US expats tax obligations can be a highly complex, often a controversial affair and for those US expats living in the UK, it is no different.
Failure to correctly file your taxes in the US and the UK can result in significant penalties (sometimes totally tens of thousands of dollars). However, it might also be possible to legally exclude some income earned from tax and reduce your tax liability.
Ultimately, getting it right could save you thousands of dollars, and is therefore worth getting professional advice to ensure you fully understand your tax obligations as a US expat.
Introduction to this guide to tax for US expats in the UK
It is estimated that there are around 200,000 American expats living in the UK, each with their own US tax requirements. Even British nationals who have a dual nationality with the US should be aware that they may also have tax obligations with the United States.
This article is designed to look at the general tax requirements that American expats living in the UK must be aware of and the rules which must be met to avoid significant penalties – either in the UK or the US.
It is important to understand that this article is created as a guide only and must not be used in isolation to make any decisions about what tax is owed. You should always seek professional advice from a qualified tax adviser before making any decisions. If you are an American in the UK and would like a free tax consultation which will cover your UK and US tax obligations, please complete the form and we will arrange for a qualified accountant to contact you.
Overview of tax for American expats in the UK
In a nutshell, the US tax rules for American expats in the UK are much the same as for Americans living in America in that worldwide income is subject to US income tax.
One major different is that for American’s living in the US, the deadline to file and pay your tax return is 15th April in any tax year, although Americans living abroad get an automatic two-month extension to file their taxes meaning the deadline is automatically 15th June. Taxpayers do not have to apply for this extension. However, any tax due must still be paid by the 15th April – failure to do so will attract interest on any late payment, beginning on the 15th April.
What if I don’t earn an income?
Obviously, if you don’t earn an income anywhere in the world, you will not have to pay tax anywhere in the world, including the United States. However, a tax return might still need to be filed, depending on your circumstances. This potentially avoids complications if the IRS investigate any disputes over your tax status/liabilities.
US/UK Double tax treaty
The United States has a tax treaty with the United Kingdom. The primary purpose of double tax treaties like this is to minimise the chance of double taxation on any particular income and is usually delivered through foreign tax relief. I.e. the US Government may allow a tax credit to reduce your US tax liability if tax has already been paid in the UK.
However, if it is not carefully managed, it may still be possible to be taxed twice on the same income. Correctly understanding and utilising the double tax agreement between the US and UK is difficult and should only be done with the support and guidance from a qualified tax adviser who can understand how to apply to rules to maximise any tax credits.
Can I give up my US citizenship to avoid US tax?
It is possible to renounce your US Citizenship, however there are implications of doing so and your main motive for renouncing must not be to avoid paying UK tax.
If you are considering renouncing your citizenship you will need specialist advice from a qualified tax adviser.
FBAR: Report of Foreign Bank and Financial Accounts
Most Americans living abroad are likely to have a bank account in their country of residence, and potentially in other countries.
It is a legal requirement for all American expats to file a Report of Foreign Bank and Financial Accounts (FBAR) by 15th April (previously 30th June), and must be filed online.
FBAR covers ALL foreign accounts held by American expats including bank accounts, insurances, pensions, trusts whether you are the main beneficiary or a signatory for the account – and the total balance held in the accounts is in excess of $10,000 at any given time in the tax year.
Failure to correctly file a FBAR report carries an automatic penalty of $10,000 per account – so it is vital to understand your full responsibilities on what the status is and what is owed.
It is possible to file your own FBAR however, if you are unsure of your requirements or what you need to do, it is highly advisable that you seek professional assistance from a tax adviser who can walk you through the process.
The Foreign Earned Income Exclusion
The largest, and potentially most important tax opportunity available to American expats is the Foreign Earned Income Exclusion (FEIE).
The FEIE potentially enables American expats to avoid paying tax on the first $101,300 of foreign earnings (figure as of 2016) providing a number of criteria are met.
Firstly, income must be foreign earned, which means earnings must not:
- Be received from the US military or as a result of employment by the US Government
- Be earned while in international waters – this is not deemed as a foreign country
- Be earned while working in specific combat zones as declared by the US president
- Be paid in the following tax year that the work was actually conducted
- Be earned from pensions or annuities – or other social security benefits
To determine whether you can claim an exemption under FEIE, you must meet particular criteria, which means:
- You must have earned foreign income (other than from the exclusions above)
- You must live in a foreign country
- You must be a be a US citizen OR be a US resident alien that has a citizenship with a country that has a taxation agreement with the US (for example, the UK)
- You must have been a tax resident in a particular country, uninterrupted, for an entire tax year. In the case of the UK, this means that you must satisfy the requirements of the Statutory Residence Test to be deemed a UK tax resident.
- You were physically present in a foreign country for at least 330 days during a period of 12 consecutive months
If you are eligible to claim an exclusion under FEIE rules, you will need to file Form 2555 or Form 2555-EZ (a shorter form). Which form you need to complete will depend on meeting a certain number of criteria.
In all cases, it is highly advisable to seek professional advice about FEIE and whether you are potential eligible for an exclusion – and potentially even assistance completing the form.
UK tax requirements of American expats
The UK tax year runs from 6th April to the 5th April the following year and anybody earning an income in the UK during the tax year will be liable to UK income tax. If this is not paid automatically through a PAYE (pay as you earn) scheme, you are a director of a company or your income is over £100,000, you will be required to file a Self Assessment Tax Return. Your “Self Assessment” will determine what tax is owed, and must be filed and paid by 31st January of the following year.
If you are an American living in the UK, you are considered a UK non-dom and the first thing that needs to be established is whether you are a tax resident of the UK.
Introduced in April 2013, the Statutory Residence Test is a series of questions which ultimately determines your UK tax residence status.
If you are considered a tax resident of the UK, you will be liable to pay tax on your worldwide earnings to the UK government.
If you are not considered a tax resident of the UK, you will only be liable for any income arising from work or investments in the UK (for example, a UK based salary or rental income).
Under the remittance basis of taxation for non-doms, it is currently possible to pay to maintain a special tax status in the UK where you can technically be a tax resident in the UK, but only owe tax on income earned in the UK or income earned abroad which is remitted into the UK.
This is a very brief very simplified overview of the tax requirements of non-doms living in the UK. For more detailed information, please read our detailed guide to the non-dom tax requirements of residents in the UK.
How can a free tax introduction via Expatriate Services help US expats?
We work with accountants and tax specialists in the UK who have extensive experience and understanding of the US tax system for US expats living in the UK. The introduction will connect you to someone who will be able to offer professional services to assist any US expat needing to:
- Identify their US compliance and filing requirements
- Prepare and complete US Federal and State tax returns
- Manage the timing of UK and US tax payments and other foreign tax credit planning
- Plan any cross-border pension schemes
- Understand how to apply rights and opportunities under the UK/US double tax agreements
- Tax efficiently manage estates with regards to UK inheritance and US gift & estate tax regimes