1st April 2010 - UK nationals living and working in the US are continuing to leave themselves open to potential additional UK tax liabilities through adopting the popular US tax planning vehicle known as a ‘Living Trust’. Even US nationals may be caught by the UK tax regime in some circumstances.

Living Trusts are typically taken out during an individual’s lifetime usually to avoid having to apply for probate in the US. However, since the introduction of the 2006 Finance Act and changes to UK trust taxation, a Living Trust in the US may trigger a 20 per cent tax charge in the UK.

The 2006 Finance Act introduced an automatic 20 per cent charge on the creation of a lifetime trust (with few exceptions), with periodic charges to UK inheritance tax every 10 years and exit charges when assets leave the trust.

Geoffrey Todd, a partner at law firm Boodle Hatfield who regularly advises UK nationals living and working in the US and US nationals in the UK 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”.

“A UK national living in the US might well believe that he has lost his UK domicile by virtue of becoming a resident in the US for an extended period of time. However it is quite difficult to lose UK domicile status and such a claim is likely to come under close scrutiny from the Revenue in the UK.”

Geoffrey adds: “The double tax treaty between the two countries will be of little assistance in preventing a charge to UK tax arising in these circumstances and there could be additional penalties imposed by if the Living Trust is not reported to the UK Revenue.”

Boodle Hatfield reports that UK nationals and, rather more worryingly, US financial advisers and tax planners, are still largely unaware of the changes in UK trust tax legislation and continue to recommend Living Trusts as a sensible option – even to the extent of including UK assets within the vehicle.

“Overlooking the UK perspective is potentially disastrous for an individual with a UK domicile,” adds Geoffrey.

And it is not just UK nationals living and working in the US that might get caught with a UK tax liability. US nationals who hold assets in the UK or if they become domiciled in the UK by virtue of spending many years in the UK might also find themselves with a UK tax liability from a Living Trust made in the US.

Geoffrey concludes: “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.”

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