10th Jun 2024 by Ollie Cutting

Do I have to pay US taxes if I live in the UK?

Grow your assets

As a Senior Wealth Manager at MASECO Private Wealth, the leading independent Wealth Manager for US-UK connected families, I have encountered countless iterations of the same question: do I still have to pay US taxes if I live in the UK? The easiest starting point is that if you are a US citizen, dual-national, or Green Card holder who resides in the UK you will need to file a US tax return. The amount you actually pay in USD taxes to the IRS can vary, and can be managed efficiently with the right support, but filing a tax return with the IRS is integral to staying compliant.


Who is responsible for filing?

You must file your US taxes if you are an American expat residing in or spending part of your time in the UK. This still applies to any US citizen, dual national, or Green Card holder who resides in the UK even if you are not receiving any US income. Technically any income derived anywhere in the world is subject to US taxation, however there exists useful tax treaties between the US and other countries that can mitigate double-taxation in certain situations.

For instance, you have to record on a US tax return if you have an employment contract in the UK but are not receiving US income of any kind, however you are unlikely to pay a significant additional tax in USD as the income should offset itself with the majority of the associated taxes due in the US as the two countries’ tax systems are broadly aligned and, there is a US-UK tax treaty in place.

 

Who is exempt from filing a US tax return while resident in the UK?

A recent university graduate who is in the UK for an internship is a typical example of an American living there without having to file a US tax return. 

You probably won't make more than £6,000 a year with a summer work placement. Even after converting from GBP to USD, as a single filer, this is less than the $13,850 threshold, thus you are not required to file.1

Broadly speaking, anyone with a US citizenship or Green Card that is over the age of 18 should be filing a US tax return if you have assets that generate an income or other income streams, unless you are specifically advised that it is unnecessary to do so as a result of being beneath the requisite income thresholds.

 

What about my investments?

Since 2008, we have focused our efforts as a business on understanding the complexities of investing as a dual US and UK tax filer. The availability of investment products varies in the two jurisdictions and, while one type of investment structure may be tax-efficient in the UK, this efficiency is not guaranteed to be reciprocated in the US (and vice versa).

Generally speaking, qualified pension assets in either the US or the UK are covered by the US-UK tax treaty and there exists a degree of reciprocity when it comes to respecting the tax-deferred nature of these schemes. This said, it is important to seek professional wealth management and tax advice that is aligned on the tax treatment of your pension schemes and their underlying investments to avoid any surprises.

Common examples where Americans living in the UK might run into unexpected taxation include UK ISA accounts (tax-free in the UK, but treated as taxable in the US), UK onshore bonds (efficient in the UK, taxes may apply in the US) or US life insurance policies with an investment component (can be inefficient from a UK standpoint).

There is also the matter of gaining access to diversified investment funds without triggering unwelcome, penal taxes in the US. The IRS considers collective investment schemes domiciled outside of the US as Passive Foreign Investment Companies, or ‘PFICs’, which can mean that the most simple UK-based ETFs (for example) are subject to penal taxation in the US. This might imply that a US tax filer based in the UK is better off holding their taxable assets in a US based account and buying US domiciled funds to ensure that their investments are well diversified and tax-efficient. Advice should be sought from a US-UK wealth professional to recommend a suite of funds that are both US and UK tax-efficient.

 

How can I get back on track after a long period without filing?

In some cases an individual will be brought to the attention of their US citizen status later in life and often to their surprise. We have seen examples of this whereby someone finds a copy of a US passport during Spring cleaning, having lived in the UK for many years. You may recall examples in the public eye such as Boris Johnson having to pay US taxes on his property sale despite not having lived in the US since the age of 5, made newsworthy by his status as London Mayor at the time.2

The quickest, least expensive, and safest way for holders of US citizenship living in the UK to make up lost US tax revenue is through the Streamlined Tax Amnesty program. For US residents who reside abroad, the IRS Tax Amnesty is designed for just that, and qualified US-UK tax professionals can guide individuals through the process.

The program's principal goal is to enable US residents to freely come forward without worrying about penalties for filing late or other consequences. Often individuals going through this process take the opportunity to rearrange their affairs so that on a go-forward basis, their financial plan is viewed favourably in the eyes of the IRS and the tax authority in their second country.

 

Conclusion

The requirement to file a US tax return applies to the majority of Americans or US-connected individuals living anywhere in the world. With the right guidance and support, this does not always mean paying taxes twice, and there are many ways to create efficient, long-term wealth plans that are fit for purpose and well received by the IRS and the HMRC.

 

References

1.    IRS: Here's why you should file a federal tax return even if you're not required (msn.com)
2.    London Mayor Boris Johnson agrees to pay US tax bill - BBC News


The Legal Stuff
 
The information is intended for clients of MASECO LLP and should not be reproduced, copied or made available to others, in whole or in part, without MASECO’s prior written consent. 
 

  • Nothing in this document constitutes investment, legal or fiscal advice and should not be construed as such. 
  • This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. 
  • This document does not take into account the specific goals or requirements of any particular individual.   
  • MASECO gives no assurance or guarantee that the information is accurate or complete and it should not be relied upon as such. 
  • MASECO is not a tax specialist and we recommend that anyone considering investing seeks their own tax advice. 

 
MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is established as a limited liability partnership in England and Wales (Companies House No. OC337650) and has its registered office at The Kodak Building 11 Keeley Street, London, WC2B 4BA.  
 
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor. 

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