Family Limited Partnerships: A lifeline in the IHT storm

19 December 2024
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The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries will often find themselves rowing against the tide between two very different and complex regimes. With the right specialist advice, they can navigate the cross-border challenges safely and make the best use of planning opportunities.

Understand the issues, avoid the traps, and discover ways to plan ahead in our Navigating the Atlantic series for US-connected clients.

In this instalment, we consider the impact of changes to UK inheritance tax (IHT) on the use of trusts by UK resident Americans and explore the use of family limited partnerships (FLPs) as an alternative vehicle for wealth planning.

Impact of proposed changes to IHT from April 2025

Changes to IHT that are due to take effect on 6 April 2025 will be a significant concern to many UK resident Americans. After ten consecutive (or ten out of the prior 20) tax years of UK residence, those who come to the UK from the US will become exposed to IHT on their worldwide assets. IHT is charged at a flat rate of 40% on death to the extent that the value of the deceased’s estate exceeds his or her available ‘nil rate band’ (NRB) amount of up to £325,000.

While those who are US citizens or domiciliaries will already have a worldwide exposure to US estate tax at up to 40% on death (and, in principle, the treaty between the US and the UK should prevent double taxation) the UK exposure represents a real additional tax cost. This is down to the size of the US federal estate tax exemption that is currently available to US citizens and domiciliaries, of up to $13.99m per individual in 2025. In effect, the worldwide IHT exposure gives rise to an additional tax liability equal to 40% of the difference between the available NRB amount and the available US estate tax exemption of the deceased (or the total value of their estate if it is less than the available US exemption) on death. Based on a USD:GBP exchange rate of 1: 0.8, this represents a real additional tax cost of up to $5.43m per individual estate.

Historically, many UK resident Americans who were expecting to remain in the UK long enough to acquire a worldwide exposure to IHT (which would occur after 15 years of UK residence under current rules) would have taken steps in advance of the change to mitigate the adverse implications. Most commonly, they would do this by transferring some or all of their non-UK assets into trust. By doing so, under IHT rules at the time, they could shelter those assets from IHT indefinitely, even if they were able to benefit from the trust. Under new rules, this planning will no longer be effective where the trust is funded on or after 30 October 2024. Instead, the trust assets will form part of the settlor’s estate for IHT purposes on death unless the settlor is excluded from benefit irrevocably. The trust assets will also be exposed to IHT charges of up to 6% every ten years and on ‘exits’ (such as capital distributions) from the trust between ten-year anniversaries for so long as the settlor retains a worldwide exposure to IHT.

There may still be opportunities for US citizens and domiciliaries (who are not also UK citizens) to leverage the US-UK estate and gift tax treaty to protect their non-UK assets from IHT through transfers into trust, but the scope for this will be significantly more limited than it has been previously. Therefore, UK resident Americans who are concerned about IHT will want to explore alternative planning strategies.

Considering alternative IHT planning strategies

It will, of course, remain important to think about how assets can pass efficiently on death. As a minimum, married couples should look to structure their wills in a way that allows access to the spouse exemption from IHT on the first death, postponing any IHT liability until they have both died. If both spouses are in good health, they may find they are able to obtain life insurance on their joint lives relatively cheaply to cover the IHT bill that arises on the second death. This can be a good option alone where substantial lifetime gifts are not viable, or it can be used in combination with a gifting strategy. Life policies taken out for this purpose should be written into trust to prevent the death benefit itself from being subject to IHT.

Potentially Exempt Transfer (PET) regime remains intact

Contrary to speculation in the run-up to the Autumn Budget, the UK’s PET regime is to be left intact following the April 2025 changes. This regime allows outright gifts in any amount to be made free of IHT if the donor survives the gift by seven years (with a reduced rate of IHT applying if the donor survives by more than three but less than seven years). Making PETs can be a powerful IHT planning tool in the right circumstances. In theory, this could allow a person to give away everything they have free of IHT during lifetime! However, there are important non-tax considerations to factor in.

First, the donor must be able to afford to give the relevant assets away. Anti-avoidance rules (known as the ‘gift with reservation of benefit’ rules) prevent the donor from ‘having his cake and eating it’, so it will be critical for the donor to cease his own enjoyment of the relevant assets at the time of the gift. Secondly, the donor must be prepared to make the gift with ‘no strings attached’. The gift must be absolute, and the donee must be free to do as he chooses with the relevant assets, which will belong to him. The donor is required to give up all formal control and ownership rights upon making the gift, which could reduce the appeal of this planning where there are concerns regarding asset protection and/or how the relevant assets will be used by the donee.

Family Investment Company (FIC) structures

This dilemma has led many to explore the use of structures through which the PET regime can be leveraged while at the same time incorporating some of the control and asset protection benefits associated with trusts. A popular structure has been the FIC. As the name suggests, a FIC is a private company that is created for the purposes of holding investments for a family. The allocation of shares and the associated rights of shareholders can be tailored to the family’s needs and can allow the division of voting control and economic interests between different generations. Gifts of shares (or funds for children to subscribe for shares) in the FIC will be PETs for IHT purposes, but control mechanisms can be built in via the company’s articles and by agreement between shareholders, which can make this option more attractive than making outright gifts of cash.

However, the use of FICs presents various challenges for American donors and donees. Active steps would need to be taken to prevent the FIC becoming entangled in penal US anti-avoidance rules that apply to ‘passive foreign investment companies’ (PFICs). Where the PFIC regime applies, the US imposes onerous income tax and interest charges on certain distributions and profits made by the FIC. Even if this can be managed (for instance, by making a ‘check the box’ election to make the entity transparent for US tax purposes), the structure presents a risk of double taxation if profits are extracted from it by UK resident family members. This generally limits the effectiveness of the planning to scenarios where the family can afford not to benefit from the FIC while they are UK resident.

The appeal of FLPs

FLPs can offer similar non-tax advantages to FICs, but without the same penal anti-avoidance rules and double tax risks. This is because an FLP is, by default, transparent for tax purposes in both the US and the UK. Therefore, the partners are subject to tax on their respective shares of the partnership’s income and gains directly as they arise.

How do they work?

