What do the UK's upcoming non-dom changes mean for US persons?

The US is virtually unique in imposing worldwide taxation on its citizens, regardless of their residence. This means that US persons cannot eliminate their global tax exposure by moving to a low-tax country or undertake "fiscal nomad" planning by ensuring they are not tax resident in any country.

The flipside to this is that if a sum will in any case be subject to US taxation, it can prove favourable to align any tax charges which other countries may seek to impose on the same sum so that the two liabilities can at least be offset against one another under an applicable double tax treaty. For US persons who are UK resident, this can mean that even if they are eligible for the remittance basis under the current rules, in some circumstances claiming it may well not be the best option in the round. If income and gains will in any case be subject to US tax, it may be preferable to choose for it also to be subject to UK tax in the year of receipt. Under the new rules, this will automatically be the case for persons who have been UK resident for more than 4 years. Absent income from LLCs, S-corps and similar mismatch vehicles, credits should be available under the US-UK income tax treaty (Income Treaty) to ensure that there is no economic double taxation. Although the UK's effective tax rates are generally higher than the US's federal rates, aligning the charges at least means the sums can be considered fully taxed in both countries in the tax year of receipt, rather than – under current rules - the UK tax liability in effect having been deferred until the income or gains in question are subsequently remitted to the UK, which can cause difficulties in obtaining tax credits for any US tax already paid on the same sums.

One point which will continue to be crucial for US persons who are (or will become) subject to UK tax on their income and gains is to ensure their investments are selected and managed with an eye on both countries' tax rules. For example, most US mutual funds are "non-reporting funds" for UK tax purposes, meaning that any gain realised on their disposal will be subject to UK income tax at up to 45%, whereas it will only be subject to US federal tax at the long-term capital gains tax rate of 20% plus 3.8% NIIT; and whilst US municipal bond interest is exempt from US federal income tax, it will be subject to UK income tax at up to 45%, so the reduced yield paid to account for the preferential US tax status is often not worthwhile if UK tax exposure has to be factored in. An investment manager experienced in managing portfolios for US/UK clients can be invaluable to navigate these nuances.

Whether a person is UK resident for tax purposes is determined by the statutory residence test. This looks at a person's connections to the UK and abroad (such as where they have a home, where and how often they work etc) as well as the number of days which they spend in the UK. The broad principle is that the more connections a person has to the UK, the less time they can spend here each tax year without being UK resident.

Where a US person is UK resident, the Income Treaty sets out a process to determine where such a person should be considered "treaty resident".

Although it is heavily fact dependent and is generally not workable for those working full time in the UK, in some circumstances with careful planning, it is possible for a US person who is UK resident under the statutory residence test to be considered US treaty resident. In that case, the US will have exclusive taxing rights over their worldwide income and gains with the exception of:

• trading income of a UK permanent establishment;
• UK rental income;
• capital gains from the disposal of UK land and unquoted UK land-rich entities; and
• dividend income from UK companies (here, the UK tax is capped at 15%, being the treaty withholding rate).

Even under current rules, this is much better than relying on the remittance basis to reduce UK tax liabilities with regard to all other non-UK income and gains, as the sum in question can be brought to the UK without triggering a tax charge and there is no need to pay the remittance basis charge. Moreover, even though they are UK resident under domestic law, the US treaty resident US citizen can invest having regard to US tax considerations only, including in US mutual funds and municipal bonds without being subject to the higher UK tax rates on them.

Under the new rules, being US treaty resident could be particularly valuable for any person who has been UK resident for more than 4 years, as it will offer continuing protection from UK tax to all non-UK income and gains, which would otherwise be subject to UK tax even if not remitted to the UK.

Although US estate tax and UK IHT are both charged at 40%, given the UK has a much lower tax-free allowance (£325,000) than the US ($13.6 million, albeit scheduled to 'sunset' to c$7 million from January 2026), exposure to IHT significantly increases a US person's global estate tax exposure by up to c.$5 million per estate.

The US-UK gift and estate tax treaty (Estate Treaty) provides that where US person who is not a UK national is 'treaty domiciled' in the US for estate tax purposes, the US has exclusive estate taxing rights over their worldwide assets other than:

• UK real estate; and
• UK business property of a permanent establishment (BPPE).

This can prove even more favourable than the current IHT rules applicable to non-doms who are not deemed domiciled, which restrict their IHT exposure to (all of) their UK assets: a person who is US Estate Treaty domiciled and not a UK national has no IHT exposure on any UK assets other than UK real estate and BPPE, i.e. their UK bank accounts, shares and artworks are Estate Treaty protected from IHT.

Whilst the new IHT rules remain subject to consultation, the current proposal is that after 10 years of UK residence, a person's worldwide assets will – as a matter of UK domestic law - become subject to IHT. Additionally, it is proposed that worldwide IHT exposure would – once acquired - only cease after 10 years of non-UK residence (assuming of course that the rules are introduced in the form currently proposed, notwithstanding that this remains subject to consultation). This is where the Estate Treaty can be hugely valuable by protecting against the new 10-year IHT "tail" for US citizens who return to the US by using the 'tie breaker' rules, for example if they have a permanent home in the US but not in the UK. Provided a person is Estate Treaty domiciled in the US, their IHT exposure will be limited to their UK real estate and BPPE, even if they remain in that 10-year "tail". This could offer comfort to long-term UK residents that they can in the future reduce their IHT exposure relatively swiftly upon leaving the UK, with appropriate planning.

The ability to give the US sole estate taxing rights over most assets is only available to non-UK nationals. It will therefore continue to be important that affected individuals take UK tax advice before applying for UK citizenship if they may in the future wish to rely on the Estate Treaty in this way.