New USA exit tax

It has been a long time coming, and its introduction has been attempted every year for the past decade, or longer, but the US has now finally got its exit tax. Having already been passed by both Houses, all that awaits is for the President to find a crayon to sign the law and it will then take immediate effect. With the changes being attached to a US veterans package, the chances of a veto are non-existent.

Whilst the USA has a fundamentally different tax code to the UK and, indeed, to most other countries, there are some similarities in consequences which can be found with this move in the USA and the recent bodged effort to change the remittance basis in the UK. In particular, both could discourage mobile individuals from entering into the tax regimes, and bringing with them enterprise which could be far more valuable and prized by the respective governments.

Currently, US citizens and long-term green card holders, who relinquish such status, will potentially remain subject to US taxes, and filings, for 10 years thereafter. Importantly, this has generally been the case only where the expatriate does not become resident and taxpaying in another high-tax country.

This rule will be replaced by a new code, which will be to the practical advantage of the less well off but is likely to be significantly disadvantageous to wealthier prospective expatriates, some of whom may now find themselves locked into the US tax system after as little as eight years of residency in the USA.

The new exit charge will apply to expatriating individuals with an average net annual tax liability of at least $139,000, or those with a worldwide net worth of $2M plus, or to those who do a moonlight flit from the USA. There are some exceptions for those expatriates with dual citizenship and those who relinquish USA citizenship upon reaching majority, but the acquisition of residency and taxpaying status in a second country will no longer serve to remove the individual from the scope of the provisions.

Those expatriates subject to the new charge will be deemed to have sold their worldwide assets for their market value at the date on which they relinquish their citizenship or green card. The profit will, in most cases, be calculated with reference to the value of the asset at the time the individual entered the US tax net or, if the asset was acquired post entry, by reference to the actual cost of the asset. If the deemed gain on an asset is more than $600,000, it will be taxed. There are provisions to defer the tax payable upon expatriation until the asset is actually sold, but at interest and subject to security and a waiver of treaty rights being given by the expatriate. Certain deferred compensation items, and trust interests, will fall outside the scope of the exit charge but will be subject to a 30% withholding tax instead.