New laws have been introduced in the US for people wishing to expatriate. Anyone who has ceased to be a US citizen or long-term resident after 16 June 2008 could be treated as a 'covered expatriate'.
A covered expatriate is a person who:
- has an average annual income tax liability of more than $139,000 (this figure will be adjusted for inflation) for the five taxable years prior to expatriation;
- has a net worth of $2 million or more on the date of expatriation; or
- fails to certify compliance with the US Internal Revenue Code for the five preceding taxable years (or cannot submit evidence of compliance).
A covered expatriate is deemed to have sold all his or her assets worldwide on the day before the expatriation. These assets are valued at the current market value and tax is payable on any increase in value over the original cost.
There is a tax-free allowance of $600,000 in unrealised gains but any excess gain is included in the taxpayer's gross income for the taxable year of the expatriation. A taxpayer can elect to postpone paying the tax until the property is actually sold, but interest is due on the unpaid tax and other conditions apply (including giving adequate security).
Fortunately, there are certain exceptions. For example, if an individual was a citizen of another country as well as the US from birth, the new tax charge will not apply as long as (at the date of expatriation):
- the individual continues to be a citizen and tax resident of that other country; and
- he or she has not been US tax resident for more than ten years out of the last 15.
This will help anyone who has inherited US citizenship via a US parent or by 'accidental birth' in the US, but who has always been a citizen of another country as well, for example, the UK.
Additional tax issues arise for trusts where a beneficiary is a covered expatriate. Unless the trust is a grantor trust, the trustees will have to withhold tax of 30% on any distribution to a covered expatriate. Complex rules exist to calculate the 'taxable portion' of a distribution and whether any part of the trust will qualify as a grantor trust. This 30% withholding tax will also apply to deferred compensation paid to a covered expatriate.
Finally, there is a new succession tax on gifts or bequests from a covered expatriate to anyone who is a US citizen or US tax resident.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
