As US residents are taxed on worldwide income and gains, real consideration has to be given to the interaction with any other jurisdiction taxing income, gains or assets. Understanding such exposure is key in identifying how to prevent double taxation. The most notable tools for mitigating this are the use of foreign tax credits where the other country has a primary taxing right and consultation of applicable tax treaties. Timing can be crucial in achieving this which again stresses the importance of taking advice early to allow ample time to take action.
Another priority prior to making a move to the US should be a review of the various income streams and assets held, through a US tax lens. Establishing and comparing the local tax costs of existing and future structures when the owner, investor, shareholder, beneficiary or settlor is US tax resident is important. Understanding how such income streams or assets will be viewed is imperative and doing so in a timely manner can enable appropriate adjustments to be made.
To illustrate, the Internal Revenue Service (IRS) has certain anti-deferral and anti-avoidance regimes that can create unexpected tax issues, particularly around foreign (non-US) assets. A common example of this is the Passive Foreign Investment Company (PFIC) rules where taxpayers may be penalised for holding interests in certain foreign funds with higher-than-expected US tax rates applying, along with additional charges, when distributions are received or gains made. Similarly, a foreign company meeting the definition of Controlled Foreign Corporation (CFC), broadly through controlling ownership by US shareholders, can attribute company profits to its shareholders irrespective of there being an actual cash distribution or dividend – again, resulting in unexpected income inclusions, additional tax liabilities and potential for real double taxation. A review of investment portfolios and corporate and trust structures in advance of relocating to identify these issues would determine whether any US tax elections or other appropriate actions could be undertaken.
It is also worth noting the mismatch in tax treatment across different jurisdictions as, where there are incentive schemes in one jurisdiction, this may not be the case in the US. Common examples include ISAs, EIS/SEIS investments, Private Residence Relief and pensions in the UK. A stocks and shares ISA, for example, is tax free in the UK but taxable in the US (possibly at punitive tax rates if the investments are deemed to be PFICs).
A US tax review of liabilities is just as important as reviewing assets held – for instance having a mortgage in local currency is standard practice for homeowners, however a US resident would need to be mindful of the foreign exchange movement of that currency with US Dollars between the date the mortgage was obtained and any dates of capital repayment (regular or lump sums) since the IRS taxes a deemed foreign currency gain upon repayment of capital if it results in ‘gain’. This, coupled with potentially different tax treatment when a primary residence is sold from a US perspective, can impact decision making for a family (e.g. retaining their home, renting it out, etc.).
Despite certain challenges, there are actions that can be realised with careful consideration and timing. Taking advice and reviewing the portfolio of assets and liabilities in advance can provide clarity as to any issues but also identify where transactions or restructuring can manage tax costs. In certain cases, this can be complex however, in many cases benefits can be gained without major disruption (e.g. making certain US tax elections) but will invariably require actions to be taken in a timely fashion, meaning early conversations are vital.
