THE TRANSATLANTIC MAGAZINE
THE TRANSATLANTIC MAGAZINE
Budget season in the UK has a familiar rhythm. First come the rumours, then the rumours about the rumours, before Budget Day finally tells us which of them were right.
For Americans living in the UK, there is an added complication. UK tax changes cannot always be looked at on their own. The US tax position also needs to be considered, and seemingly sensible planning in one country can sometimes have an unexpected result in the other.
This year's Budget contains several changes worth knowing about.
From 6 April 2027, UK tax rates on savings income will increase to 24%, 44% and 49% for basic, higher and additional-rate taxpayers respectively. Property income will also be subject to new rates of 24%, 44% and 49%.
For anyone with significant investment or rental income, that clearly means a higher potential UK tax bill.
For US taxpayers, however, there is another part of the calculation. Additional UK tax may give rise to additional US Foreign Tax Credits, but it is not as simple as assuming that every extra pound paid in the UK will reduce US tax by the same amount.
The US rules governing Foreign Tax Credits include restrictions around the type and source of the income and how much credit can be used. The practical result will therefore depend on the individual's circumstances.
For those with significant investment or property income, it will be increasingly important to look at the UK and US positions together before making investment decisions or realising income.
There was mixed news for entrepreneurs.
From 6 April 2027, the lifetime amount of qualifying gains that can benefit from Business Asset Disposal Relief (BADR) will fall from £1 million to £500,000.
Alongside this, the Government announced a new Founders' Relief, which could potentially be considerably more valuable. The proposed relief would provide a 10% Capital Gains Tax rate on up to £10 million of qualifying lifetime gains for disposals from 6 April 2027.
The catch is that the qualifying conditions are much more demanding.
Among other requirements, an individual would need to have held at least 25% of the company's ordinary shares when its trade began, held the shares for at least five tax years and been UK resident for the five tax years before the disposal. Conditions also apply to the company, including requirements concerning turnover, employees, growth and innovation.
Founders' Relief is therefore not simply a more generous version of BADR. It could be extremely valuable, but only for a much narrower group of business owners. The detailed rules also remain subject to technical consultation.
US founders have an additional consideration. A 10% UK Capital Gains Tax rate does not necessarily mean a 10% overall tax bill. The US tax treatment of the sale and the availability of Foreign Tax Credits will also need to be considered.
Anyone contemplating a sale or restructuring should therefore establish whether they could qualify for the relief, and what it would mean for their overall US and UK tax position, well before a transaction takes place.
One of the most relevant announcements for Americans received considerably less attention than the headline changes to tax rates.
US Limited Liability Companies (LLCs) are commonplace in the United States. Problems can arise when an LLC owner becomes UK resident because the UK and US can treat the entity, and the income arising from it, differently.
Broadly, the US may tax an individual on an LLC's profits as they arise, while the UK may tax the owner by reference to distributions from the LLC. This difference can create double taxation where the tax paid in one country cannot readily be credited against the tax arising in the other.
The Government has now responded to its consultation on the taxation of US LLCs and other reverse hybrids.
Rather than treating LLCs as transparent for UK tax purposes more generally, the Government intends to introduce a new UK Foreign Tax Credit mechanism to address double taxation caused by differences in how the two countries classify entities. A further technical consultation will follow, with claims under the new rules expected to be possible from early 2028.
This could be a significant development for Americans living in the UK with existing LLC interests.
It is also a useful reminder for anyone moving to the UK. A business or investment structure that is entirely conventional from a US perspective can have a very different tax treatment once its owner becomes UK resident.
Pensions are also becoming a more important part of estate planning.
From April 2027, most unused pension funds and pension death benefits are due to be brought within the UK Inheritance Tax regime. The 2026 Budget includes further changes concerning the administration and taxation of pension death benefits.
For Americans living in the UK, succession planning can already involve UK Inheritance Tax, US estate and gift tax and, where relevant, the US-UK estate tax treaty.
Individuals with significant pension assets should therefore consider their pension and wider estate planning together. This is particularly important for internationally mobile families, where the position can change as residence and other circumstances change.
There is no single planning response to the Budget.
Someone with substantial investment or rental income will have different considerations from a business owner preparing for a sale, while an LLC owner and someone with significant pension wealth may need to focus on completely different issues.
What they have in common is timing. It is much easier to assess the interaction between the two tax systems before a transaction takes place than after it.
That might mean reviewing an LLC before moving to the UK, modelling the US and UK tax consequences before selling a business, considering the Foreign Tax Credit position before realising substantial income, or looking at pension assets as part of a wider estate plan.
The Budget has changed rates and reliefs and, in the case of US LLCs, proposed a possible solution to a longstanding cross-border problem.
For Americans living in the UK, though, the key question remains the same: what does it mean once both the US and UK tax positions are taken into account?
Gabriele Palumbo is a Manager at leading audit, tax and business advisory firm, Blick Rothenberg.