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Be sure to let the IRS
know you are overseas by filling out a change of address form
(form 8822). Be sure to read the publication "Tax Guide
for US Citizens and Resident Aliens Abroad" also available
from the IRS website.
Revenue has a pretty good website answering most of your
tax questions for filing in the UK. You can even file online.
Be sure to check out the Non-residents
section. All forms are available online.
As you may have
already discovered, UK taxation can be both complex and costly
with the taxation of expatriates being one of the most difficult
areas to understand. To make matters worse, the UK tax years
runs from 6 April to 5 April presenting particular problems
for US nationals moving to the UK.
The summary provided
below is intended to be a general guide to the taxation of US
expatriates in the UK and considers both the taxation of short-term
visitors and of those moving on a more permanent basis.
Short Term Visitors
Broadly, an employee
of a US company visiting the UK who spends less than 30 days
here in any UK tax year should not run into any tax problems
whilst they are here, as the UK tax authorities, the Inland
Revenue (IR), will not normally seek to tax these individuals.
A short term visitor
(i.e. an employee of a US company) coming to the UK for between
30 & 91 days in a UK tax year is, strictly speaking, liable
to UK withholding taxes (Pay As You Earn, or PAYE) on their
employment income for the period of time they are here. However,
it is normally possible to reach an agreement with the IR that,
under the terms of the Double Taxation Agreement that the UK
has with the US, PAYE withholdings are not required on the basis
that no tax will eventually be payable here.
The tax treatment
of those individuals in the UK for between 91 days and 183 days
in a UK tax year is complicated and depends not only on the
number of days they spend in the UK in the relevant tax year,
but also in the previous 4 years. In overview, providing the
following conditions are met, an employee of a US company visiting
the UK for a temporary purpose will not suffer UK tax on their
1) They are in
the UK for less than 183 days in the tax year; &
2) Their visits
to the UK over the previous 4 years have averaged less than
91 days per year, &
3) They are not
paid by a UK company, &
4) Their compensation
is not borne by a UK company (i.e. their costs are not re-charged
back to the UK company).
Clearly, this is
an area where a little planning can produce big savings, particularly
as UK tax can be significantly higher than in the US (UK tax
rises to 40% at around £37,500 per annum of taxable income).
to the UK are taxed according to their residence status.
coming to the UK and expecting to spend 3 years or more here
will be treated as "ordinarily resident" (see below)
in the UK. As a result, they will be taxed on all of their employment
income, wherever paid and regardless of where the individual
carries on their duties.
As noted above,
an individual coming to the UK for an indefinite period, or
for 3 years or more, is regarded as Resident & Ordinarily
Resident (R/OR) in the UK.
However, an individual
coming to the UK with the intention of being here for between
2 & 3 years, we will be regarded as Resident but Not Ordinarily
Resident (R/NOR). The practical effect of this is that the individual
regarded as R/NOR will be taxed on the higher of:
a) The income paid
to them in the UK, or brought into the UK; &
b) The income that
relates to their UK duties.
Rick comes to the
UK intending to be here for 2 to 3 years. He is paid $70,000
per annum. He is paid $60,000 into his UK bank account and $10,000
into a bank account outside the UK. Rick has a European role
and spends 20% of his time working in France/Germany/Italy.
Rick is taxed on
the higher of:
a) $60,000 (the
income paid to him in the UK); &
b) $58,000 (the
income that relates to his UK duties, i.e. $70,000 x 80%)
As can be seen,
with a little bit of planning, Rick can save himself UK tax
@ 40% on $10,000 per annum.
The tax treatment
of those individuals intending to spend less than 2 years in
the UK mirrors to a large extent that above, though in some
cases their treatment can be even more beneficial, depending
on the date of arrival in the UK and the amount of time they
spend working outside the UK.
Normally an individual
who was borne outside the UK and intends to return permanently
to a country other than the UK is regarded as not domiciled
in the UK for tax purposes.
