatriate, this may complicate the taxation of your deferred compensation balances. And also impose a special inheritance tax against anything you leave to U.S. beneficiaries.

And what is a "covered expatriate"?
Expatriation Tax
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Old Jul 26th 2014, 5:35 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

Originally Posted by limeyzen
JAJ, not implying there is ambiguity just did not understand the terminology. Given that I have in the IRA amount way in excess of 325,00 pounds (but less than $2m) and will leave it here in US can I avoid UK Inheritance Tax on it? And what is a "covered expatriate"?

Again, I find it odd that an IRA (not taxed until withdrawals are made, and as result of earning in USA before taxes) would be subject to UK income taxes on withdrawals and not USA. Different than IHT I know but ... . Tx.

Geoff
I believe that if you die a UK domiciled and resident person, IHT is levied on your worldwide assets, but I'm no expert on IHT. A quick search on Google indicates that there may be strategies to mitigate this. Also of course you'd be getting specialist estate planning advice if considering a permanent move to the UK, so IHT strategy would be an important part of that.
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Old Jul 29th 2014, 2:30 pm
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Default Re: Considering moving back to UK from USA - Question about US/UK Taxes

My answers assume you are a British citizen, give up your green card by filing 8854 and I-407) and become taxed on an arising basis in the UK.

Originally Posted by limeyzen

- As far as I can tell the IRA withdrawals are subject to UK taxes NOT USA True? (I find this counter intuitive!)
If you are a Non Resident Alien you can file a W-8BEN with your IRA administrator and you won't pay any US tax. Also you will only be taxed on 90% of your IRA withdrawals by the UK.

- Social Security incomes are subject to UK NOT USA taxes - True?
Yes that's true.

- If I give up my resident alien status (and green card) the additional exit tax will NOT be applied - True?
As long as your assets are under $2M

- My death in the UK does NOT complicate my USA written and only will given that I have a USA resident executrix. - True?
False. If your personal world wide assets are over the UK inheritance tax limit and are held in the US I can see a lot of complications when applying US and UK inheritance tax rules. You might want to ask a professional about how to structure your assets for inheritance purposes.
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