In a typical FLP structure, the parent/grandparent will fund the FLP in exchange for limited partner (LP) and general partner (GP) interests. The GP interest (to which minimal economic value will be attributed) will hold the management rights, including strategic decision-making powers and control over the FLP’s distribution policy. The GP interest will often be held through a limited company to provide de facto limited liability. LP interests (including a pro-rated share of profits) will be given by the parent/grandparent to his children/grandchildren. A partnership agreement will be put in place that is bespoke to the family’s requirements. This is likely to incorporate control mechanisms and seek to provide a degree of asset protection for the partners – e.g. by incorporating limits on transfers of interests, admission to the partnership, redemption of capital, exercise of voting rights, etc. The GP interest will sometimes be retained by the donor, but more often will be transferred to a spouse or third party to mitigate the risk of the donor reserving powers that prevent the gifts from being ‘completed’ for US transfer tax purposes.

Tax considerations

No liability to tax should arise in the US or the UK on the initial funding of the FLP by the donor because there will not be any change to the beneficial ownership of the underlying assets. From a transfer tax perspective, the gifts of the LP interests will be PETs for IHT purposes, so will pass free of IHT if the donor survives the gifts by seven years. If the donor is a US citizen or domiciliary, the gifts will also be subject to US gift tax, but no liability will arise if the value of the gifts falls within the donor’s available exclusion amounts. When assessing the value of the gifts for tax purposes, there may be discounts available for minority interests and lack of marketability. Future growth on the assets will occur outside the donor’s estate for IHT and US estate tax purposes.

Although the gifts of the LP interests will not constitute ‘gain recognition events’ for US income tax purposes, they will represent disposals of the underlying assets for UK capital gains tax (CGT) purposes. This could mean it is preferable to fund the FLP with cash or, where the FLP is funded with assets in specie, to structure the transfers as gifts of cash, followed by sales of the LP interests. The sales will trigger tax on uncrystallised gains in both the US and the UK, but relief should be available under the US-UK income tax treaty to prevent double taxation.

Non-tax considerations

FLPs offer a mechanism to pass wealth to younger generations while retaining a degree of control and protection over the underlying economic interests. In many respects, this separation of control and economic ownership is reminiscent of a trust structure, which is attractive. However, this must be balanced against other non-tax considerations related to the use of FLPs. In particular:

- Because FLPs are transparent for tax purposes, they will give rise to tax liabilities for the limited partners, even if no distributions are made. This exposure to tax on the profits of the FLP means the limited partners will require full transparency regarding the finances of the partnership, to enable them to comply with their personal tax reporting obligations. There will be little mystery as to the value of their interests!

- There will be substantial professional costs associated with the setup and maintenance of the structure, including annual compliance costs for the FLP and its partners.

Historically, there have also been concerns that FLPs may be treated as collective investments schemes, requiring regulatory oversight by the Financial Conduct Authority (FCA). However, the FCA has confirmed that this is not relevant to single family FLPs.

In a nutshell:

Upcoming changes to UK inheritance tax will be a concern to many UK resident Americans, who may want to explore new IHT planning strategies. For UK tax reasons, the use of trusts as vehicles for lifetime gifting will become unappealing and ineffective in many cases. While UK tax rules favour outright gifts as an IHT planning tool, there are non-tax factors that can prohibit or limit the appeal of lifetime giving. FLP structures can offer a tax-efficient and flexible solution, which balances the desire to reduce the size of the donor’s estate with the need for a controlled transfer of wealth to younger generations.

Disclaimer

The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on US-connected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.

Family Limited Partnerships: A lifeline in the IHT storm

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Labour presses ahead with non-dom abolition

31 October 2024
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In her first budget held on 30 October, the new Chancellor, Rachel Reeves, confirmed that the government will press ahead with the abolition of the non-dom tax regime.

Draft legislation has been published setting out the detail of the new rules, which will apply from 6 April 2025.

The proposals are broadly in line with those announced by the previous government in March. The information released yesterday brings some clarifications, and significant further detail in relation to the reforms to inheritance tax (IHT).

Income and gains – the FIG regime

A new four-year foreign income and gains (FIG) regime will apply from 6 April 2025. Those who qualify for the FIG regime will benefit from a complete exemption from UK tax on their foreign income and gains, whether or not they remit them to the UK. Anyone wishing to avail themselves of the regime will need to declare their global earnings on a tax return that will need to be submitted to the UK tax authority (HMRC).

Eligibility for the new regime

The four-year FIG regime will be available to anyone in their first four years of UK residence, provided they have not been UK resident in the previous 10 years.

This means that those who are already UK resident will only be eligible for the new regime if they became UK resident on or after 6 April 2022 and were non-UK resident in the preceding 10 tax years. Subject to the residence criteria, the four-year FIG regime will be available to UK citizens and UK domiciliaries.

Trusts

The FIG regime will apply to non-UK resident trusts. Settlors who are within the FIG regime will not be taxed on the foreign income and gains of trusts they have created. Beneficiaries will not be taxed on distributions that are matched with income and gains of the trust while they are eligible for the regime.

Exceptions

Those individuals who are not in the FIG regime will be subject to income tax and capital gains tax (CGT) on their worldwide income and gains. Settlors will generally be taxed on the worldwide income and gains of trusts from which they can benefit. Currently, there are exceptions from the automatic attribution of income and gains for those who have funded overseas companies (including companies owned by non-resident trusts) where the avoidance of UK tax was not a reason for creating the structure. These exceptions – the so-called “motive defences” – will continue to apply although the rules of which the motive defences form part will be subject to government review in the course of 2025.

Transitional rules

There are two transitional rules for individuals who were already UK resident:

Temporary Repatriation Facility

The Temporary Repatriation Facility (TRF) will allow those who have previously been taxed on the remittance basis and who have unremitted income and gains to remit them and pay tax at a reduced rate. The TRF will be available for three years from 6 April 2025 (i.e., until 5 April 2028).

The reduced rates will be as follows:

- 12% in the 2025/2026 and 2026/2027 tax years; and
- 15% in the 2027/2028 tax year

The TRF will also apply to unremitted income and gains arising in non-UK resident trusts and non-UK resident companies before 6 April 2025, and also income and gains arising within such a structure that has been attributed to them before this date under the UK’s anti-avoidance rules. In addition, the TRF will cover pre-6 April 2025 income and gains within such structures that have not been attributed to the individual to the extent that the income and gains “matches” to benefits received by the individual during the TRF window. However, the TRF will not be available for distributions of post-6 April 2025 income.

Capital gains tax rebasing

This will allow current and past remittance basis users to rebase foreign assets to their market value as at 6 April 2017. This could reduce the chargeable gain if an asset is disposed of on or after 6 April 2025 and the individual is not eligible for the FIG regime.

This CGT rebasing will not be available to individuals who are already UK domiciled or deemed UK domiciled, or become so prior to 6 April 2025.

