What Do the New UK Tax Rules Mean for US Nationals?
As of 6 April 2025, the UK has introduced sweeping changes to its tax regime, replacing the previous system that relied on “non-dom” status. These new rules significantly alter the landscape for individuals with ties to the US who are living in or moving to the UK. Below is an overview of how these changes may affect US-connected individuals and the key points they should monitor.
Overview of the New Regime (Effective from 6 April 2025)
- Four-Year Tax Exemption Period: Individuals who qualify under the new system will be exempt from UK tax on foreign income and capital gains during their first four years of tax residency, even if such funds are brought into the UK. After this initial period, global income and gains—including those derived via offshore structures like trusts—become subject to UK tax.
- Inheritance Tax (IHT) Now Based on Residency, Not Domicile: The concept of domicile no longer determines IHT exposure. Instead, liability is determined by “long-term residence” (LTR) status, which applies if an individual has spent at least 10 of the past 20 tax years in the UK. LTRs are taxed on worldwide assets, while non-LTRs are taxed only on UK-based assets.
- IHT “Tail” Effect: Even after leaving the UK, an individual may retain LTR status for up to 10 years. The length of this tail depends on years of UK residency—those resident for 10–13 years face a 3-year tail, increasing annually up to a 10-year maximum for those resident 20 years.
Implications for US Expats and Former UK Residents
US individuals who were previously UK residents, or those moving from the UK to the US, should reassess their exposure to IHT. Before these reforms, individuals needed to sever their UK domicile to avoid IHT on global estates. HMRC had become more aggressive in challenging domicile claims, making this process uncertain.
Under the new rules, clarity improves. However, IHT continues to apply when assets are transferred into a trust or upon death. With the tail provision, long-term planning becomes more manageable.
Importantly, US citizens who meet the criteria under the US/UK estate tax treaty may shorten or eliminate this IHT tail. For example, if they are not UK nationals and meet treaty requirements, they may limit IHT to UK real estate and business assets.
Trusts Under the New Tax Framework
Trust planning remains essential but complex. While the US system allows flexibility via grantor trusts and other mechanisms, UK tax rules now impose new obligations if the settlor is an LTR at key events:
- Creation of a Trust: If an LTR settles assets into a trust, an immediate IHT charge of up to 25% could apply.
- 10-Year Anniversaries and Distributions: A 6% periodic or exit charge may be incurred if the settlor is still an LTR—even if excluded from benefiting.
- Death of the Settlor: A 40% charge arises if the settlor had retained a benefit in the trust. Many grantor trusts, where the settlor is a beneficiary, fall into this category unless they were funded before 30 October 2024 with non-UK assets.
- Termination of “Life Interest” Trusts: These may also face a 40% charge if the settlor or income beneficiary is an LTR.
Certain trusts formed before 30 October 2024 may still qualify for exemptions, and the treaty provisions could help shield some trusts from IHT where conditions are met. However, relying on the treaty requires careful analysis, as it only benefits a limited group.
Trusts and Income Tax Considerations
Trusts have always presented a challenge for US taxpayers residing in the UK due to differing tax treatments. Although the US/UK income tax treaty offers limited alignment, there are strategies to reduce the risk of double taxation.
Since 2017, tainting grantor trusts has helped align US and UK income tax outcomes. The new four-year exemption period further simplifies this by excluding foreign income and gains from UK tax during that window. Afterward, UK taxation will resume on such trust income—though it may match up more easily with US tax obligations, particularly for grantor trusts.
Planning Opportunities Before Moving to the UK
The four-year grace period presents a unique chance for effective pre-immigration tax planning. For instance:
- Collapsing Existing Trusts: Doing so before moving can prevent UK anti-avoidance rules from applying retroactively to gains realized years earlier.
- Reviewing Investments: Common US assets, such as mutual funds or municipal bonds, are often taxed less favorably in the UK. With the remittance basis abolished, proactive adjustments before residency becomes vital.
Even if planning isn’t done in advance, the initial four-year exemption allows time to restructure finances in line with UK tax expectations.
Reviewing US Entities Before Immigration
US entities like LLCs or grantor trusts may be treated differently under UK tax rules. Once a US person becomes UK-resident, their affiliated entities can inadvertently become UK-resident too—subjecting them to UK tax.
These entities might also face an exit charge when they cease to be UK-resident. Since such rules are unchanged under the new regime, careful planning is required to avoid unexpected liabilities.
Asset Rebasing and Transitional Relief
Only previous remittance basis users who were not deemed UK domiciled by 6 April 2025 will benefit from transitional rebasing relief, which allows personal assets to be rebased to 2017 values. Trusts or company-held assets are excluded.
For new arrivals, this rebasing does not apply. They should consider manually resetting asset values pre-arrival. US-transparent structures like LLCs or grantor trusts will likely not qualify for this relief under UK law.
Temporary Repatriation Facility (TRF)
US-connected individuals who previously used the remittance basis can remit pre-April 2025 foreign income and gains at a reduced UK tax rate under the TRF:
- 12% in 2025–26 and 2026–27
- 15% in 2027–28
The TRF also applies to trust beneficiaries and settlors, provided the income/gains are matched with distributions during this period. This relief can significantly reduce historical UK tax exposure.
Post-Four-Year Period: Stay or Leave?
After the four-year exemption ends, US individuals must decide whether to stay or ensure they are no longer UK tax resident.
Given that many US taxpayers already pay tax on worldwide income, remaining in the UK and aligning their planning accordingly may make sense. Others may use the UK’s statutory residence test to maintain non-resident status while relying on the treaty for further protections.
The US/UK tax treaty remains a key tool, potentially reducing withholding tax on US dividends and preserving favorable tax treatment across both jurisdictions—even during the exemption period.
Final Thoughts
For US persons considering UK residency—or already residing there—the 2025 tax changes are far-reaching. They offer both new planning opportunities and new complexities. With the right advice, these individuals can navigate the system effectively, minimize tax exposure, and ensure their cross-border affairs are fully optimized.
