Dual citizenship UK residence and US domicile for tax purposes

I am a US citizen living in the UK with my British husband.  In 3 years I had planned to request dual citizenship (UK/US).  I have a living trust set up in the US with my daughter as beneficiary.  I pay only US taxes on the trust income.  I now have the choice to declare my permanent domicile in either country.  Obviously it makes more sense tax-wise to keep a US domicile for tax purposes.  I am wondering if it might be a mistake to apply for UK citizenship as this may be seen by Inland Revenue as establishing domicile (as opposed to residence) in the UK. 

Both my husband and I are retired so I do not have any income in the UK.  I pay US federal tax on my pension and investment income.  He pays UK tax on his pension and assets in the UK.

1) Applying for UK citizenship alone is not enough to establish domicile.  It depends in part on why you are applying (which you must put on your application). If you want to be sure you phrase everything in such a way as to ensure you don't lose your domicile by obtaining citizenship, then use the services of a lawyer or immigration specialist whose job it is to know what to say and how to say it, and who can be held accountable for screwing up.

2)  You gave away way, way, way too much information on your post.  Give any further info offline in a telephone or in-person conversation with your advisor.

3)  Trusts may in fact have UK tax as well. (Don't reply here!) If the trustees are resident in Britain, it turns it into a British trust.  Hopefully, your trustees are NOT living in the UK, and if they are, HOPEFULLY you can retroactively change them to non-UK-resident persons.  Also, any remittances from the trust into the UK are taxed in the UK (less any UK tax paid).

4)  Pensions and investment income are taxed in the UK if you remitted them to the UK.  If you kept all this money offshore, then you did the right thing taxing them only in the US. 

5)  You can restructure your investments in such a way that there's no UK tax.  This is because after your restructuring, the monies you are remitting to the UK are considered capital instead of investments, pensions, or trust proceeds.  That requires some serious work between your dual US/UK tax consultant and your US financial planner.

6)  As you can see, you've opened a mega can of worms by including way too much information that was irrelevant to your actual question.  I wouldn't ask these kinds of questions here, and wherever you do ask them, don't do it in writing and use the phrase "hypothetically speaking" a lot.  A lot.  Exclusively, even.  Why?  So that you can figure out what you need to do without committing yourself to an immediate plan of action.  Not paying taxes is a crime in the UK, so you have to resolve it quickly once you've brought the problem to the attention of a professional.  Thus, hypothetically speaking gives you time to take care of things at your own speed. You may be able to make some changes retroactively, and thus you may be able to significantly reduce any UK tax exposure.  Get serious, real, offline advice.

NHow; Lizzit has expressed very clearly many of the issues. I re-phrase them here based on my view.

1. You are only exempt from UK tax on your pension/investment income if:
a) It is not remitted to the UK,
b) You are not domiciled within the UK,
c) You claim to be taxed only on UK remittances on a UK tax return
d) None of the income/gains are attributed to a UK resident trust.

2. We don't know from what you say where your daughter is domiciled or resident.

3. You are under a common misconception that one can be UK or US domiciled, whereas this is not technically possible.

4. If the trust is a trust under English/Scottish law and is UK resident then resigning as trustee could instantly bring all unrealised gains into the UK tax charge.

5. Domicile and citizenship only have a tenuous connection.

6. Your US trust may be a foreign trust at this stage so requiring US filing as a foreign trust if it can be subject to English/Scottish law.  Penalties for failure to file are 35% of the assets of the trust.  This is a legal question and will require a US atorney's opinion.

7. Lizzit is not quite right about your investment income.  We don't know what kinds you have but some could be taxable on you even if not remitted.  Some of the trust income/gains could escape UK tax even if remitted.  I know Lizzit was simplying things but you need to clarify this with an attorney/CPA/Chartered/Certified Accountant etc familiar with these kinds of issues.

8. We don't know the State tax and legal issues.

9. There are UK and US estate planning consequences that seem on the face of it to have been overlooked.  Was the person who advised you on setting up the trust aware there were UK issues to be considered?

Hypothetically speaking, the trust is not and has never been a UK trust.  There are no UK residenced trustees.  All income from it is in the US alone.  The hypothetical daughter is a US citizen living in the US.   

Interestingly, you say that applying for UK citizenship (dual with US citizenship) should not in and of itself establish domicile.  Hypothetically speaking then, could one live in the UK, be married to a UK citizen, become a dual citizen and still claim domicile in the US?

Thanks for your hypothetical thoughts.

Domicile is used for both State residence and estate taxes as well as for UK tax income tax, capital gains tax and inheritance tax.

You will need advice on where you are currently domiciled for all of these various different purposes and the effect of the proposed UK citizenship application once again for all of these purposes.

These are all complex issues requiring advice from a US/UK qualified person.  Without a substantial fact pattern it is not going to be feasible to comment in sufficient depth.

Given that you and your trustees (who will presumably become your executors upon your death) could not rely on advice obtained through an open internet forum there is truthfuly no way to answer the issues here.

Points well taken.  Many thanks for everyone's comments and advice.

Cheers,
N

To quote Guya:  "your trustees (who will presumably become your executors upon your death)"

I couldn't resist the pun...  Better than being her executors before her death....

:-)  Best laugh of the day.