How can we avoid being taxed twice?

My wife and I are in our mid-thirties and are considering emigrating to the US from London. We have jobs we can do from anywhere. We want to relocate to Colorado, but how can we make sure that we aren’t taxed in both the US and the UK? How do we manage the capital gains tax from selling our flat in London? Looking further ahead, how would we co-ordinate a UK will with a US will and trust documents when passing wealth to our children?

Marilyn McKeever, a partner in BDB Pitmans’ private wealth team, says once you and your wife are non-UK resident you will not be subject to UK income tax on most UK income (except tax on work done in the UK and UK rental income). You would not be taxable on most investment income. Once resident in the US, you will be subject to US federal and state taxes.

If you are subject to tax in both countries, the Double Tax Treaty will allocate taxing rights or provide for a credit of one country’s tax against the other’s, so you will not be taxed twice. The treaty does not cover state taxes.

If you and your wife relocate part way through the tax year, you are UK resident and taxable for the whole year, even after you leave. In specific circumstances you can “split” the year so that you are treated as non-resident, broadly, from when you leave.

If you return to the UK having been non-resident for five or fewer tax years, you may be taxable in the UK on your return, on certain gains made or income received while abroad.

Assuming that the London flat has been your main home throughout the period you have owned it, if you sell while UK resident, you can claim “principal private residence relief” and any gain will be exempt.

If you sell the flat within the first nine months of non-residence, you should get full exemption. If you sell later, you would be able to claim relief for the years when you were resident and occupying the property. You would also get relief for tax years when, between you, you spend at least 90 days at the flat. If there are years that do not qualify, the gain is time apportioned; the period attributable to years of non-occupation is taxable at 28 per cent. The gain would still remain taxable in the US.

Wealth planning depends on whether you settle permanently in, for example, Colorado, so you become domiciled there; whether you take US citizenship; and whether you retain assets in the UK, which are always subject to inheritance tax. If you remain UK domiciled you will be subject to UK inheritance tax on your worldwide estate and gifts, even if resident in the US.

You may also be subject to US estate tax, and gifts between you would be largely taxable unless you become US citizens. You must guard against premature US planning. Even if you become domiciled in Colorado, you will be treated as UK domiciled for a further three years and common US planning, such as establishing a trust, could land you with a large UK tax bill.

How can I help my grandchildren buy property?

I wish to set up my two grandchildren with money to buy a house after they reach 21 — a few years away — but I am elderly and unsure whether it is more tax efficient to pass on the money during my lifetime or via my will. Can you help?

Nick Mendoza, a senior associate at law firm Wedlake Bell, says gifting money to your grandchildren within your lifetime is known, for inheritance tax (IHT) purposes, as a potentially exempt transfer and whether IHT is payable will depend on how long you live after the gift and whether you make other gifts within a seven-year period. However, if you survive the gift by seven years the gift will be IHT-free.

Additionally, if the gifted money grows over the next few years, the growth will be outside your estate for IHT purposes. Even if you fail to survive the full seven years, but survive for at least three years, there will still be an IHT saving, providing your gifts exceed £325,000. 

Assuming your grandchildren are under 18, they cannot receive money directly, meaning you will need to consider a trust to hold the money. Bare trusts are simple trust arrangements that do not attract ongoing IHT charges. The money is simply held by the trustees on behalf of your grandchildren.

However, a bare trust would allow your grandchildren access to the money from 18, so if you want to ensure the money is protected until they are 21, a more formal trust structure is needed, such as a discretionary trust. This allows the trustees to retain control of the money after your grandchildren turn 18. Depending on the amount you want to give your grandchildren there may be ongoing IHT charges, additional costs and compliance associated with setting up and running a trust. 

If instead you choose to give the money via your will, then it will be part of your estate, which is assessed for IHT on your death. Whether the IHT is paid from the remainder of the estate or out of the gift itself can be mentioned in your will. You can also state in your will that your grandchildren are not to have the money until they reach 21, but this will again require you to name trustees to manage the money until then, with the same potential issues of ongoing IHT and other charges. 

Overall, a gift is generally the better option as it presents the opportunity to reduce your estate’s IHT bill, but careful planning is required to ensure the right trust structure. Most importantly, if you are considering giving away significant sums during your lifetime, be certain you don’t leave yourself short of funds to maintain your lifestyle and finance any future care costs.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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