Inheritance tax

From 6 April 2025, a person will be within the scope of IHT once they have become a ‘long-term resident’ of the UK. Domicile will cease to be relevant. An individual will become liable to IHT on their worldwide assets once they have been UK resident for at least 10 out of the immediately preceding 20 tax years. This will be determined based on the existing residence rules – the statutory residence test (SRT) from the 2013/2014 tax year onwards; and the pre-SRT rules for earlier years.

UK situated assets and non-UK situated assets that derive their value from UK residential property will remain within the scope of IHT, regardless of other factors.

The “tail period”

It had previously been proposed that, once within the scope of worldwide IHT, an individual would remain so for 10 years after ceasing UK residence. That will be the case for an individual who has been UK resident for at least 20 years, but the “tail” period will be reduced where the individual has been UK resident for between 10 and 19 years, on a taper basis. For example, an individual who has been UK resident for 13 out of 20 tax years, will only need three years of non-UK residence to fall outside the scope of IHT.

“Excluded property” trusts

Buried in the budget announcements, there was some limited good news for non-doms with existing “excluded property” trusts. Currently, non-doms who settled non-UK assets into trust are protected from IHT on death. The government had announced previously that this protection would be lost. In response to widespread lobbying, the government has decided that excluded property trusts settled before 30 October 2024 should continue to be exempt from IHT on the death of the settlor.

Non-UK situated property held within a discretionary trust will no longer be excluded property where, and for so long as, the settlor is a long-term resident within the scope of IHT. If the settlor loses their long-term residence status, then the trust can reacquire excluded property status and this will trigger an exit charge for IHT. Settlements that currently have a UK domiciled settlor (under current rules) who will not be a long-term resident (under the new rules) on 6 April 2025, will be facing an unexpected exit charge. Many trusts will be in a situation where the settlor is non-domiciled (under current rules) but will be a long-term resident (under the new rules) and will become subject to the ongoing IHT charging regime with periodic and exit charges.

Commentary

The government has placed growth and wealth creation at the centre of its agenda. It has promoted the FIG regime as “internationally competitive”. The assumption seems to be that those who move to the UK to take advantage of the regime will remain beyond the four-year period and accept UK tax on their worldwide assets thereafter.

The appeal of what is (in effect) a four-year tax haven has drawn speculation. The obligation on those availing themselves of the FIG regime to report their global assets to the UK tax authority may add to the doubt.

The government appears to have heard at least part of the message that has been delivered over recent months. Subjecting existing UK resident non-doms to IHT at 40% on assets settled into trust under the current rules has been widely reported as a deal-breaker for those considering their options. While this was a step too far for many non-doms who were waiting for this clarification, it remains to be seen how those who are left will respond.

Next steps

We will be working closely with our clients and contacts to work out what the detail of the changes will mean to them and to their plans going forward.

Labour presses ahead with non-dom abolition

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Tradition abolition – Emma Gillies and Rebecca Anstey write for STEP Journal

10 October 2024
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Emma Gillies and Rebecca Anstey on why the proposed abolition of the UK’s non-dom regime will have little impact on many UK resident Americans.

What is the issue?

The UK government has proposed changes to the taxation of non-UK domiciled, UK residents from 6 April 2025.

What does it mean for me?

Individuals will be looking to their advisors for help navigating these changes and those advising US citizens will need to understand how the new rules affect their clients.

What can I take away?

The interaction between US and UK tax laws means that US citizens residing in or moving to the UK may not be as concerned as others by the changes, but there are still challenges and potential planning opportunities to be aware of.

It will be old news to many that the UK government plans to introduce changes to the tax treatment of non-UK domiciled, UK-resident individuals (so-called ‘non-doms’) with effect from 6 April 2025. Although many non-doms will have concerns about the impact of the new regime, US non-doms should be sheltered from the fallout more than most.

Proposed changes to UK income tax and capital gains tax

Abolition of the remittance basis

Non-doms can currently claim the remittance basis of taxation. Those who do are subject to tax on their UK-source income and capital gains as they arise, but only on non-UK income and gains if and to the extent that they are ‘remitted’ to (broadly, brought to or used in) the UK.

It is proposed that the remittance basis will be abolished and replaced by a new ‘foreign income and gains’ (FIG) regime. Under the FIG regime, those who have not been UK resident in any of the previous ten years will be exempt from tax on their non-UK income and gains during their first four years of residence (regardless of any remittances). Thereafter, they will become subject to tax on their worldwide income and gains as they arise.

In many cases, the loss of access to the remittance basis will not be a major concern to US non-doms.Unlike most non-doms, US citizens are already exposed to tax (in the US) on their worldwide income and gains as they arise. Fortunately, there is a treaty in place between the UK and the US that is designed to provide relief from double taxation where a liability arises in both countries at the same time. A UK-resident US citizen (with exposure to tax in both countries under domestic rules) may be able to show that they should be treated as tax resident in the US for the purposes of the treaty, at least for the early years of residence when their ties to the US remain strong. In these cases, their exposure to UK tax will be limited to certain types of UK income, with no need to claim the remittance basis on their foreign income and gains.

Where the taxpayer is resident in the UK for the purposes of the treaty, they will generally be exposed to tax at the higher of the two countries’ effective rates on a given item of income or gain. In that scenario, the utility of the remittance basis is generally limited to avoiding the risk of double taxation. This can be helpful where an item of income or gain is treated differently in the UK and the US, and treaty relief is not available. It can also assist in avoiding a higher rate of tax in the UK than is payable in the US; for example, on investment returns from US mutual funds that do not have ‘reporting’ status in the UK, which are taxed at capital gains rates (20 per cent) in the US but income tax rates (45 per cent) in the UK.

For these reasons, it is uncommon for US non-doms to claim the remittance basis beyond the point at which it comes at the cost of an annual charge (i.e., from the beginning of the eighth consecutive tax year of residence). Before that, it can be convenient to claim the remittance basis from a reporting perspective. However, using the remittance basis to defer UK tax is generally not wise for US citizens, because a mismatch in the timing of the UK and US liabilities can often cause a loss of treaty relief, resulting (ironically) in double taxation. It should only really be used where the taxpayer is confident that their foreign income and gains will never be remitted to the UK.

Removal of ‘protected settlement’ status for ‘settlor-interested’ trusts

Under current rules, where a non-dom settles assets into a non-UK-resident trust, the trust’s non-UK source income and capital gains are generally sheltered from tax unless and until a UK-resident individual receives a benefit from the trust, at which point a liability may be triggered. It looks as though the protected’ status of these trusts will no longer be available under the new regime. Instead, where the UK-resident settlor retains an interest in the trust (within the relevant statutory definitions) it is proposed that the trust’s worldwide income and gains will be treated as arising to the settlor, and will be taxed accordingly.

