British by birth, I moved to the US 25 years ago for work reasons and now plan to move back with my family — my American wife and our two children. I understand there are special tax rules for returning domiciled people. What do I need to be aware of and should I transfer any assets into my wife’s name to reduce my potential tax liabilities?
Laura Harper, partner in the private client team at Kingsley Napley, says if you were born in the UK and have a UK domicile of origin, the tax rules for ‘formerly domiciled residents’ (FDRs) will apply. Spouses without a common domicile are treated very differently for tax purposes by the UK.
Whilst FDRs are deemed domiciled whenever they are UK resident (subject to a one-year grace period for inheritance tax (IHT) purposes), non-FDRs are only deemed domiciled once they have been UK resident for at least 15 of the preceding 20 tax years. The FDR rules now cover income tax and capital gains tax (CGT).
That said, for income tax and CGT purposes, exposure to UK tax will still largely be assessed under the Statutory Residence Test — which assesses a person’s status related to the number of days they spend in the UK — not domicile test. However, an FDR will be deemed UK domicile for income tax and CGT purposes as soon as they become UK resident. The most significant consequence of this is that an FDR will not be able to benefit from the remittance basis of taxation while resident in the UK, under which tax on foreign earnings and gains is paid only if the funds are transferred to the UK.
For IHT, a formerly domiciled individual will be deemed UK domicile from the start of their second tax year of continuous UK residence. From that point, their worldwide estate would be subject to IHT while they remain UK tax resident, and possibly for a short period afterwards.
In terms of planning while you are still overseas, you should be aware that trusts set up by FDRs who become deemed domiciled under the FDR rule are taxed on the arising basis on foreign income and gains within their offshore trusts (in line with the taxation of trusts settled by an actual UK domicile).
In contrast, your non-FDR spouse could establish an offshore trust and later become deemed domiciled under the 15-year rule but still benefit from a form of tax-protected offshore trust. This type of trust will prevent the non-UK assets from being subject to IHT. As the US Estate Tax threshold is considerably more generous than the UK, this may result in a significant tax saving, although tax advice should be sought before the transfer of any assets.
This protected status will, however, be lost if your wife acquires an actual UK domicile or if the trust falls foul of the rules at any time.
I got divorced last year and as part of the financial agreement, my ex-wife and I agreed that I would keep my cryptocurrency assets while she got the lion’s share of my pension and other investments, and we split the family home. When we negotiated last autumn, the crypto market was riding high and I was convinced it would go higher still, but following the recent crash my digital assets have more than halved in value. I’m now considerably worse off than my ex and worried about my financial future. She says I only have myself to blame and won’t discuss the matter further. Can I go to court to renegotiate our financial order?
David Lillywhite, partner at Burgess Mee Family Law firm, says the volatility of specific assets can be taken into account by the court when considering the division of the matrimonial finances. Generally, one spouse should not carry all the risk-laden assets, while the other holds those whose value is much less immediately susceptible to market forces (like a family home).
You say you chose to offset other assets with substantial crypto holdings, and took the risk of an asset with known volatility. You expected your holdings to appreciate in value and compromised your financial claims on that basis. The court prefers finality wherever possible, so only allows limited circumstances in which one party can revisit a financial settlement. These kind of intervening events need to be unforeseen and unforeseeable and a fluctuation in the natural price of an asset is generally not one of them. If every final financial order could be revisited in this way, then the courts would face a deluge of cases looking to reopen agreed settlements.
In your crypto value crash scenario, a court is still unlikely to reopen a financial agreement given the knowledge of crypto generally — though the closer to settlement and the scale of the fall would be taken into account. Your ex-partner will undoubtedly contend that there is no need to reconsider the order you both willingly entered into, presumably with the benefit of independent legal advice. If you still wish to assess what are likely to be a narrow set of options — every case is fact-specific — then further legal advice should be sought swiftly.
For couples separating now, the introduction of no-fault divorce carries with it a wait of 20 weeks from the date that the application for a divorce is received, before applying for the first of two orders required to bring a marriage formally to an end. The second can only be made six weeks later and so, even in the most optimistic scenarios, where a financial agreement is approved, separating parties may be waiting six and a half months before any potentially volatile asset is received and, of course, the value of this asset may well have fluctuated during that timeframe.
This week, bitcoin (one of the best known cryptocurrencies) was trading at about £20,496 a coin, down from highs of around £48,000 in November 2021.
Independent financial advice should always be taken where a separation involves a variety of assets. That adviser should work closely with your solicitor so informed decisions can be taken to ensure future needs are properly met on separation.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Our next question
I set up a business on my own, which my soon to be ex-wife later joined as a shareholder. Could the courts force me to hand over shares to her as part of the divorce? That doesn’t seem very fair if so.
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