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What should Americans divorcing in the UK ask a wealth manager?

By Jenny Judd | 18 Oct, 2023

Divorces are always a challenging time for everyone involved. The emotional strain is felt not just by those individuals separating, but by children and the wider family. The decision to divorce is inevitably followed by a focus on financial issues and how family assets will be divided. This often fraught debate can become even more complicated when a family is international or the divorcing parties are citizens of different countries.

Executive Director, Jenny Judd, specialises in advising wealthy individuals with U.S. connections going through life-changing events such as divorce. We sat down with Jenny and asked some key questions on the challenges faced by U.S. citizens when going through a divorce in the United Kingdom.

1.What is the biggest concern that American citizens getting divorced in the UK come to you with?

The tax implications of divorce are always a big concern. If it’s earlier in the divorce, there is often a conversation around which assets should be allocated to which individual. The outcome of that debate often depends on the differing tax positions and U.S. links and we would typically work alongside a UK/UK tax specialist. There’s often a question mark over whether someone will go back to the U.S. or not and where their family, children and life in general will take them.

This can then lead to conversations around the importance of financial planning and getting clarity on future intentions. Divorce is likely to create the need for one partner to find a new property. This will often highlight the tension between using assets to pay for a new property and maintaining enough of an income from those assets to fund a certain lifestyle.

2. What should American citizens getting divorced in the UK consider when it comes to tax?

If the marriage is a mixed US-UK partnership, then care needs to be taken around which assets are held by which individual. Assets may need to be sold to generate capital and if these are funds in an investment wrapper, the tax implications on liquidation need to be considered carefully. For example, if whilst resident in the UK, a U.S. person sells U.S. funds (mutual funds) held in a US brokerage account, these funds will be taxable at UK income tax rates rather than capital gains tax if they are not on the UK reporting list. A full review of the existing assets, looking under the hood at the underlying investments is important in this situation before decisions are finalised.

From 6th April 2023, all separating spouses are given up to three tax years after the year of separation in which to make ‘no gain no loss’ transfers for UK tax purposes.

In the US, there are similar ‘no gain no loss’ provisions which apply to US spouses. In the case of US-UK spouses, it may be possible to make an election for the non-US spouse to be treated as a US person in the year of transfer and thus potentially benefit from these provisions. However, there is a strict criteria that needs to be met in this scenario and thus it is important to consult with UK/US tax specialist who would be able to advise further.

3. Does owning UK property add complications to a divorce for expatriate Americans?

Potentially, it could. In the UK, we have something known as Principal Private Residence Relief where there is no capital gains tax when selling a property if that property is the main home. However, if someone is a U.S. citizen and the gain is over $250,000 on their share, they could have a U.S. capital gains tax liability. Additionally, if there is a mortgage on the foreign property and there is a plan to repay the mortgage as part of the financial arrangement, care needs to be taken that there won’t be a phantom mortgage gain which can become subject to tax in the US.

4. How do American couples divorcing in the UK typically handle combined finances like joint investments?

Complications come if it’s a mixed UK-US marriage as the tax position will be different for each individual. We would often have a conversation around whether the existing investment strategy is still appropriate for the individual we are advising. Their longer term intention for the funds or the time horizon might have changed and their tolerance for taking risk may no longer match the strategy. It usually goes back to the fundamentals of investing and going back to a client’s future needs and objectives. As with all American clients, it’s really important they’re working with a wealth manager who takes a dual US-UK thought process when providing advice. This ensures that the investment will be appropriate regardless of whether the client remains in the UK or moves back to the U.S.

5. What challenges do Americans divorcing in the UK face when thinking about the future of their children’s education?

Often, we come across clients with 529 plans set up whilst still in the U.S. for their children’s education. Depending on whether the children decide to go to a U.S. or UK university, the costs are going to be significantly different. It will be a lot higher in the US. In addition, there may be UK tax considerations with respect to 529 plans and if the child decides to go to university in the UK, they may not be able to use funds without tax implications, therefore advice should be taken on 529 plans generally and how best to fund their education from their income/assets.

6. How can a U.S. client living in the UK map out their financial future after a divorce?

We use cash flow modelling to help our clients project their financial future. Cash flow models examine your assets and debts along with income and expenditure. Projections can then be created on future finances. Most cash flow modelling tools only take into account UK tax, but ours takes into account both U.S. and UK tax rates. This makes the model a lot more accurate.

7.It can be hard to know what to ask a wealth manager when it comes to divorce. What questions should people ask and what should someone consider when choosing a wealth manager?

Quite often wealth managers can slip into using jargon with clients. I would recommend that clients don’t refrain from asking for a simpler explanation when they don’t understand something. It is also important to understand the fees being charged and what you are getting in return.

Take your time and never feel rushed into making a decision. Divorce is an emotional time and clients are more vulnerable during this period so always take time to think things through properly. A final thing to consider is that if a client is an international American, it’s very important that they work with a wealth manager that has that has an appreciation of both sides of the Atlantic.

To get in contact with London & Capital, please give us a call on +44 (0) 207 396 3388 or click here.

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