Again, this change will be of less concern to many US settlors, who will have deliberately put their trusts outside the ‘protected settlement’ regime, having been advised to do so on the basis of double taxation risks. These arise because most lifetime trusts settled by US citizens will be grantor trusts for US income tax purposes, meaning the income and gains of the trust are taxed on the settlor as they arise. The resulting mismatch in the timing of the tax liability (immediate in the US versus deferred in the UK) and, potentially, the identity of the taxpayer (settlor in the US versus beneficiary in the UK) will often cause a loss of treaty relief. By contrast, maximum relief should be available if the income and gains are taxed on the settlor in both the UK and the US as they arise.

Changes to UK IHT

Under current rules, non-doms who are not deemed domiciled in the UK (because they have not been resident in 15 or more of the past 20 tax years) are only subject to UK inheritance tax (IHT) on UK assets. Under the new regime, domicile will no longer be relevant when assessing IHT. Instead, a person will become exposed to IHT on worldwide assets after ten years’ tax residence in the UK.

The deemed domicile ‘tail’

Currently, where a non-dom becomes deemed domiciled, they
will continue to be deemed domiciled for IHT purposes for a
further four tax years after ceasing UK residence. Under the new
regime, it is proposed that this IHT ‘tail’ will be extended to ten
years.

Thanks to the US-UK Estate and Gift Tax Convention (the Treaty), US citizens who leave the UK to return to the US will lose this ‘tail’ much sooner than other non-doms, provided they can show they are US resident for the purposes of the Treaty (and they are not UK citizens). In that scenario, the US will have exclusive taxing rights over the estate, save for UK immovable property or business property of a permanent establishment (BPPE).

Excluded property trusts

Until now, assets transferred into trust by non-doms (including US citizens) who are not yet deemed domiciled are excluded from IHT indefinitely (hence the term, ‘excluded property trusts’).

The government has announced that trust assets will no longer be excluded from IHT. However, some US citizens may be able to rely on the Treaty to achieve the same result. The Treaty provides that no IHT is due on trust assets (other than UK real estate and BPPE) settled by someone who was domiciled in the US and not a UK citizen. If the treaty continues to apply in the same way under the new regime (with UK domicile interpreted to mean ten years’ UK tax residence), assets settled into trust by US citizens who are not UK citizens and have not yet spent ten years in the UK may be protected from IHT beyond the ten-year threshold.

Impact on advice

US non-doms who currently make use of the remittance basis should review their financial affair with their advisors, with the Treaty in mind.
US citizens moving to the UK for the first time will have four tax years to tailor their investments to account for UK tax considerations. Pre-arrival advice will still be required to avoid tripping up on UK rules affecting existing trusts, business interests and reporting obligations.
UK-resident US citizens approaching the new ten-year threshold for worldwide IHT exposure may still consider trust planning to protect their non-UK assets from tax. Alternatives to cover include lifetime giving, structuring wills to defer IHT until the second death of a married couple, investing in relievable assets and/or taking out life insurance to cover the bill.

Tradition abolition, Emma Gillies and Rebecca Anstey, STEP Journal (Vol32, Iss5)

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Non-dom rules to be replaced with four-year temporary residence regime

6 March 2024
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The Chancellor of the Exchequer, Jeremy Hunt, has announced that the government will abolish the current tax regime for individuals who are UK resident but not UK domiciled in favour of a residency-based system, which will apply from 6 April 2025.

The proposed changes are wide-ranging and will affect both individuals currently living in the UK and those planning to move to the UK. The good news is that the 6 April 2025 implementation date gives those who are already UK resident time to take advice and plan before the changes take effect.

Summary

From 6 April 2025, the remittance basis of taxation, which allows UK resident individuals who are not UK domiciled to pay tax only on foreign income and gains that are “remitted” to the UK, will be abolished. It will be replaced with a new regime under which those who have been UK resident for at least four years will pay income tax and capital gains tax (“CGT“) on their worldwide income and gains.

Draft legislation has not been published, but the government has made it clear that the new rules will also apply to income and gains arising within trusts. The result is that the generous trust protections introduced in 2017 will no longer be available to those who have been resident for four years, even if their trusts were set up before 6 April 2025.

Four years of residence tax-free

Individuals who become UK resident after a period of at least 10 years of non-UK residence will not pay UK income tax or CGT on their foreign income and gains in their first four years of UK residence, even if they bring the income and gains to the UK.
This means that individuals who are only temporarily UK resident will be able to spend their foreign income and gains freely in the UK without incurring UK tax – and without the need to navigate the complicated remittance basis rules.
Foreign income and gains arising in non-resident trusts, and distributions from those trusts, will also be tax-free during the four year period.

Transitional rules

For those who are already UK resident, there will be several transitional rules.

Pre-6 April 2025 income and gains

The remittance rules will continue to apply to unremitted foreign income and gains generated prior to 6 April 2025 on assets held personally. That is, the income and gains will continue to be free of tax provided they are not remitted.
This will not be the case for income and gains arising in trusts before 6 April 2025, which will be taxed in full if matched against distributions made on or after 6 April 2025 regardless of whether they are remitted (though distributions made within the first four years of residence won’t be matched or taxed).
Those who are already UK resident may need to consider planning in advance of the changes.

Temporary Repatriation Facility

A new Temporary Repatriation Facility will be available from 6 April 2025 to 5 April 2027. This will allow those with pre-6 April 2025 unremitted income and gains to remit them and pay tax at a reduced rate of 12%. Again, this will not be available for pre-6 April 2025 income and gains in trusts.

Reduced rate of tax on foreign income earned in 2025/26

Existing remittance basis users who will have been UK resident for at least four years on 6 April 2025 will only pay income tax on 50% of their foreign income in the 2025/2026 tax year.

Capital gains tax rebasing

Those who have been UK resident for more than four years (whether in 2025/26 or later) will be able to choose to “rebase” any assets held personally on or before 5 April 2019 to their market value on that date, so that only the post-5 April 2019 gain will be subject to CGT on a disposal.

Inheritance tax

The inheritance tax (“IHT“) regime, which is currently based predominantly on domicile, will also move to a residency-based system. The government intends to consult on the details. However, it is proposed that individuals will be subject to IHT on their worldwide assets after they have been UK resident for at least 10 years, and will remain so for 10 years after ceasing residence.

