Which state?

Hi all,

My husband and I are moving to the UK soon.  At this time, it will not be a permanent move (we may change our minds), but we do plan on being there 3-5 years.

We're currently CA residents and therefore have to pay state income tax.  My parents live in WA.  At this point, we figure we will need to change our address to one of our parents for mail that we get that doesn't get forwarded.  Would it be advantageous to us to use my parents for this (they are WA residents and WA doesn't have state income tax), or is it a moot point?

We know we'll have to pay state income tax for the time we lived in CA this year, but in the future would we be subject to state income tax?

Thanks!
~Sonja

Breaking residence for California tax purposes requires - broadly - spending over 1.5 years living outside of CA.  Where your correspondence is mailed is of little relevance.

You will however need to ensure that you do not have CA living trusts before becoming UK resident, as these could become UK resident.

I suggest that you take tax advice from a dual US/UK tax qualified advisor before arriving...

There should be a California state taxation website which should answer your question.

Even though I'm from Maryland and my family lives there my last State of residence before moving to the UK was Virginia.  Virginia law requires me to file taxes with them as that was the last State I lived in and filed taxes with.  It may very well be the same for California.  As far as I know there's no limit to how long you need to file with Virginia so if I spend the rest of my life in the UK or abroad I'd have to file with Virginia for the rest of my life.

Thankfully for most folks there are only a few States such as Virginia and Georgia where domicile determines taxability.  New Jersey changed a few years back to match New Tork and California also has a time test.

The pointer is well made however, do not forget both about the rules of the State you are leaving and of the place you are entering (ie the UK).  I have met enough folks over time who have overlooked one or the other where simple planning could have saved a fair few dollars and loads of worry later on!

You will however need to ensure that you do not have CA living trusts before becoming UK resident, as these could become UK resident.

I don't understand this statement. 

Courtney -

For the benefit of those who read this thread and like you are puzzled, a Living Trust is commonly used (especially in CA) to avoid the paperwork on probate after death.  All of the assets such as stocks, bonds and real estate you own are (on paper) transferred into the ownership of the Trust while you are still alive.  This way you avoid having to get probate on death because the trustees/executors just have to get the trust paperwork sorted as against going through Court to get probate.

In practice, many Californians don't see the trust as separate from them because they keep getting monthly bank and brokerage statements.  Typically both husband and wife are both beneficiaries of the trust and also are the trustees.  In effect the trust is only a paperwork exercise done during lifetime by the attorney who drafts the Wills.  This is all very sensible (and I know that I am picking on California here but Living Trusts are also used in other States too).

Now lets say husband and wife move to the UK for a 3 year assignment.  For UK tax purposes they become resident here (although they remain domiciled in CA).  If the Living Trust did not exist then all of the money invested in their brokerage account in the States would not be taxable in the UK unless the interest, dividends or capital gains were remitted here. 

But because the Living Trust exists AND husband and wife are trustees and UK resident then the Trust becomes UK resident AUTOMATICALLY (this is based on UK trust law).  Since last weeks UK Budget that means that there is a 20% entry charge on new money invested in the trust, an annual income tax charge on worldwide income of the Trust, a 6% 10-yearly charge and an exit charge when the trustees resign or become non-UK resident.

I know what I have written may be (or will be) way  beyond most folk's interest, but the main message is if you have a US trust you MUST now take UK advice because of last week's UK Budget.

(Also do not confuse a Living Trust with a Living Will, which is quite different again...)

 

Crappity crap crap. I have a living trust. 

Dearest Courtney - please do not cry.   You have only arrived in the UK in recent months I believe, so the important thing is to get good advice what to do.

Did you get tax advice before you moved over?  The issue over Living Trusts is not new, its just that the tax position may have got even worse since last week's Budget.

OK what you need now is an attorney who specializes in UK taxation of foreign trusts.  These guys are not cheap, but as trustee you have created a duty of trust that cannot be ignored.  The UK divides lawyers into solicitors and barristers.  You may be able to get a barrister's opinion that the trust is a bare trust for UK (as well as US) purposes but this will depend on the facts as well as having the barrister understand English and California law.  You cannot instruct a barrister directly, this has be done by your solicitor.  I recommend getting advice BEFORE 6 April 2006, when the new tax year starts if you can ... although if you are already UK resident it may already be too late...

Sorry to bear bad news, but cross-border taxation is never simple which is why most folks need a helping hand from UKY and professional advisers.

Guya~ I very much appreciate the heads up! I am still in CA but will be moving very soon. I have already sent an email to my attorney here in CA explaining what has happened with the UK trust law. I'll see what he has to say. It may behoove me to just dissolve the trust. I don't have a complicated estate right now so it might be easier that way.

If anyone is interested in what my attorney has to say, let me know. Otherwise I won't bore you all with the details. 

Your CA attorney probably doesn't know much about UK trust law and the UK taxation of trusts.  May I recommend he speak with Mr. Kevin Burke, a UK solicitor and Florida attorney who handles this issue all the time?  Mr. Burke would not able to advise on the CA aspects, but because he is dual-licensed, he could liaise with your CA lawyer regarding the UK element.   You can contact him at www.bennettslaw.com.  Unlike many dual-qualified attornies, he is reasonably priced.

Thank you Liz! Very much appreciated.