I would like to add to the comments following Michael’s question of 10 June.
US Taxation: General Position
It is implied that when you left the US that you ceased to be liable for US tax on a worldwide basis. I am not familiar with the US tax rules on this: do you immediately cease to be liable for US taxation, or does this only follow after a period?
You mentioned that you are not a US citizen. Accordingly, you do not have a continuing liability to US tax on a worldwide basis because of citizenship.
US Source Income: General Position
The US, in common with most countries, imposes taxes on the US source income of non-residents. In practical terms, as regards investment type income, this is imposed through withholding taxes.
My understanding is that the rate of US withholding tax on dividends, interest and similar income is 30%. Perhaps others would confirm this, or comment if this has changed recently.
I am not aware of any withholding tax in respect of capital gains. (This is subject to a 10% deduction from the sale price of real estate.) Would others comment on this?
UK/US Double Tax Treaty
The double tax treaty between the UK and US can allow for reduced tax on income and gains earned by UK residents from US sources. Michael can therefore benefit from this.
The main relevant articles in the treaty are:
• Article 10: Dividends
• Article 13: Gains
On dividends, the key provisions are:
• For non-pooled investments, Article 10(2)(a) reduces the general US tax from 30% to 15%.
• For pooled investments, Article 10(4) seems to give the same result.
On gains, Article 13(6) gives the general taxing rights solely to the country of residence of the vendor, which is the UK for Michael. This is subject to special rules for real estate and other situations. Further, Article 13(7) allows, in Michael’s case, the US to tax him under US rules for six years after ceasing to be resident. I would be interested to know from others if the US does use this override in practice.
In his posting of 16 June, Michael mentioned that he had filed W-8BEN. This claims the benefit of the double tax treaty and would allow the US payers of dividends (or their agents) to apply the reduced rate of withholding tax under the treaty. Michael said that this applies to capital gains, not to dividends; this does not seem to me to be correct.
Remittance Basis
Michael did not say where he considers himself to be domiciled. It is inferred that he considers himself not to be UK domiciled. If he had a domicile of origin in the UK and acquired a domicile of choice in the US during his 10 years there. He needs to consider whether he has reacquired his UK domicile on returning to the UK.
Michael indicates that he will claim the benefit of the remittance bases. Several points arise:
• In general, unless the amounts of foreign income are small, he will need to claim this on a self-assessment return.
• He will need to avoid remitting amounts representing the income or gains to the UK. Following extensive changes in 2008, this needs care with the extended meaning of remittance.
• Michael will lose the benefit of his personal allowance and annual capital gains tax allowance.
• It seems to me that the use of the remittance basis does not prevent Michael from claiming the benefit of the reduced withholding tax on dividend income under the double tax treaty. I would be interested if others have views on this subject.
Comparative Position
If Michael chose not to claim the remittance basis then, it seems to me, the taxation of his dividends would take the following into account:
• The 10% tax credit for dividends, including dividends from non-UK sources and distributions from most non-UK pooled investments.
• The special dividend rates of income tax, being lower than the normal rates of tax on income.
• An offset against UK tax for US withholding tax.
The overall UK tax burden may not be significant.
If Michael were to use the remittance basis, but remit amounts representing the income (whether in the same or later years), then it seems to me that:
• The 10% tax credits would remain available.
• The special dividend rate would clearly not apply.
• The second of the above points means that it is possible to increase UK tax liabilities by using the remittance basis, but later remitting the income.
Offshore Income Gains (OIGs)
As Nun mentioned, gains on disposals of US mutual funds which are not UK reporting funds will be taxed as income in the UK, rather than capital gains. Some points to note are:
• OIGs are taxable on the remittance basis for individuals claiming that basis.
• The whole of the gain would be potentially taxable, not just the amount of gain that might have arisen since establishing UK residence. Was Michael advised to consider this, subject to US considerations, prior to becoming a UK resident?