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Moving to the UK: key considerations for US citizens

23 November 2023
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The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries will often find themselves rowing against the tide between two very different and complex regimes. With the right specialist advice, they can navigate the cross-border challenges safely and make the best use of planning opportunities.

Understand the issues, avoid the traps, and discover ways to plan ahead in our Navigating the Atlantic series for US-connected clients.

Moving to the UK

In this instalment, we explore some of the key considerations for US citizens who are moving to the UK for the first time.

Managing the risk of double taxation from ‘Day One’

Upon becoming tax resident in the UK, individuals will become exposed to UK taxation in respect of their worldwide income and gains (subject to the remittance basis of taxation, discussed below). US persons, unlike those moving from most other jurisdictions, will also carry with them an exposure to US income tax on their worldwide income and gains. This leads to the risk of double taxation.

Welcome relief under the US-UK income tax treaty

The double taxation agreement between the US and the UK (also known as the “income tax treaty”) is designed to provide relief from double taxation. Broadly, the treaty operates by allocating taxing rights between the two countries and, to the extent that both countries have a right to tax, providing for a system of credits that allows tax paid in one country to be credited against the liability arising in the other.

Where treaty relief won’t help!

Although double taxation can generally be avoided through use of the treaty, the dual exposure can nevertheless have a significant impact on the tax-efficiency of certain types of investments – for example, where an asset is treated favourably for US purposes but is subject to higher tax rates in the UK. A classic example are US mutual funds that do not have “reporting” status in the UK¹. While profits on those investments will typically be subject to capital gains rates (currently 20%) in the US, they will be subject to income tax rates (currently up to 45%) in the UK. For this reason, the UK’s remittance basis of taxation can still play an important role for US persons.

Benefitting from the “non-dom” tax regime

For so long as UK resident US persons maintain a non-UK domicile for UK tax purposes, they should be eligible to claim the remittance basis of taxation. By doing so, they can shelter their non-UK source income and capital gains from UK tax, provided those income and gains are not “remitted” to (i.e. brought to or used in) the UK.

Many US persons will claim the remittance basis for at least the first seven years of UK residence, when it is available free of charge. This offers a degree of administrative ease when compared to claiming treaty relief. After the seven-year point (when an annual charge becomes payable to access the remittance basis), the taxpayer will need carry out a mathematical exercise each year to determine whether payment of the annual charge is worthwhile.

In many cases, it won’t be worthwhile for US persons to pay to access the remittance basis because the global tax saving can be marginal once the residual exposure to US taxation is taken into account. However, it could be helpful for taxpayers who wish to maintain holdings in investments that are not tax-efficient in the UK (provided they can afford not to remit the income or gains arising on those assets to the UK).

US persons who choose to claim the remittance basis will need to take extra care around the timing of remittances and tax payments to ensure that tax credits are available. This is a complex accounting issue on which US remittance basis users will require specialist advice.

What steps should be taken ahead of time?

Maximise “clean capital” – Anyone who plans to take advantage of the remittance basis of taxation should explore ways to maximise “clean capital” (i.e. funds that can be brought to the UK without triggering a taxable remittance). They might do this by crystallising capital gains and/or accelerating income to be paid to them prior to their arrival in the UK. However, US persons will need to be mindful of the US income tax consequences of such planning and execute a careful balancing act between US and UK considerations.
Consider risks associated with existing trusts – Any existing trusts of which the individual is a settlor, trustee and/or beneficiary should be examined before the individual becomes UK resident. For instance, it is common for US citizens who are moving to the UK for the first time to already hold assets in revocable living trusts, which they have been advised to put in place in the US as a probate avoidance vehicle. The individuals will very commonly be the trustees of those trusts themselves. Consideration ought to be given to how the trusts will be characterised for UK tax purposes, as there is a risk of tax inefficiencies resulting from a mismatch in the US and UK treatment.
The double tax risks for UK resident beneficiaries of US trusts are considered in detail in our article, ‘Welcome Relief‘.
Consider risks associated with existing company interests – It is common for US persons to hold assets through Limited Liability Companies (“LLCs”), which can produce tax traps for the unwary. Again, there is a likely mismatch between the US and UK treatment of these entities, which can give rise to double taxation. Broadly, this is because the US generally treats LLCs as partnerships (i.e. transparent entities) for tax purposes, whereas the default position in the UK is to treat LLCs as companies (i.e. opaque entities).
As a result, the US will typically tax the members of the LLC on their respective shares of the underlying profits of the LLC as they arise, whereas the UK may seek to tax distributions of profits from the LLC as dividends. This mismatch can cause treaty protection to be lost, with the result that the same income or gain suffers tax twice. The options for mitigating this risk will need to be considered.
Consider planning opportunities before purchasing a UK home – Many US citizens who move to the UK will acquire a home there. This raises various tax, estate planning and other considerations, including mitigating exposure to UK inheritance tax and putting in place a UK will. We explore these issues in detail in our separate guide for US purchasers of UK residential property.

Contact Us

It is essential to plan in advance of a move to the UK, to take advantage of available tax reliefs and ensure arrangements are as efficient as possible. This is particularly pertinent for those with connections to the US due to their global exposure to US income tax, regardless of where they live. It is therefore important that advice is taken from advisors with an understanding of how the two legal systems interact; ideally before any action is taken. Please contact a member of our specialist US/UK team to find out more.

Disclaimer

The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on US-connected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.

¹To be a reporting fund, a fund must register with HMRC as such. In doing so, the managers of the fund must agree to comply with onerous reporting obligations regarding the performance of the fund and the distributions that are made to investors. Most non-UK mutual funds will be non-reporting funds unless they have been designed with UK resident investors in mind.

Labour presses ahead with non-dom abolition

In her first budget held on 30 October, the new Chancellor, Rachel Reeves, confirmed that the government will press ahead with the abolition of the non-dom tax regime.

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Emma Gillies to chair Informa Connect’s Transatlantic Wealth & Estate Planning Conference 2023

6 November 2023
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Private Client Partner, Emma Gillies, will be chairing Informa Connect’s ‘Transatlantic Wealth & Estate Planning Conference’ taking place on November 7 in London.

The conference, targeting advisors of internationally mobile clients, will focus on how to navigate the most complex transatlantic arrangements for private clients. Covering topics including:

Potential political changes on the horizon
The Transatlantic private client and charitable giving – why philanthropy matters
Cross-border estate planning & administration
Developments in family offices
US tax update & IRS investigations
Global mobility and pre-arrival planning.

More information on the conference can be found here.

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Emma Gillies to attend STEP Miami’s 12th Annual Summit

17 October 2023
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Private Client Partner, Emma Gillies, will be attending STEP Miami’s 12th Annual Summit taking place in Miami on October 18 – 20.

