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 legally file taxes, avoid some income taxes, and enjoy less tax liability. This blog should not be the sole deciding factor in 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.ย
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 similar to those for Americans living in America. One major difference comes with the deadline for filing 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 the 15th of June, the US expats must pay their tax returns by the 15th of April, or they’ll have to pay interest on the late payment.ย
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.ย
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 UKย 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 taxes to the country in which you reside.ย ย
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, which include the sale of the main residence, life insurance policies, corporate bonds, motor cars, gifts to 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 individuals, UK taxes will apply only to the capital gains earned in the UK.
Estate Taxes
You can be liable for paying inheritance tax on 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 years or more of the last 20 years. Expats domiciled in the US are only accountable for inheritance tax on the assets in the UK.ย
Here’s a useful read if you’re looking to understand inheritance tax-saving options.
Do I Need To Pay Tax If I Donโt 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 a 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 a professional tax advisor to seek guidance to avoid double taxation. The US government provides a tax credit to reduce 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.ย
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.ย
Exclusion Of The Foreign Earned Income
The most important tax opportunity US expats enjoy is the Foreign Earned Income Exclusion (FEIE). The FEIE allows 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:
- The income earned from the US military or as a result of employment provided by the US Government.
- Be earned while in international waters โ it is not considered a foreign country.
- Be earned from the job in specific combat zones as announced by the US.
- Be paid in the following tax year in which the money was actually earned.
- Be earned from pensions or annuities.
To find out whether you can claim an exemption under FEIE rules, you need to qualify for the following criteria, which state:
- 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 for 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 ยฃ100,000, you will be liable to file a self-assessment tax return.
Want to learn more about how self-assessment works in the UK?
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.ย
The Statutory Residence Test is a set of tests to determine the taxpayer’s 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.ย
Conclusion
The tax obligations for expats work differently and depend on the circumstances. The UK has a double tax agreement that prevents you from 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 on how to avail of tax opportunities under the US-UK double taxation treaty.
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