London is a global financial and business center that has always attracted American expats. The United Kingdom is famous for its weather, high living costs and an extremely complex tax system for expats. In 2013 HRMC introduced a new Statutory Residence Test to facilitate the process of determining UK residency for tax purposes. Several Automatic Residence Tests and Sufficient Ties Test are applied to each individual. Proper guidance from an expatriate tax professional is required to determine a UK residency. US UK tax treaty and a social security agreement add an additional layer of complexity to expat tax planning and preparation.
We receive multiple questions from Americans who plan to move to UK or who currently reside in the UK. How is a residency status determined in the UK? What are income tax rates in the UK? Do you provide US expatriate tax preparation services for American expats UK? The purpose of this guide is to provide a summary of the most popular questions.
Expatriate Tax Rules and Filing US Taxes from UK for American Expats UK
Americans expats UK who are U.S. citizens or green card holders are taxed on a worldwide income. American expats working in the UK are required to file US expat tax return and pay US taxes if they meet the filing requirements.
However, there are several exclusions and deductions under under Internal Revenue Code section 911 that American expats UK can use to avoid double taxation.
- Foreign earned income exclusion. American expats UK can exclude from the earned income up to $101,300 for a calendar year 2016. However, they have to meet either a bona fide residence or physical presence test.
- Foreign housing exclusion or deduction of UK expenses. Additionally, American expats UK may be able to exclude or deduct foreign housing expenses. The UK is famous for its high housing costs.
- Foreign tax credit. American expats UK can deduct or take a foreign tax credit for UK income taxes. As a result of it, they can minimize their tax liability on a dollar-for-dollar basis.
Additionally, American expats UK might be required to file the FBARs form to report foreign financial accounts as a part of expatriate tax preparation. Moreover, the UK is the first country to sign a UK FATCA agreement with the USA that promotes information sharing about taxpayers in both countries.
Tax system in UK – FAQ
I am an American expat UK. Is my worldwide income taxed in UK?
If American expat in the UK is considered a tax resident, then s/he is taxed on the worldwide income on the arising basis as well as on the worldwide capital gains. Also, expats UK may be able to claim a remittance basis. Per the remittance basis, certain types of foreign income and gains are taxed only when remitted to the UK.
Who is considered a tax resident in UK?
Per the Statutory Residence Test, expat UK is considered a tax resident under the following circumstances:
– S/he does not meet an automatic overseas test.
– Expats UK meet the sufficient ties test OR
– S/he meets one of four automatic UK tests.
What are Automatic UK tests?
- Expat UK is present in the UK for 183 days in a tax year.
- S/he works on a full-time basis in the UK for 365 calendar days or more and s/he is present for at least 75% of days in a tax year in the UK.
- S/he has a home in the UK. This home must be available for more than 90 days and s/he visits the home for least 30 days in a tax year. This home must be the only home. If an expat UK has a home located overseas but s/he does not use it for more than 30 days in a tax year.
- S/he died in a tax year, had a home in the UK upon the date of death and s/he was a UK resident in each of three prior tax years.
The residency position has a significant impact on individual tax situation and further guidance from an expatriate tax practitioner is required.
What is Automatic Overseas Test?
- Arrivers – Expat UK is not a UK resident if s/he spent less than 46 days in the UK.
- Leavers – Spent less than 16 days in the UK.
- S/he works abroad and spends less than 91 days in the UK.
- S/he dies abroad and s/he was not a UK resident for two years as well as spent less than 46 days in the UK.
What is the tax year in UK?
The tax year in UK runs from April 5 to April 6.
What are income tax rates in UK?
Maximum UK income tax rate for the year ending April 6, 2013 is 50%. Her Majesty’s Revenue and Customs anticipates that this tax rate will be 45% for the tax year ending April 5, 2014.
Which income is taxable in UK?
Generally, the following categories of income are subject to income tax: earned income, income from self-employment, trade or business/partnership income, dividends, interest and rental income.
Is an American expat in UK allowed to file an expat tax return with a spouse?
Spouses are taxed separately and they have to file separate tax returns since they claim personal allowances.
Is it a requirement to file a UK tax return every year?
Expats UK have to file a tax return by October 31 in case of a paper return, or by January 31 in case of online filing. Usually expats UK have to pay a late filing penalty of GBP100 if a tax return is not delivered by the filing date.
Does UK have a tax treaty or social security agreement with the USA?
There is a tax treaty and totalization agreement between the USA and UK. American expats UK must consult an expatriate tax professional to minimize the effect of double taxation and overseas taxes as well as to review social security payments.
These are some of the issues that American expats UK should consider when they file an expatriate tax return and report their overseas and US taxes. Please make sure to check the latest developments by the Her Majesty’s Revenue and Customs.
If you have any questions about overseas taxes paid in UK and how you can minimize U.S. tax liability on your expatriate tax return by applying different treaty positions, please seek help of an expatriate tax professional that provides international tax services. International tax experts at Artio Partners are pleased to assist with FBAR, FATCA, PFIC, foreign trust and other expat tax issues.