The conference will bring together professionals from around the globe to discuss the newest changes, updates, and trends in the market for international private client planning.

If you are planning on attending the event and would like to meet with Emma, please do get in touch.

More information on the conference can be found here.

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Forsters’ Private Wealth lawyers recognised in Spear’s Tax and Trusts Indices 2023

28 September 2023
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Seven Partners have been listed in the Spear’s Tax and Trusts Indices 2023:

Head of Private Client, Xavier Nicholas – Top Recommended Tax Lawyer
Head of Contentious Trusts and Estates, Roberta Harvey – Top Recommended Contentious Tax and Trusts Lawyer
Partner, Catherine Hill – Top Recommended Tax Lawyer
Partner, Emma Gillies – Recommended Tax Lawyer
Partner, George Mitchell – Recommended Tax Lawyer
Partner, Kelly Noel-Smith – Recommended Tax Lawyer
Partner, Daniel Ugur – Recommended Tax Lawyer

Spear’s publishes annual rankings of the top private client advisers and service providers to HNWs. These are drawn up on the basis of peer nominations, client feedback, interviews, data supplied by firms, as well as information gathered by the Spear’s editorial and research teams. The Tax and Trusts Indices are a guide to the finest tax advisers and lawyers working with high and ultra high net worth clients around the world.

We are delighted that the hard and dedicated work our Private Wealth team carry out for their clients has been echoed by this year’s listings.

The complete Spear’s Tax and Trusts Indices can be viewed here.

The news follows the team’s recent success at the STEP Awards 2023, where Forsters were named as the winner of three categories.

Emma will join a panel of experts, who will deliver a market update on Prime Residential Property in the UK, and discuss the tax planning strategies that should be considered by foreign buyers.

The conference will take place on June 14 at the Royal Automobile Club in London and will bring together leading advisors to high net worth private clients with US connections.

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Emma Gillies to speak at Transatlantic Wealth & Estate Planning conference

16 November 2022
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Private Client Partner, Emma Gillies, has been invited to speak at the Informa Connect Transatlantic Wealth & Estate Planning conference.This London conference features US and UK tax experts as well as specialists in immigration and wealth management, and is designed to provide full coverage of the transatlantic tax ecosystem. Emma will be speaking at the session entitled ‘Estate Planning and Charitable Giving’ alongside Jaime McLemore of Withers and Jo Crome of CAF American Donor Fund.

The conference will take place on 30 November. You can view the full agenda and register to attend here.

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Emma Gillies to speak at the US/UK Tax Planning conference

9 November 2021
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Private Client Partner, Emma Gillies, has been invited to speak at the US/UK Tax Planning, Digital Week Conference.

The conference, held from the 22 – 24 November, is an event dedicated to helping tax and estate planning professionals when advising their US clients with transatlantic interests.

Emma will join Nita Upadhye of NNU Immigration and Laura Zwicker of Greenberg Glusker in a session entitled “Global Mobility through the pandemic”. In the session, they will discuss tax residency as well as experiences and motivators towards relocation.

You can sign up to attend the event here.

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Catherine Hill, Emma Gillies and Catharine Bell listed in Spear’s Tax & Trust Advisers Index 2021

4 October 2021
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Private Client Partners, Catherine Hill and Emma Gillies, and Private Client Consultant, Catharine Bell, have been listed in the Spear’s Tax & Trust Advisers Index 2021:

Catherine Hill, Top Recommended Tax Lawyer
Catharine Bell, Top Recommended Contentious Trust Lawyer
Emma Gillies, Rising Star Tax Lawyer.

Spear’s publishes annual rankings of the top private client advisers and service providers to high net worth individuals. These are drawn up on the basis of peer nominations, client feedback, telephone and face-to-face interviews, data supplied by firms, as well as information gathered by the Spear’s editorial and research teams.

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Charles Miéville and Emma Gillies write for Bloomberg Tax on SDLT for international buyers

25 August 2021
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Residential Property Partner, Charles Miéville, and Private Client Partner, Emma Gilles (née White), have authored an article for Bloomberg Tax entitled ‘U.K. Property Market—Tax Considerations for International Buyers’.

The Covid-19 pandemic has led to 18 months of changes from a U.K. Stamp Duty Land Tax (SDLT) perspective with mixed (and conflicting) objectives, from kick-starting the property market to improving affordability for the average buyer. On July 8, 2020 an SDLT “holiday” was introduced which is still ongoing, albeit in a reduced way. In April 2021 a 2% non-resident (NRSDLT) charge commenced.

As the tax holiday winds down, we consider what each of these measures was introduced to achieve, what the result was, and how international buyers should now approach any new purchase in light of the current SDLT legislation.

Stamp Duty Land Tax Holiday

The pandemic led to a great deal of uncertainty in the U.K. property market as the government initially advised against moving home; people were also naturally cautious about this in a time of great unpredictability. The U.K. chancellor’s introduction of an SDLT holiday on the first 500,000 pounds ($687,800) of the purchase price aimed at re-opening the market, encouraging buyers to put their SDLT saving into a deposit, and kick-starting the buying process for many would-be buyers.

The SDLT holiday benefits all buyers, whether purchasing a main or additional residence, and whether domestic or international investors. It also had the effect of pushing up prices, as supply dwindled and demand increased, so much so that any SDLT saving may easily have been lost to the significant increase in asking prices, pushing many homes well beyond the affordability of the intended buyers.

In March 2021, the SDLT holiday was extended, so that the market did not fall off a cliff face at a time of great economic uncertainty, and the staggered reduction of the saving, which had been as much as 15,000 pounds, has, from June 30, 2021, been reduced to a maximum saving of 2,500 pounds until September 30, 2021.

Given the high average price of a property in London and the south of England, it is unlikely that many people in this region will be purchasing at under 250,000 pounds and therefore benefiting from the full current exemption. First-time buyer relief on properties up to 500,000 pounds is however still available.

The result of the reduction of the SDLT saving was a flurry of transaction completions before the deadline; our office saw over 200 completions in the final weeks of June. Interestingly, the SDLT holiday was a key factor for clients in all price brackets, rather than just those up to 500,000 pounds who would pay no SDLT at all. The impetus to complete the purchase before September 30, 2021 is now far smaller given the reduced saving.

Non-resident Stamp Duty Land Tax

Against this backdrop, a 2% NRSDLT charge was introduced in April 2021. The aim of the tax, which applies to “non-resident” purchasers only, was to improve affordability of housing against large price increases over the last few years; any funds raised would be used to tackle homelessness.

