Divorce is often an emotionally challenging experience, not only for the couple involved but also for their children and extended families. Once the difficult decision to separate has been made, the focus quickly shifts to the complex process of dividing finances and assets. In today’s increasingly mobile world, many families have an international footprint, holding assets across multiple countries and sometimes multiple citizenships. This global dimension adds further complexity, especially when one or both spouses are US citizens living in the UK.
LGT Wealth Management US provides wealth management advise to high-net-worth individuals with US ties as they navigate major life events, such as divorce. Here, we examine some of the key considerations and challenges that US citizens may encounter when divorcing in the United Kingdom.
The tax implications of divorce are always a major concern. Early in the process, discussions often focus on how to allocate assets between the individuals. These decisions are heavily influenced by differing tax positions and US connections, and we typically collaborate with a US/UK tax specialists to navigate this complexity.
Additionally, there is often uncertainty about whether an individual plans to return to the US or where their future, including their family and children, may lead them.
Divorce often necessitates one partner finding a new home, which can bring to light the challenge of balancing the use of assets for a property purchase with ensuring there is enough income from those assets to sustain a desired lifestyle.
For US citizens, when selling their main residence in the UK they are subject to US capital gains tax, but only if the gain of their share is over $250,000.1 Moreover, if there is a mortgage on the property and the repayment of this mortgage is part of the financial settlement, it is important to consider any "phantom mortgage gain" which could be subject to tax in the US.
In US-UK marriages, it is crucial to carefully evaluate which assets are held by each spouse, as the sale or transfer of asset, particularly those within investment wrappers, can trigger significant tax consequences. For instance, if a US citizen residing in the UK sells US mutual funds that are not on the UK reporting fund list, any gains may be taxed as income rather than capital gains in the UK. This underscores the importance of conducting a comprehensive review of all assets and their underlying investments before taking any action.
Since April 6, 2023, UK law allows all separating spouses up to three tax years after the year of separation to make ‘no gain no loss’ transfers.2 The U.S. has similar rules for US spouses, and under certain criteria it may be possible for non-US spouses to elect US tax status to benefit from these provisions also. Given the complexity, cross-border tax advice is crucial.
UK-US marriages often present complications due to differing tax regimes. In these cases, we reassess whether the current investment strategy still suits the client's revised goals, time horizon, and risk tolerance following divorce. This process brings us back to the fundamentals, ensuring the strategy aligns with their future needs and objectives.
As with all US connected clients, it's essential that they work with a wealth manager who approaches advice through a dual US-UK lens. This ensures the investment strategy remains appropriate and tax optimal.
Pensions are often among the most significant financial assets an individual owns, making it essential to consider them carefully during divorce settlements.
Generally, UK and US tax authorities mutually recognise each other’s qualified pensions as tax-deferred accounts. It’s common for UK courts to issue a pension sharing order during divorce, dividing pension assets between the parties. However, the implications of receiving a pension credit or incurring a pension debit can be complex, so it’s important to seek expert advice before proceeding.
Divorce often calls for a comprehensive review of an individual’s estate planning documents, including wills, trusts, powers of attorney, and healthcare directives, as well as beneficiary designations on life insurance policies and retirement accounts. For US connected clients, it’s essential to approach estate planning through a dual US-UK lens to ensure cross-border compliance and alignment.
We use cash flow modelling to help clients project their financial future with clarity and confidence. These models assess assets, liabilities, income, and expenses to create detailed projections. Unlike most tools, which consider only UK tax, our modelling can incorporate both US and UK tax rates providing a far more accurate and realistic financial picture for clients with cross-border considerations.
Wealth managers often use jargon, so don’t hesitate to ask for clear explanations. It’s crucial to have a full understanding of the fees involved and the services offered in exchange.
Divorce is an emotional time, avoid rushing decisions. Finally, for international Americans, it’s vital to work with someone who understands both US and UK tax and financial systems.
Navigating a US-UK divorce without expert guidance can lead to significant financial pitfalls and legal complications. By securing specialised cross-border tax advice, comprehensive wealth management, and updated estate planning, individuals can protect their assets, ensure compliance, and achieve a fair settlement. This proactive approach not only safeguards financial interests but also provides peace of mind during a challenging transition.
At LGT Wealth Management US, we work alongside our clients across borders, assisting them in navigating various aspects of their financial lifecycle. Whether we are collaborating with your current advisors or engaging professionals from our trusted network, we are dedicated to supporting you and your family every step of the way.
[1] https://www.irs.gov/taxtopics/tc701
LGT Wealth Management US Limited is a registered Company in England & Wales, registered number 06455240. Registered Office: 14 Cornhill, London EC3V 3NR. LGT Wealth Management US Limited is Authorised and Regulated by the UK Financial Conduct Authority and is a Registered Investment Adviser with the US Securities and Exchange Commission.
This communication is provided for information purposes only. The information presented is not intended and should not be construed as an offer, solicitation, recommendation or advice to buy and/or sell any specific investments or participate in any investment (or other) strategy and should not be construed as such. The views expressed in this publication do not necessarily reflect the views of LGT Wealth Management US Limited as a whole or any part thereof. Although the information is based on data which LGT Wealth Management US Limited considers reliable, no representation or warranty (express or otherwise) is given as to the accuracy or completeness of the information contained in this Publication, and LGT Wealth Management US Limited and its employees accept no liability for the consequences of acting upon the information contained herein. Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change. The tax treatment depends on the individual circumstances of each individual and may be subject to change in the future.
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