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US tax reform - The implications for HNWIs and families abroad, some unexpected consequences

16/07/2018 Mark Walters, tax partner, BDO,

We are coming to terms with the Tax Cuts and Jobs Act, the most substantive change to US tax legislation since 1986. The broad intent was to reduce taxes for both individuals and corporations, yet the American abroad may not achieve this.

In a series of articles by BDO’s London-based private client US tax advisory team considers the recent US tax reform through the eyes of the American abroad. In this first instalment, tax partner Mark Walters introduces the concept of the ‘Accidental American’. 

The Accidental American

Who is the next Boris Johnson?

Out-going British Foreign Secretary Boris Johnson’s exposure to the US tax system hit the headlines a few years ago. Back in 2014, while serving as the Mayor of London, Boris had a public spat with the US Internal Revenue Service over a tax bill on the gain from the sale of his main residence in North London. 

While exempt from paying UK tax on the sale as a British citizen, he was subject to US tax on the sale under US tax laws because he held dual US citizenship having been born in New York. 

This meant he was subject to US tax rules, regardless of where he subsequently resided in the world. In 2016, Boris consequently gave up his US citizenship, a step which of itself requires careful consideration due to potential exit tax consequences.

Professional advisers regularly uncover “Accidental Americans”, those who unwittingly hold US citizenship having been born there, or from marrying an American. These are the less visible circumstances in which individuals, families and their business interests are exposed to the US tax system.

Consider the example of a client who has built a UK family business here in Britain. The founder (the client) has always been a UK resident and then meets their future spouse - an American who came here on a short secondment 20 years ago but never returned to the US. There are children from the marriage and, whilst it is uncertain whether the children will participate in the business, the founder has no plans to sell and needs to consider inheritance, the wills of both spouses, succession and the provision for the children.

It is common to consider the provisions from a UK perspective and overlook the fact that like Boris, any plans need also to be considered through the lens of the US special rules which will apply to any gift/estate or the establishment of a foreign investment, trust or entity in the hands of a US person. 

For those finding themselves in this position, the recent US Tax Reform, the most substantive change in US tax legislation since 1986, will certainly have implications for the American (Accidental or otherwise) abroad. (Future instalments in this series will look at the recent US Tax reform in different scenarios for the American abroad).  

The message quite simply is where there is a US aspect to an individual’s business or family interests – seek specialist advice. BDO’s private client US tax advisory team, based in London, comprises dual qualified US UK tax professionals experienced in the international taxation for ‘US-connected’ clients:

- ‎US citizens living abroad

- Foreign nationals moving to US or with investments in the US

- Businesses looking to expand into or out of the US

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