In order to avoid a NRSDLT charge, a buyer must have been living in the U.K. for 183 continuous days in the calendar year prior to completion of the transaction, otherwise the buyer will be liable to pay the tax. If the buyer can then show a period of 183 continuous days living in the U.K. during a combination of the years immediately prior and post the transaction completion, they will be able to claw back the 2%.

It is important to note that the test for the application of the NRSDLT charge is entirely separate and distinct from the statutory residence test (SRT) that applies when determining tax residence for all other U.K. tax purposes. It is possible for an individual to be tax resident in the U.K. under the SRT while being non-resident for the purposes of NRSDLT, and vice versa.

Unlike the previously introduced 3% surcharge that applies on the acquisition of an “additional residential property”—where a transaction was automatically liable to this charge where one half of a married couple owned another property, even if they were not involved in the purchase—the 2% NRSDLT charge can be avoided where a married couple or couple in a civil partnership buy a property, and only one of them is non-resident for the purposes of the tax; so there is no need to structure to avoid the NRSDLT if one half of a married couple only meets the requirements.

It may therefore be helpful if an international buyer who is considering buying in the U.K. is able to spend the requisite six-month period in the U.K. prior to completion of the property purchase (or immediately afterwards) to avoid the NRSDLT charge. However, such international buyer should not spend this amount of time in the U.K. without seeking advice on the broader U.K. tax consequences of doing so.

This SDLT charge has seen far less interest from international buyers to date, particularly given the majority of sales during lockdown have been to a domestic market, with very few international buyers committing to purchases sight unseen. It will be interesting to observe the impact of the 2% NRSDLT once travel corridors fully reopen. It is questionable whether it will achieve its desired outcome, given the affordability of U.K. property for foreign buyers due to favourable exchange rates, low interest rates for borrowing, and the high holding costs of property in some overseas locations, notably New York and California, where there are significant annual property taxes.

Interpretation can be Complex

A more complex example of the current SDLT position can be seen in the following recent transaction this firm handled which brings into play both the 3% SDLT charge, the 2% NRSDLT charge and the SDLT holiday.

A couple who lived abroad sold their main residence abroad and moved into a U.K. pied-a-terre they owned. They aimed to replace their main residence with a London house purchase, but having just moved to the U.K. are living in their pied-a-terre. They entered into a conditional purchase contract to buy a house. If the contract completion date is prior to September 30, 2021, they will benefit from the 2,500-pound SDLT holiday saving, but due to not having been in the U.K. for 183 continuous days in the year to completion, they would be charged the 2% NRSDLT. They would be able to reclaim this after November 2021, by which point they would have been here for the requisite 183 continuous days.

Alternatively, if the conditions to the contract are not satisfied until after September 30, 2021, they would lose the 2,500-pound SDLT holiday but potentially still be liable for the 2% NRSDLT if completion is any time before November 2021. If completion is in November 2021, they do not benefit from the SDLT holiday, but equally they do not pay the NRSDLT. The position has been further complicated by entry into an option agreement to buy the house, the grant of which triggered an SDLT charge, which is initially based on the NRSDLT calculated charge, but which needs to be revisited once the sale itself completes or at a later date when NRSDLT is not chargeable, which could lead to a refund for the initial option grant.

Planning Points

As is demonstrated by the above example, the SDLT legislation is constantly shifting, and its interpretation can be complex. By moving quickly prior to September 30, 2021 buyers will achieve a small saving in many price brackets, and by structuring their purchase around a six-month U.K. stay may be able to avoid the 2% NRSDLT—although they should be aware of the broader U.K. tax consequences of doing so.

Further planning would be needed to avoid the 3% surcharge on SDLT for additional dwellings, such as selling your former main residence and replacing it with your U.K. main residence, selling or gifting any additional properties prior to purchase of your main residence (but beware any capital gains tax or inheritance tax or foreign tax consequences).

As ever, early structuring advice and legal involvement will be key to minimizing stress and unintended tax consequences.

Meanwhile, the government’s plans to boost the property market on the one hand, and to make it affordable on the other, will continue to have a very mixed effect on market conditions, though it appears our international client base is keen to revisit U.K. acquisitions as soon as travel is easier, and seems undeterred by the myriad possible pitfalls.

Disclaimer

This article reflects the law as of 25 August 2021. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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Charles Miéville

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What is the best way to buy our first UK home? Emma Gillies answers the Financial Times reader’s question from a US connected couple

25 August 2021
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Private Client Partner, Emma Gillies (née White), answers a reader’s question for the Financial Times entitled ‘What is the best way to buy our first UK home?’.

The question seeks to understand whether holding the property as ‘joint tenants’ or ‘tenants in common’ is more suitable for a married couple, where one is British and the other American.

In her response, Emma explains the difference between the two options; highlighting that ‘as joint tenants, you own the whole property together, whereas tenants in common each own a separate and distinct share of the property, which may or may not be equal’.

Although Emma acknowledges that there can be practical advantages to owning property as joint tenants, she goes on to recommend owning the property as tenants in common, as it provides greater flexibility for estate planning. However, she emphasises that US tax advice should also be sought by the reader.

The full answer can be read here, behind the paywall. For further details about purchasing UK property when you have connections to the US please check out our comprehensive guide here.

A Guide for US Purchasers of UK Residential Property

When acquiring UK property, US purchasers should seek advice on the broader tax and legal implications. In this report, Forsters’ partners along with specialists in the industry, share their insights on the current UK market for US buyers and how best to navigate the specific risks for US-connected clients.

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Emma Gillies

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Emma Gillies shortlisted in the Chambers High Net Worth Awards 2021

9 August 2021
News

We are delighted to announce that Private Client Partner, Emma Gillies (née White), has been shortlisted for ‘UK Rising Star’ in the upcoming Chambers High Net Worth Awards 2021.

Nominations for the Awards are based on the results of the extensive research process carried out for the recent edition of Chambers HNW Guide 2021, recognising individuals at the top of their profession and resulted in Emma’s inaugural ranking as an “Up and Coming” Partner in the Private Wealth listings.

Following Emma’s promotion to Partner in April last year, she has been widely acknowledged for her standout practice. Chambers explain that “Emma has gained a strong reputation for advising high net worth individuals and families on a range of cross-border matters, including estate planning, trusts and succession” with sources commenting, “Emma is great. She is really easy to work with. She’s adaptable, she’s proactive and always on the ball”.

