A Guide to US and UK Taxation for Americans Living in the UK

Navigating the complexities of tax preparation can be challenging, especially for Americans residing in the UK. This guide aims to provide you with best practices to efficiently manage your tax obligations and highlights some issues that you should be aware of.

Tax Return Deadline

As a US resident, you are likely familiar with the April 15th tax deadline. However, non-US residents benefit from an automatic filing extension to June 15th (or the next working day if the 15th falls on a weekend, as it does this year). At Phinch, we understand the difficulties in obtaining records, particularly given the non-coterminous year ends of the UK and US. Therefore, we recommend submitting a protective 4868 extension application, which grants an additional 4-month extension to October 15th.

Foreign Bank and Financial Accounts Return (FBAR)

The FBAR is a crucial form for reporting financial accounts held outside the US, where the combined value exceeds $10,000 at any point during the year. This includes accounts where you have signature authority, investment accounts, personal pensions, and life insurance policies. Given the severe penalties for incorrect returns, it is advisable to report any accounts if in doubt. Importantly, the FBAR does not generate a tax liability and is submitted for informational purposes to the Treasury Department.

Penalties

• Late Filing Penalties: 5% for each month the return is filed after the due date, up to a maximum of 25%.
• Late Payment Penalties: 0.5% for each month from the ordinary due date for filing (June 15th for non-US residents).
• Interest Charges: Rates are subject to change; the current rate is 7%, added daily from the original due date of April 15th.

Investments

As a UK resident, you will primarily be taxed in the UK, as UK tax rates are generally higher than US Federal rates. However, certain investments, such as ISAs (both cash and stocks and shares accounts), are taxed solely in the USA, as the same tax incentives are not available to US citizens. Dividends from US sources can be complex, with the US entitled to apply primary taxing rights of up to 15%.

Passive Foreign Investment Companies (PFICs)

US citizens should seek specialist advice before investing in PFICs, as these assets can have severe tax consequences. Common investment vehicles like Unit Trusts, ETFs, index-linked funds, and property investment companies are typically subject to this punitive regime, which can impose a tax charge on uncrystallised gains. The complex reporting requirements for PFICs can also result in prohibitive professional fees.

Foreign Earned Income Exclusion (FEIE)

The FEIE allows you to exclude a portion of your earned income from US taxation. For 2024, the exclusion amount is $126,500. The decision to claim the FEIE depends on various factors, and Phinch is well-equipped to advise on its suitability and the impact on reclaimable tax credits. Note that once you stop claiming the FEIE, you are barred from utilizing it for five years.

Double Tax Treaty

The US-UK Double Taxation Convention is designed to prevent double taxation on the same income. This treaty allows for tax credits and exemptions for taxes paid in one country against tax liabilities in the other. For instance, if you pay tax on your income in the UK, you can claim a credit for those taxes against your US tax liability, ensuring you are not taxed twice on the same income. The treaty covers various types of income, including pensions, dividends, and capital gains, providing a comprehensive framework for tax relief.

By understanding these key aspects of US and UK taxation, you can better manage your tax obligations and avoid potential pitfalls. If you need further assistance, Phinch is here to help you navigate these complexities with ease.

Pensions

Pensions are another complex area. Most pensions are dealt with under Article 17 of the Double Tax Treaty which broadly explains that your pension is taxed where you reside. There are nuances of course, for example ROTH IRA distributions are exempt here in the UK, as they are in the USA, lump sums and government pensions also operate slightly differently and so specialist advice is recommended before making decisions on your finances.