Benjamin Franklin, one of the founding fathers of the U.S. and someone who spent decades of his life in the United Kingdom and Europe, once said, “By failing to prepare, you are preparing to fail”. No other sentence could be more appropriate for a U.S. corporate executive relocating to the UK.
In 2017 the world’s top 500 largest companies recorded US$27.7 trillion in profits and together employed 67 million people across the globe, according to Fortune Global 500 figures.
Numbers of this grandeur are impossible without internationally-mobile executives and the UK welcomed 285,000 non-EU citizens in 2017 — an increase of 26,000 from the previous year, according to the Office of National Statistics.
Moving overseas is a huge undertaking and one that, even with a well thought out corporate relocation package, needs rigorous research, planning and advice to avoid falling foul of tax and investment rules that could end up costing you.
Relocation: It’s all in the preparation
It is, of course, impossible to plan for every eventuality, especially when governments on both sides of the pond appear to constantly move the goal posts, but putting in place a plan that considers future goals and aspirations could prevent potentially costly mistakes.
Mark Hassett, managing director, Sales and Relationship Management at RBC Wealth Management in London, explains: “Before the plane ticket is booked there are so many things that need to be taken into consideration and fully researched. The onus is always on the individual to get it right, regardless of the extent of the advice they take.”
Darrell King, head of Intermediary Relationships – USA at RBC Wealth Management in New York, adds: “Thought should always be given to circumstances outside of the day-to-day banking. What is being offered as part of the corporate package and is it suitable for the time being spent in the UK?”
Foreign pensions, for example, could be recognised by the U.S. for tax purposes. The good news is that there is a comprehensive tax treaty between the U.S. and the UK that defines how pensions must be structured in order to be treated as if they are U.S. qualifying plans. If the executive is working for a global corporation it is likely that the work has been done to ensure the UK plan qualifies. If not, professional advice should be sought.
Appropriate estate planning
All executives faced with a move to the UK must also ensure they fully research the estate and inheritance taxes they may be subject to further down the line. Similar to investments and pensions, estate and inheritance taxes differ between the UK and the U.S. It’s worth remembering that the US tax system is generally based on a person’s citizenship whereas the UK system is based on residence and “domicile”: the interplay between these two very different systems can be complex and will certainly require good advice and planning.
In the UK, the basic inheritance allowance is £325,000 per person, whereas in the U.S. an individual can hold assets of up to $11.18 million before an estate tax charge is applied. The difference is vast.
“Before you take up residence, you need to give thought to what else needs to be done outside of setting up accounts,” King explains. “You don’t want to be in a position where you move to the UK, decide to retire there and find yourself potentially subject to UK inheritance tax rules as well as the U.S. estate regime.”
Again, the U.S.-UK tax treaty will determine which jurisdiction has taxing rights, helping to avoid potential double taxation, but proper advance planning will ensure your estate plan makes use of exemptions available in both countries, is efficient and suited to your circumstances.
One estate planning tool which is well known in both countries is the trust. Although it has ancient origins, the trust remains a valuable device for estate planning today, enabling a person to set aside a part of their wealth for future generations.
In a UK context the trust is particularly useful when it comes to planning for people from other countries - so called “non-doms” - who are taking up residence. The non-dom appoints a trustee outside of the UK, who takes responsibility for managing the wealth which is placed in trust.
As well as being tax efficient, the UK off-shore trust really comes into its own as a flexible vehicle for long-term estate planning.
A worthwhile, but taxing start
There are two important areas that must be taken into consideration by U.S. executives prior to migration – the Foreign Account Tax Compliance Act (FATCA) and the use of passive foreign investment companies (PFICs).
Put in place by the U.S. government at the start of the decade as a means to track down unreported income from accounts held by U.S. persons, FATCA has fast become one of the most important considerations for an executive considering emigrating to the UK – not least because it limits the choice when it comes to choosing a UK financial institution for day-to-day living once settled.
King explains: “A U.S. person is unique in that they are taxed on their citizenship and not on their residence. Prior to FATCA, income gained from accounts held outside of the U.S. wasn’t always disclosed.
“FATCA was introduced as the U.S. government’s way to join the dots between U.S. persons and foreign financial institutions to ensure that all income and gains from accounts held abroad was being properly reported,” King says.
The introduction of FATCA has led to challenges for U.S. nationals looking to immigrate to the UK as they are forced to bank with an institution that implicitly understands U.S. reporting rules for foreign accounts.
King adds that the bigger challenge for U.S. executives migrating to the UK is to find a bank that will provide the banking and investment services they need, as well as one which understands the U.S. reporting rules they are now subject to, as a holder of foreign accounts.
This is one of the most common pitfalls, with many only discovering the limitations of a UK bank offering only a deposit account, if any at all, once they land on UK soil.
Building an investment portfolio
The U.S. applies specific tax rules to foreign investment funds held by U.S. persons, known as Passive Foreign Investment Company (“PFIC”) rules.
The issue with PFIC’s, according to King, is that if a U.S. person receives income or recognizes a gain in a PFIC investment then that person is subject to a tax and interest regime. Given a sufficiently long holding period, the tax and interest charges may exceed 100 percent of the distribution or gain. There is an opportunity to make an election to avoid these punitive rules but there are specific conditions that must be met and the PFIC investment provider must be willing to provide an annual statement with the shareholder’s income and gains information. Many do not provide this.
With all rules, however, there are exceptions and according to Hassett, “As an alternative to PCIFs, individuals may consider establishing a portfolio that holds individual stocks and bonds”.
Hassett concludes: “All too often we see people missing the opportunities to plan effectively before they migrate. Be mindful; take pre- and post-migration advice to avoid any common pitfalls. Remember, once you are here, it could be too late.”