Her work for US citizens with links to the UK continues to command attention, with a Chambers’ interviewee describing Emma as “knowledgeable and very connected to US markets. She is a real calm influence on many clients, which is important”.

She has also been recognised in the 2021 Spear’s Tax and Trust Advisers index (Rising Star), Legal Week’s Private Client Global Elite 2021 (One to Watch) and ePrivateclient’s Top 35 under 35 2020, as well as being shortlisted for ‘Partner of the Year’ at the Citywealth Future Leader Awards 2020.

The winners of this year’s Chambers High Net Worth Awards will be announced at the ceremony on 7 October 2021, which will be held virtually.

A Guide for US Purchasers of UK Residential Property

When acquiring UK property, US purchasers should seek advice on the broader tax and legal implications. In this report, Forsters’ partners along with specialists in the industry, share their insights on the current UK market for US buyers and how best to navigate the specific risks for US-connected clients.

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Emma Gillies

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Asset protection considerations

20 July 2021
News

When acquiring UK property, aside from seeking legal support on conveyancing, US purchasers should seek advice on the broader tax and legal implications. As with any substantial acquisition or investment, there will always be traps for the unwary. Where US purchasers are concerned, the traps can be more common and more dangerous. Taking advice from the outset will enable pro-active planning and help to avoid costly future mitigation.

Use of trusts

While the use of trusts to hold UK residential property can potentially offer some degree of asset protection when compared to outright personal ownership , this protection may not be as robust as clients would like.

In the event of a divorce, for instance, trust assets can be considered a financial resource available to the spouse who is a beneficiary (although this will depend on the terms of trust, distribution patterns, etc.) and the trust may even be treated as a “nuptial settlement” if it is settled by one or both of the couple, or by a third party for their benefit. If a court finds the trust is a nuptial settlement (which is comparatively rare but not unheard of) it will have extensive powers to change the terms of the trust, remove/replace trustees, order distributions, etc. This is in stark contrast to the position in the US, where trusts are generally robust and immune from variation.

The use of trusts might also be unattractive from a tax perspective. For instance, the value of the property would suffer an IHT charge of up to 6% every ten years while it was held in trust. The property would also continue to form part of the estate of the settlor (so be subject to IHT on his or her death) unless he or she was irrevocably excluded from benefit. Excluding the settlor from benefit is unlikely to be practical if he or she wishes to occupy the property. Furthermore, holding the property in trust would give rise to reporting obligations for the trustees, who would need to report the existence of the trust and details of its beneficiaries to HMRC through the Trust Registration Service.

As a result, there will only be very limited scenarios in which trust ownership will be appealing. Generally speaking, direct personal ownership will be the preferred route for the family home.

Protecting assets from separation or divorce

Nuptial agreements

A pre-nuptial or post-nuptial agreement offers the best degree of protection for UK property on divorce. Parties are able to define marital property (which is to be shared) and separate property (to be ringfenced) on divorce and can also set out levels of spousal and child maintenance payable on separation. Whilst prenups are not automatically enforceable in England and Wales, provided the agreement meets the parties’ respective needs, and those of any children, its terms will generally be upheld.

There are many reasons why people have a nuptial agreement, including;

if there is an actual or expected disparity between the wealth of the spouses;
there are assets which have been in one of the couple’s families for generations that they would like to protect on divorce, in order that future generations can benefit; and
if it is not a first marriage and a party wants to preserve assets for children of a previous marriage.

The aim of nuptial agreements is to provide certainty and security if the marriage did breakdown, and more power to a couple to make arrangements for the future, rather than leaving everything to be determined by the court. Above all else, a pre-nuptial or post-nuptial agreement saves acrimony and potentially significant costs if there were a divorce in the future.

Pre-nups and post-nups will be familiar territory to many US connected clients, but there are some additional considerations and differences that they will need to be aware of on moving from the US to the UK. English nuptial agreements are not automatically enforceable like pre-nups in the US, but are instead guided by case law. This case law states that the starting point is that nuptial agreements will be upheld, but they must meet certain conditions including;

the agreement been entered into freely;
each party has taken independent legal advice;
there has been full financial disclosure by both parties; and
agreement is fair. This element of fairness is the second differentiator between UK and US pre-nups; if a US pre-nup is in place, it must satisfy the principles of fairness to be upheld in England.

It would be wise for any clients that are moving from the US to the UK to have their arrangements reviewed by a specialist English family lawyer and revised or supplemented, if necessary, to provide more robust protection against claims on divorce. Alternatively, if a nuptial agreement is not in place, a move to the UK or an investment in UK property may provide the impetus to negotiate a post-nup.

Cohabitation

There can also be a risk of claims against property on the separation of unmarried cohabitees. While there is no such thing as common law marriage in England and Wales (and the starting point on the separation of unmarried cohabitees is that neither party will have any ongoing financial obligations towards the other), there are a number of means through which one party can make a claim against the other with respect to property.

In England and Wales, cohabitation is a patchwork quilt of potential claims that can call on various different areas of law, including property, family, trust and children law, to make a claim. For example;

Claims for the benefit of children – The court could make a settlement or transfer of property order, to provide a home for the child for their minority (NB: Any capital awarded to purchase a property is likely to be held in trust until the child’s majority or the end of full-time education, when it will revert to the payer).
Trusts of land – One party may be able to rely on actions during the course of a relationship (e.g. conversations, oral agreements, regular payments towards outgoings in relation to the property etc.) to establish a beneficial interest pursuant to an implied, resulting or constructive trust. The latter is most relevant in the domestic context. Alternatively, a party can rely on proprietary estoppel to claim a beneficial interest.

They must show:

an assurance on the part of the other party (e.g. leading them to believe they will have some right in relation to the property)
that they relied on the assurance to their detriment; and
that it would be unconscionable for the other party to deny them the right they expected to have.

Cohabitation agreements can protect against these risks. They allows parties to regulate the terms of their cohabitation, providing clarity both during the course of the relationship and in the event that it should break down.

The agreement would incorporate or be accompanied by a declaration of trust in relation to any real property, confirming the parties’ respective beneficial interests. The agreement can also deal with a wider range of issues, including how household expenses are to be split; what happens if one party wishes to sell the property and the other does not; financial support during and after cohabitation; and living arrangements and financial provision for children.

Security and clarity of such a kind is extremely beneficial to a couple if the relationship breaks down in the future.

A Guide for US Purchasers of UK Residential Property

When acquiring UK property, US purchasers should seek advice on the broader tax and legal implications. In this report, Forsters’ partners along with specialists in the industry, share their insights on the current UK market for US buyers and how best to navigate the specific risks for US-connected clients.

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