UK Taxes for US Expats- A Complete Guide For US Expatriates
Tax obligation is a complex issue for expats living in any other country, and it is no different for American expats in the UK. Failure to correctly file the taxes can cause you a significant penalty. This blog explains how American expats in the UK can rightly file taxes and legally avoid some income from taxes and enjoy less tax liability. This blog should not be the sole deciding factor to your tax obligations; always consult a professional tax expert to help you correctly file your taxes in the US and UK. Failure to do so can result in significant penalties, sometimes tens of thousands of dollars.
The US expats living in the UK is estimated to be around 200,000. And they all have their own tax requirements and obligations. The same is the case with UK citizens living in the US or having dual citizenship with the US as they have tax obligations to the US government. Let us deep-dive into the UK taxes for US expats and how living in the UK can impact their US tax obligations.
An Overview Of Taxes For American Expats In The UK
The US tax rules for US expats in the UK are much similar to Americans living in America. One major difference comes with the deadline for filing the taxes as US citizens must file taxes before or on the 15th of April. Even if the US expats in the UK get an automatic two-month extension to file their US expatriate tax returns with the deadline of 15th of June, the US tax expats must pay their tax returns by the 15th of April, or they’ll have to pay interest on the late payment.
Social Security for US citizens in the United Kingdom
Expats are required to pay into the UK national insurance contribution once they get employment in the UK. The national insurance payment covers health insurance, welfare, pension plans, workers’ compensation, unemployment benefits, and other state social programs.
According to the US-UK Social Security Agreement, you have to pay social security to the country you are working in. However, if you are sent by your employer to the UK for five years or less, you will continue to be covered by the US expat taxes. If you are self-employed, you have to pay to the country in which you reside.
Other Taxes For US Expats In The UK
Other than taxes on salaries, they also vary for other forms of income in the UK.
UK Tax On Non-Cash Compensation
Non-cash compensation covers housing stipends, relocation expenses, gifts, meals, clothing allowances, club memberships, education reimbursement, travel or lodging expenses. It is taxed in the UK. Exceptions are there, but US expats can incur taxes on non-cash compensation.
Capital Gains Tax
Expats can be taxed on any kind of capital gains, that includes the sale of the main residence, life insurance policies, corporate bonds, motor cars, gifts to the charity, and gains from the UK government. People who are resident and domiciled in the UK are taxed on their worldwide capital gains. Otherwise, for non-domiciled ones, UK taxes will apply only to the capital gains earned in the UK.
You can be liable for paying inheritance tax to worldwide assets if you are domiciled in the UK. HMRC considers you responsible for inheritance tax if you have been living in the UK for 17 or the last 20 years. Expats domiciled in the US are only accountable for inheritance tax on the assets in the UK.
Do I Need To Pay Tax If I Don’t Earn An Income?
For no income, you do not incur any tax obligations anywhere in the world, including the United States. However, a tax return might be required to file. It is recommended to file with zero income as it avoids complications if the IRS audits your income.
US-UK Double Tax Treaty
A double tax treaty is signed between the countries to minimise the chances of double taxation. The United States of America has this treaty with the United Kingdom. The countries party to this agreement provide relief to the people if their income is already taxed in another country party to the tax treaty agreement. However, it is still difficult to manage, and you might possibly incur double taxation on the same income. Always refer to the professional tax advisor to seek guidance to avoid double taxation. The US government provides a tax credit to your tax liabilities as a relief if your income is already taxed in another country.
Can I Renounce My US Citizenship To Avoid US Tax?
Yes, it is possible to renounce your US citizenship, but you have to pay a one-time fee of $2,350. If the motive of relinquishing your citizenship is to avoid paying taxes, it might not be the right thing to do. You need to consult a qualified tax consultant to make a realistic cost-benefit analysis of the decision.
Report Of Foreign Bank And Financial Accounts
American expats living abroad are likely to have a bank account in the country of their residence and other countries too. However, the US expats are legally required to file a Report of Foreign Bank and Financial Accounts (FBAR) by the 15th of April and must be done online.
The report includes all the accounts held by American expats covering bank accounts, insurances, pensions, trusts, whether an expat is the main beneficiary or signatory for the account. The total balance in the accounts exceeds $10000 at any given time in the tax year.
Incorrect Filing of an FBAR attracts a penalty of $10000 per account. So you must understand the significance of filing FBAR correctly. You can file FBAR on your own, but it is advisable to seek advice from a tax professional to help you in the process.
Exclusion Of The Foreign Earned Income
The most important tax opportunity US expats enjoy is the Foreign Earned Income Exclusion (FEIE). The FEIE allows the US expats to avoid paying tax on their first $112,000 (for 2022) earned in a foreign country if certain criteria are met.
The income must be foreign earned while it must not be:
- Be the income earned from the US military or as a result of employment provided by the US Government.
- Be earned while in international waters – it is not considered as a foreign country.
- Be earned from the job in specific combat zones as announced by the US.
- Be paid in the following tax year that the money was actually earned.
- Be earned from pensions or annuities.
To find whether you can claim an exemption under FEIE rules, you need to qualify the following criteria, which states:
- The income must be foreign earned other than the exclusion discussed above.
- You must be living in a foreign country.
- You must be a US citizen or be a US resident alien having citizenship with a country that has a tax treaty with the US.
- You must be a tax resident in a particular country, e.g. the UK, for a complete uninterrupted tax year. In the case of the UK, you must pass the Statutory Residence Test to be deemed a UK tax resident.
- You were physically present in the foreign country for at least 330 days during a year.
The form you need to complete depends on a certain number of criteria. Form 2555-EZ is the simpler version of form 2555 provided to file taxes if total income does not run over the threshold for Foreign Earned Income Exclusion.
UK Tax Requirements Of American Expats
The UK tax year starts on the 6th of April and ends on the 5th of April the following year. Anybody earning any income in the UK during the tax year will be liable to pay UK income tax. Employees pay income tax through a PAYE scheme; while the directors or your income exceeds £100,000, you will be liable to file a self-assessment tax return.
For an American living in the UK to be considered a UK-non domiciled citizen, you need to look at whether you are a tax resident of the UK or not.
The Statutory Residence Test is a set of tests to determine the taxpayer residency status for each year. If the test qualifies you as a tax resident of the UK, you will be liable to pay tax on all (worldwide) earnings to the UK government.
If you are not considered a UK tax resident, you will only be liable to pay tax on the earnings from the work or investment in the UK. It is possible to maintain a special tax status where you, being technically a UK resident, are only liable to pay tax on the income earned in the UK or earned abroad and remitted into the UK.
The tax obligations for expats work differently and depend upon the circumstances. The UK-US has a double tax agreement that avoids you being taxed twice on the same income. At clear house accountants, our team of tax experts can assist you with the process of filing tax returns. We can guide you through how to avail tax opportunities under the US-UK double taxation treaty.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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