Multi-jurisdictional divorce for US Expats: unravelling the complexities

Written by Rory Dorman, ACA

Over the past few decades, it has become increasingly popular for US citizens to move around the world and settle in different countries – there are reportedly approximately 200,000 US born American citizens living in the UK. 

The US is among a handful of countries that impose Citizen Based Taxation on its citizens.  This means any American citizen, regardless of where they live in the world, is liable to US taxes on their worldwide income.  This differs from most countries, such as the UK, that adopt Residence Based Taxation.  Other notable imposers of Citizen Based Taxation include Eritrea and North Korea!  For this reason, it is of utmost importance that Americans living in the UK take steps to mitigate the risk of double taxation.  This difference underpins the challenges faced by US/UK taxpayers – and those challenges arise in divorce as well as any other financial event our clients may face.

Sadly, divorce has become an unhappy fact for some couples, and combined with growing global mobility, it is increasingly common for couples to undergo an international divorce process when ending a marriage – whereby they are eligible to divorce in more than one jurisdiction across different countries. 

Ending a marriage is difficult at the best of times. Getting an international divorce brings additional complexities. If you are an American living in the UK, with assets that cross multiple jurisdictions, and are contemplating divorce, then it is essential to seek expert strategic divorce planning advice well in advance.

Which country has jurisdiction?

When a client’s financial life touches multiple jurisdictions, it is important to understand which country maintains jurisdiction for an impending divorce.  Understanding this upfront can be incredibly beneficial as some jurisdictions may be more favourable than others for certain parties. 

When it comes to being able to divorce in the UK, it will depend on whether you satisfy the jurisdictional criteria.  Put simply; are you habitually resident or domiciled in England, Scotland or Wales?

Even if you can divorce in the UK, do you want to?  What would provide a more beneficial and advantageous outcome for you based on your circumstances?

Note that even where the divorce process occurs in the UK, it may be that the relevant state in the US is involved regarding the assets that are located within it – as well as arrangements for any children.

The stages of divorce in the UK 

The divorce process, assuming the divorce is not defended/contested, usually takes around six months, depending on the complexity of the finances involved or whether children orders need to be made.  If so, the process is likely to take longer and can take more than 12 months.

The basic steps are:

Step 1: File the application for divorce in the English courts;
Step 2: Serve the application on the other side; 
Step 3: Receive Acknowledgement of Service of divorce application;
Step 4: Apply for Conditional Divorce Order (this has to be 20 weeks after acknowledgement of service);
Step 5: Legally end the marriage with the Final Divorce Order being granted.

This last stage cannot take place any earlier than six weeks and one day after the Conditional Divorce Order. It is also essential that the financial settlement is agreed upon before the Final Divorce Order is applied for to avoid any negative impact on the outcome of the finances being apportioned, particularly relating to pensions.

Financial settlement and dividing the assets

When divorcing in the United Kingdom, your worldwide assets will be taken into account and determined as to whether they constitute marital assets. The starting point in the UK for the sharing of assets is equality; however, there are considerations that can impact the sharing and shift the division in favour of one or another party in order to satisfactorily meet each parties’ needs.

Detailed financial disclosure from both parties is required to effectively analyse the assets to split. Professional valuations will be made as appropriate for each asset class, whether real estate, investments or pensions. Ultimately the aim is to achieve a clean break between parties and to achieve a fair financial outcome for both parties. Ascertaining what a fair outcome is will also take into account income, earning capacity, financial resources available to either party, as well as financial needs, obligations and responsibilities of each party.

In most divorce cases, both parties will assess the split of marital assets based on the value of said assets.  But what if various marital assets are not worth the same to both parties due to tax considerations of the particular assets?  This is something our US and UK-connected clients need to take care with when going through a divorce with assets in both jurisdictions.  In too many cases, we have advised clients who received assets as part of a divorce settlement, which seemed reasonable at the time, but have turned into something of a poisoned chalice.

How to reach a financial settlement

There are several ways of approaching the question of dividing the financial assets and future financial provisions on divorce.  The most appropriate approach will depend on the volume and class of assets, the location and any legal or tax complexities connected with the asset and whether children are involved.

Options include:

• Direct discussion between the parties;
• Negotiation between lawyers;
• Facilitated negotiation with a mediator;
• Private arbitration; and
• Litigation through the Court. 

In the UK, the court system prescribes a timetable to adhere to in terms of delivering financial disclosure and attending court hearings (sometimes multiple).   Should a financial settlement not be independently reached between the parties, then the Judge’s decision at the final Court hearing will conclude the division of assets definitively and the order will be legally binding on all parties.

Litigation should be the last recourse and only implemented where intervention is absolutely necessary because an agreement was not reached in earlier negotiation.  Litigation, especially through to the final hearing, can be hugely costly; emotionally, financially and psychologically.

If you are an American living in the UK and contemplating a divorce, it is essential to get advice and plan ahead.  Each divorce and client circumstance is unique, and at Expatriate Law we aim to understand what is important to you, what your aspirations for your family’s future are and we will work with you to help achieve your desired protection and outcome.

Financial planning for an optimal settlement

Understanding which assets are worth more to each party is an obvious first step.  Naturally, the goal of both parties is then to ensure their future (and their beneficiaries’ future) is secure. Going through a divorce without a robust financial plan is like driving blindfolded – you do not know where the road leads you and the outcome is likely unsuccessful!

With financial planning, MASECO’s goal is not necessarily to look into a crystal ball, but to analyse what we know today and take steps to keep as many future doors open as we can.

Our job is to understand what ‘good’ looks like for our clients.  In our whitepaper entitled ‘Divorce – Stepping Towards a New Life’, we explore how to fund a divorce and how to think about expenses once all is said and done.

