Tax obligations for U.S. expats can be a very complex and usually a controversial affair, for U.S. expats that live in the U.K it is no different. I will aim to help with lots of tips with taxes for U.S expats living in the UK.
If you fail to properly file your taxes in the US and the UK then this can result in significant fines and penalties. Although it may be possible to legally exclude some of the income earned from tax and reduce your tax liability, I will go over these in a little more detail shortly.
Introduction to tax for US expats in the UK
There are many U.S. expats living in the UK, each with their own US tax requirements. Also, British nationals who have dual nationality with the U.S. should be aware that they might have tax obligations with the United States.
This article has been written to look at the tax requirements that U.S. 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.
Overview of tax for U.S. expats in the U.K
Basically, the U.S. tax rules for U.S. expats in the UK are much the same as they are for Americans living in the U.S. as in that worldwide income is still subject to U.S. income tax.
One major difference is that for American’s living in the U.S., 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 of April – failure to do so will definitely attract interest on any late payment, beginning on the 15th of April.
What if I don’t have an income?
Well, if you don’t have an income from anywhere in the world then obviously you will not have to pay tax anywhere in the world, including the United States. However, a tax return may still have to be filed, depending on your personal circumstances. This potentially avoids complications if the IRS do investigate any disputes over your tax status/liabilities.
U.S./U.K Double tax treaty
There is a tax treaty between the United States and 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 U.S. Government may allow a tax credit to reduce your U.S. tax liability if you have already paid tax in the UK.
Although if 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 U.S. and U.K is not easy and should only be done with the support and guidance from a qualified tax adviser who can understand how to apply the rules to maximise any tax credits.
Can I give up my U.S. citizenship to avoid paying U.S. 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 U.S. 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, then you should seek out 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 living abroad 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 (figures as of 2016) providing a certain number of criteria is met.
Firstly, income must be foreign earned, which means earnings must not:
- Be earned from pensions or annuities – or other social security benefits
- Be paid in the following tax year that the work was actually conducted
- Be received from the US military or as a result of employment by the US Government
- Be earned while working in specific combat zones as declared by the US president
- Be earned while in international waters – this is not deemed as a foreign country
- To determine whether you can claim an exemption under FEIE, you must meet certain 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 US citizen OR be a US resident alien that has citizenship with a country that has a taxation agreement with the US (i.e, 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 eligible you can claim 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 potentially eligible for an exclusion – and potentially even assistance completing the form.
UK tax requirements of American expats
The tax year in the U.K runs from 6th April to the 5th April the following year and anybody earning an income in the U.K during the tax year will be liable to U.K income tax. If this is not paid automatically through a PAYE (pay as you earn) scheme, if 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.
As 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 that 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 technically you can 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 blogs.
If you want to know more information on a personal and individual circumstance please contact me via the form below and I will arrange a call with you.
