UK citizens in the US: the domicile trap

The tax problems of being a person with both US and UK connections are becoming more widely known, but there are many unfamiliar angles.

Born in the US? US parent? Green Card? Many are aware of connections that can cause people who consider themselves British to in fact be within the US tax net.

Less high profile are the traps that can cause a UK person who is a long term resident in the US to be treated as a UK domiciliary and so potentially exposed to tax in the UK.

Take Sarah and her son Alex. Born of UK parents in the 1960s, Sarah grew up in Bath. At 25 she moved to New York to work. There she met her boyfriend Max, from Philadelphia, and in 1994 their son Alex was born in New York.

Sarah and Max broke up in 1997 when Alex was three. Later, Sarah got to know Mark, a business associate from Miami, and married him in 2001. In 2003 they moved to Florida and set up a very successful business together. Sarah took US citizenship several years ago and plans to remain in the US for life.

Sarah’s son Alex, now 24, is a US citizen, and does not have a British passport. Having grown up in Florida, he now works in New York.

Sarah’s US adviser was aware that the UK rules on domicile are a pitfall, but concluded that as Sarah had lived for so long in the US, and intended to remain there, she must have a US domicile of choice.

He was not aware that, under English law, domicile in the US is decided by reference to a particular state, not to the US as a whole. So if Sarah intended to retire to, say, upstate New York, she might still have her UK domicile.

Fortunately, Sarah plans to stay in Florida when she retires, so she has a domicile of choice there. But what about Alex? Sarah and his father were not married when he was born, so he took her domicile at that time, rather than his father’s (a nuance that is frequently overlooked). Although, when Alex was born, Sarah intended to remain in the US, she had no particular intention to remain in New York state. She was therefore still domiciled in England.

Alex therefore probably has an English domicile of origin. He may have acquired a domicile of choice in Florida, but no longer lives there so the original English domicile could possibly revive. Alex needs to know that he does not just have US taxes to worry about, he might have UK ones too.