We do a lot of work with clients to map this out, using sophisticated tools which analyse current assets and liabilities, income and expenditure – both now and in years to come.  We challenge our clients on what is most important to them, and look to stress-test various ‘what-if’ scenarios with the final question always being ‘How much capital do I need today to feel financially secure?’  For many people, it is nearly impossible to fathom what X assets today means for them tomorrow (‘many people’ extends to ‘everyone’ in today’s uncertain environment!).  The last thing our clients want is to realise they have been left short-changed after an already gruelling process.

Once the blindfold is off, our clients can work with their lawyers to discuss these financial goals, which feeds into a key part of the proceedings.

Below we take a look at various examples of types of assets and how they should be considered in the context of divorce.

Pensions

By and large, UK and US qualified pensions are mutually respected as tax-deferred wrappers.  It is not uncommon for the courts to issue a pension sharing order, whereby a pension is split between the two parties.  The consequences of having either a pension debit, or a pension credit should be carefully considered, and advice should be sought.

Suppose a British spouse receives part of a US pension and are not a US person.  Care should be taken from an estate planning perspective, given the exposure to US estate taxes on US assets held by non-resident ‘aliens’.

On the UK side, it is important to consider the Lifetime Allowance (LTA) implications of a pension sharing order, especially if the pension has already been crystallised (typically meaning it has been accessed). To those in pension ‘debit’ i.e., ceding away part of their pension, it is important to note the remaining percentage of LTA remaining is what presides, so further top ups (even after the debit) can lead to a Lifetime Allowance charge. On the flip side, the party receiving a pension ‘credit’, i.e. being awarded a share, can apply to extend their LTA via an enhancement factor in certain circumstances, but again advice should be sought.

Investment accounts

Investments can take many forms in either the US or the UK.  Outside of qualified pensions, it is usually safe to assume that an account with tax advantages in one jurisdiction does not enjoy those same benefits across the pond.  Once again therefore, whilst steps can be taken to avoid double taxation, the more punitive tax treatment on a particular asset will usually preside over the friendlier regime.

As a result, regardless of the structures investments are in, it is important that the underlying investments are as efficient as possible in both the US and the UK.

As an example, a collective investment fund in a UK investment account is likely considered a Passive Foreign Investment Company (PFIC) in the US and is aggressively taxed at the hand of a US taxpayer.  The equivalent opposite is true, where most US-based funds are much more valuable to a US taxpayer than a British counterpart, given HMRC rules on overseas funds.  Put simply, an efficient investment for one party can be a real hospital pass to the other, and understanding these differences is paramount when agreeing how a household’s assets should be split.

Real Estate

The same is true for real estate, although this can be more cumbersome to plan around in practice, given the high percentage of many households’ wealth tied up in their home.

If we look at a couple’s main residence, if this is based in the UK, a US taxpayer may have a larger tax bill than their British counterpart.  Under current rules, Britons are not taxed on their main UK-based residence by HMRC under ‘principal primary residence relief’.  The US treatment for a US taxpayer is not so generous, and again once the tax authorities have had their say, it may be that the marital home is worth more to one spouse versus the other.

The US tax treatment of mortgages is also an issue to contend with, especially when that mortgage is based in the UK.  Currency fluctuations can give rise to a taxable currency gain in the US on a UK mortgage, even if in Sterling terms, the value of the mortgage has remained flat (or in many cases, reduced, as you might expect after repayments).  The challenge of currency fluctuation applies to every type of investment for our clients, but the example of a taxable US Dollar gain on a UK mortgage tends to astound those affected.  Again therefore, in some circumstances taking over the marital home and its large mortgage exposes the US person to the potential of nasty surprises.

In conclusion…

The role of an advisor, whether a lawyer or a wealth manager, takes many forms and aspects. One of those aspects is stopping our clients from making mistakes, which rings especially true in the context of divorce, especially where more than one jurisdiction is involved. 

Above, we have seen that there are many steps in the process and plenty to think about along the way. In difficult times, receiving personal and tailored advice becomes more crucial than ever.

Rory Dorman
Partner & Senior Wealth Manager
MASECO Private Wealth
T: +44 (0) 207 043 0455
E: rory.dorman@masecopw.com

Naomi Grimwood
Solicitor
Expatriate Law
T: +44 207 846 5462
M: +44 7734 439426
E: naomi@expatriatelaw.com 
W: www.expatriatelaw.com

If you are an American living in the UK and contemplating a divorce it is essential to get advice and plan ahead.  Each divorce and client circumstance is unique, and at Expatriate Law we aim to understand what is important to you, what your aspirations for your family’s future are and we will work together with you to help achieve your desired protection and outcome.  

The legal stuff

The information in this article is provided for information purposes only and does not take into account the specific goals or requirements of any particular individual.  The information regarding divorce proceedings in England & Wales has been provided by Expatriate Law but does not and should not be construed as legal advice.  The information regarding investment considerations in divorce proceedings has been provided by MASECO LLP but does not constitute and should not be construed as investment, tax, accounting, legal or any other type of advice.  The information contained herein is subject to copyright with all rights reserved.  The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof.  This document is intended for the recipient only.  It may not be copied, forwarded or otherwise distributed, in whole or in part, to any other party.

All investments involve risk and may lose value.  The value of investments can go down depending upon market conditions and you may not get back the original amount invested.  Your capital is always at risk.  Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change.  The levels and bases of, and reliefs from, taxation is subject to change.  The tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, WC2R 0HS. The individual partners are Mr J E Matthews, Mr J R D Sellon, Mr A Benson, Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr E A Howison, Ms A L Solana and Mr N B Tissot. Telephone calls are usually recorded for your protection.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered in the US with the Securities and Exchange Commission as a Registered Investment Adviser.