In a recent PCD podcast, David Bell spoke with David Foster, partner in the US/UK cross-border team at EY, and Ed Johnson, wealth planning professional at W1M, to explore one of the most complex client scenarios in private wealth: a US citizen living in London with a British spouse, significant assets across both jurisdictions — and a marriage under strain. Their case study, the Patterson family, is fictional. The tax problems are entirely real.

The Starting Point: Two Very Different Tax Positions

Michael Patterson is a US citizen. That one fact defines everything. Unlike almost every other nationality, Americans are subject to US taxation on their worldwide income and gains regardless of where they live. Michael, as a private equity managing director based in London earning £1.25 million a year with $4.2 million of unvested carried interest, files in both the US and UK every year — and potentially in a US state too, if he retains connections there.

Charlotte, his British wife, is a residence-based taxpayer only. She files a UK self-assessment. The complexity of her position is determined almost entirely by her proximity to Michael's. "The key to all the tax and financial planning," says David Foster, "is usually focused on the US because of the potential for double taxation — avoiding that first, and then reducing the global tax burden."

The couple have a choice on the US side: they can file jointly, which brings Charlotte into the US tax net, or Michael can file as married-filing-separately. Most couples in this position decline the joint filing. The implications of that choice — across investments, estate planning and, eventually, divorce — run through every dimension of their financial lives.

The Investment Minefield

For Ed Johnson at W1M, the starting point with any US/UK family is a thorough fact-find — not just of the couple, but of their three children. The eldest is 18 and holds dual US/UK citizenship. The tax position of each family member materially affects how investments are structured, and that position is not static: it changes with residence, with new tax policy in both jurisdictions, and with life events.

The central investment challenge for a family like the Pattersons is navigating the mutual toxicity of UK and US investment products. From a US perspective, any foreign collective investment vehicle — including funds recommended by a UK adviser — risks being classified as a Passive Foreign Investment Company (PFIC). The PFIC regime is punitive by design: it imposes income tax rates plus interest charges intended to eliminate the benefit of deferral, creating effective rates that can exceed 100% in extreme cases.

From a UK perspective, the equivalent problem is the offshore non-reporting fund rules. Gains on disposal of non-reporting funds are taxed as income rather than capital, removing access to the lower capital gains rates. So a standard US mutual fund is perfectly efficient for an American in the US — and potentially disastrous for that same person once they become UK resident.

Ed's solution is to build portfolios from individual securities — direct equities and fixed-income — rather than wrappers or collectives. "Investing into a direct strategy is more efficient because you can be more granular in the tax optimisation, and it's typically more flexible if they want to move to a different country at some point."

It also allows a holistic view: rather than managing each account in isolation, a consolidated approach populates asset classes across the brokerage account, ISAs, US pensions and UK pensions in the most tax-efficient way across the whole family.

One nuance worth noting: Charlotte's different tax status creates genuine planning opportunities. She is not subject to US tax, meaning she can hold investments in fund wrappers that would be PFICs for Michael. She can also hold qualifying corporate bonds and UK gilts, where capital gains are tax-free in the UK but taxable in the US — putting those assets in her name eliminates the UK tax entirely.

The Chelsea Home and the Carried Interest

Two assets create particularly acute cross-border problems: the family's £6.5 million Chelsea home, and Michael's carry.

On the residence: the UK's primary residence relief is generous and would typically eliminate any UK capital gains tax on sale. But the US relief is capped at $250,000. For a London property that has appreciated significantly, Michael will almost certainly face a meaningful US tax bill on any sale or transfer — even if there is no UK tax at all.

The answer may be to transfer ownership to Charlotte, in whose hands there is no US exposure. But doing so requires careful use of Michael's lifetime gift and estate tax exemption, since transfers from a US citizen to a non-US spouse are restricted on an annual basis.

Michael's carried interest is a separate complexity. UK tax policy has progressively moved to tax carry as employment income rather than as a capital gain — a shift that HMRC has largely achieved. In the US, capital gains treatment is still available if the underlying investment is held for a sufficient period, though policy is evolving. "It's the most evolving area of tax law at the moment," says David Foster. "Watch this space."

If the Marriage Ends: The Divorce Dimension

Divorce between a US and UK citizen is not simply an emotional and legal event. It is a tax crystallisation event with significant complexity on both sides of the Atlantic.

In the UK, there is a three-year window from separation within which assets can be transferred between former spouses without triggering capital gains tax. Beyond that window, without a court order, transfers become taxable.

In the US, the picture is different: once the couple are no longer married, the gift and estate tax framework no longer applies. Assets transferred from Michael to Charlotte as part of a settlement are potentially subject to US tax — the US taxes transfers from US persons to foreign persons — which means the structure and timing of any settlement must be carefully planned.

The Delaware Family Living Trust inherited from Michael's parents adds another layer. A US trustee structure designed for domestic efficiency can become highly problematic when a UK family member is involved — particularly if Michael becomes a trustee himself, which can drag the entire trust into the UK tax net.

Pensions present their own complications at divorce. Pension-sharing orders may be workable in the UK but unrecognised in the US, creating mismatches between what the court has ordered and what is tax-efficient in both jurisdictions.

David Foster flags one often-overlooked opportunity: where Michael has historic untaxed offshore income on the remittance basis, it may be possible in a divorce context to route part of the settlement through offshore accounts in a way that brings funds onshore cleanly for the recipient, without triggering UK tax. "It's looking at all those points," he says. "And making sure they understand there might be no tax now, but a lot of these assets have still got tax buried in them."

The Team Principle

Both speakers return, at the close, to the same fundamental point. No single adviser — whether tax, legal or investment — can manage this alone. The complexity is too interconnected, too fast-moving, and too jurisdiction-specific.

"Having a team around you that really get the US/UK complexity," says Ed Johnson, "is probably my best piece of advice." The team needs to speak to each other, not just to the client.

Tax policy in both jurisdictions is shifting rapidly — from the FIG regime and the abolition of non-dom status in the UK, to the ongoing evolution of carry taxation and the direction of US policy. For a couple like the Pattersons, standing still is not a neutral choice.

David Foster is a partner in the US/UK cross-border team at EY, specialising in trust, estate and inheritance tax planning and cross-border divorce. Ed Johnson is a wealth planning professional at W1M, focusing on US-connected families and US expats in the UK. This conversation was recorded for the PCD Group podcast series.