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Expatriation - A Comparison of Tax Issues in
the US & UK in an Increasingly Mobile World
U.S. Perspective
What Does It Mean to Expatriate?
To expatriate is to irrevocably relinquish U.S. citizenship, with all
of its attendant obligations and privileges.
At the time of expatriation, a potential expatriate must be a citizen
of at least one other country, so that he/she is not rendered stateless
by the act of relinquishing U.S. citizenship.
Unlike all European countries, and unlike almost all countries (a
U.S. Perspective
Overview of Expatriation Tax Regime
The U.S. imposes a mark-to-market “exit tax” on certain citizens who expatriate, as well as on
certain green card holders.
The exit tax applies to individuals who meet the definition of a “covered expatriate” (“CE”).
The U.S. also imposes a “succession tax” on U.S. citizens or residents who receive a “covered gift”
or bequest from a CE, even years after expatriation.
A direct or indirect distribution from a nongrantor trust to a CE who was a beneficiary of that trust at
the time of the CE’s expatriation will be subject to a 30% withholding tax (unless the CE elects to
include the value of his/her interest in the trust in his/her exit tax base).
Special rules apply to the taxation of a CE’s deferred compensation assets (for example, IRAs,
401(k)s, qualified and nonqualified pension plans).
Long-Term Residents
As mentioned on the previous slide, the mark-to-market “exit tax” is also
applicable to certain green card holders who satisfy the definition of a “long-term
resident” under I.R.C. § 877A(g)(5) and § 877(e)(2) and who qualify as a CE.
A “long-term resident” is any individual (other than a U.S. citizen) who is a
“lawful permanent resident” of the U.S. in at least 8 of the last 15 years.
Who Is a Covered Expatriate?
An expatriate will be a “covered expatriate” if he/she meets:
–
An income tax liability test (an average annual net U.S. income tax of $155,000 for
the five years preceding expatriation); or
–
A net worth test (a net worth of $2,000,000 or more); or
–
Either:
(i) fails to certify under penalties of perjury on IRS Form 8854 that he/she has been
in compliance with all U.S. federal tax laws for the five years preceding
expatriation; or
(ii) fails to submit evidence of such compliance as the Secretary of the U.S. Treasury
may require.
It is possible to arrange one’s financial affairs in order to avoid being classified as a CE at
the time of expatriation.
Exceptions to Covered Expatriate Status
A child will not be a CE if the child expatriates prior to age 18½ (i) having never been a U.S.
resident, or (ii) having been a resident of the U.S. for not more than 10 taxable years before the date
of relinquishment.
Special Exception for Dual Nationals from Birth. An individual may expatriate at any time
subsequent to attaining age 18, and the individual will not be a “covered expatriate”, if the following
conditions apply:
1) the individual became at birth a U.S. citizen and a citizen of another country;
2) as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country; and 3) (i) has never been a resident of the U.S.; or (ii) has been a resident of the U.S. for not more than 10 taxable
years during the last 15-taxable year period ending with the taxable year during which the expatriation date occurs.
Imposition of Mark-to-Market Exit Tax
A CE is exposed to U.S. federal income tax liability in the form of an immediate exit tax
whereby the CE’s personal worldwide property is deemed sold and tax is paid on the
resulting notional gain in excess of $668,000 (the inflation-adjusted amount for 2013) at
the applicable capital gains rate.
So, only a CE who has more than $668,000 of net appreciation in his/her worldwide
property will have an exit tax liability; conversely, CEs who are in a net loss position will
not be liable for any exit tax.
A CE includes in the CE’s exit tax base any interest in property that would have been
taxable as part of his/her gross estate for U.S. federal estate tax purposes had the CE died
a U.S. citizen on the day before expatriating. Generally, this is the taxpayer’s worldwide
property, but certain trust interests and items of deferred compensation are treated
Imposition of Mark-to-Market Exit Tax
A CE must obtain fair market value appraisals of his/her worldwide property and
attach the appraisals to the CE’s final U.S. income tax return.
An appraisal is only required for assets for which a ready market value is not
available (for example, real estate or closely-held assets). Quoted market prices
on the day prior to expatriation will suffice for marketable securities.
A taxpayer may elect to defer the exit tax payable with respect to a particular
asset, provided that security for the ultimate payment of the tax is posted and
interest is paid over the deferral period.
U.S. Perspective
Inheriting from a Covered Expatriate
A U.S. citizen or resident who receives a “covered gift or bequest” from a CE will be subject to a “succession tax” on that gift or bequest at the highest applicable rate of gift or estate tax. I.R.C. § 2801.
Not all gifts or bequests from a CE are covered gifts and bequests. For example, succession tax is not imposed on annual exclusion gifts or on gifts or bequests to a U.S. spouse or charity.
Also, the term does not include: (i) property reported on a timely filed gift tax return that is a taxable gift by the CE, or (ii) property included in the gross estate of the CE and reported on the CE’s timely filed estate tax return.
For example:
- If a CE made a gift or bequest of U.S. real estate to his/her U.S. citizen child, that gift or bequest would be reportable on a gift or estate tax return and would be subject to U.S. gift or estate tax, but would not be subject to the succession tax in the hands of the U.S. citizen child.
- However, a CE’s bequest to a U.S. citizen child of a portfolio of non-U.S. securities would be subject to the succession tax, because that property would not be subject to U.S. estate tax.
Receipt of a covered gift or bequest by a domestic trust is treated no differently than if an individual had received it, but the trustee must pay the tax from the trust.
U.S. Perspective
Transfer Tax Rules Applicable to Nonresident
Aliens
After expatriating, the expat would be a “nonresident alien” for U.S. estate, gift and GST tax purposes, and could arrange his/her affairs so as to minimize U.S. transfer or succession taxes in the event of a gift or bequest.
The expatriate’s ability to transfer assets at his/her death without exposure to U.S. tax would depend on many factors, including the citizenship of his/her children and the nature of his/her assets.
As a general matter, a nonresident alien is subject to U.S. gift tax on gifts of U.S. real estate and tangible property situated in the United States. Cash in a U.S. bank account is considered tangible property for gift tax purposes.
As a general matter, a nonresident alien is subject to U.S. estate tax on bequests of U.S. real estate and tangible property situated in the United States. Cash in a U.S. bank account is considered intangible property for estate tax purposes.
In addition, stock in domestic corporations also is subject to estate tax if owned by a nonresident alien at his/her death, but is not subject to gift tax.