This can have a
number of tax advantages in the UK such as:
income is not taxable in the UK as long as it is not remitted
Overseas capital gains are not taxable in the UK as long as
the proceeds are not remitted here,
Home leave trips paid for by an employer are not treated as
taxable income in the UK,
Contributions to a US 401k plan will be deductible in the UK,
and contributions to such a plan by an employer will not constitute
taxable income (there are some conditions to be satisfied, though
the general principle should apply).
US citizens assigned
to the UK for a temporary purpose should be able to remain in
FICA for the duration of their posting to the UK and a Certificate
of Coverage should be obtained in the US. As a result, they
will not be liable to pay National Insurance Contributions in
US citizens employed
in the UK by a UK company will have to pay full National Insurance
Contributions for the duration of their employment here.
On arriving in
the UK, you will be required to complete and submit an arrival
questionnaire, known as form P86 to the Inland Revenue. The
Inland Revenue will use the information on this form to determine
how you should be taxed for the duration of your stay in the
UK and therefore it is recommended that professional advice
is sought before this form is filed.
If the Inland Revenue
issues a tax return, it must be completed and submitted (even
if you have no taxable income to declare).
If you have not
received a tax return but have taxable income or gains which
are not covered in full by withholding, you will also be required
to file a return and settle any additional liabilities due.
In general, it
is strongly recommend that you seek professional advice to determine
whether a tax return should be filed, particularly as you are
likely to have overpaid tax in the years of arrival and departure.
The final deadline
for filing a return is 31 January following the tax year end.
If a return is filed late, there are automatic fixed penalties.
In either case, the full amount of any tax due must be made
by 31 January following the tax year end. In addition, if you
have significant income which has not been taxed at source,
payments on account (or estimated tax payments) may be required.
If this is the case, the first installment will also be due
by 31 January with the second payment due by the following 31
Unlike in the US,
there is no system of joint filing in the UK and individuals
are therefore responsible for their own taxation and for making
any claims in respect of applicable reliefs and allowances.
US TAX MATTERS
will usually discover that their tax matters become extremely
complex following their departure. It is therefore recommended
that advice is sought from a professional tax adviser specialising
in this area whilst you are living outside of the US.
US citizens or
residents are taxed on their worldwide income regardless of
where they live or where the income is paid. As such, US expatriates
must continue to file US tax returns and in many cases owe US
tax whilst residing in the UK.
There are two special
tax provisions used by expatriates to reduce their federal income
tax liability whilst on assignment. These provisions are the
foreign tax credit and foreign earned income and housing exclusions.
The foreign tax
credit is a dollar for dollar tax credit which reduces US tax.
The foreign tax credit is designed to ensure that a taxpayer
is not subject to both foreign tax and UK tax on the same dollar
of income (i.e. the foreign tax credit alleviates double taxation).
A US citizen or
resident who establishes a tax home in a foreign country and
who meets either the bona fide residence test or the physical
presence test may exclude foreign earned income and foreign
housing costs within certain limits.
are elective and an individual may elect either or both exclusions.
In addition, these elections are available to each individual
so each spouse may claim the exclusions even if a couple files
a joint tax return. However, an expatriate may not claim both
the foreign tax credit and exclusions from income on the same
dollar of income.
The first hurdle
that must be cleared to qualify for the foreign earned income
and the housing exclusions is the tax home requirement. As a
general rule, most US citizens or residents who accept a foreign
assignment which lasts more than one year will meet the tax
The bona fide residence
test is met when a US citizen establishes a bona fide residence
in a foreign country for an uninterrupted period which includes
an entire calendar year. This test requires that a person has
a tax home outside of the US and the person is considered a
resident of the foreign country. A green card holder cannot
normally utilise the bona fide residence test.
The physical presence
test requires that a US citizen or resident be physically present
in one or more foreign countries for at least 330 days in any
365 day period. The 330 days do not need to be continuous. The
individual's tax home (i.e. principal place of business and
employment) must be in a foreign country during the 330 day
period. Any partial days in the US are treated as full days
for the purposes of this test.
In addition to
the special tax provisions that apply to US expatriates, you
will still remain subject to the normal US tax laws with respect
to all other items of income, expenses and credits. Other common
federal issues that arise due to a foreign assignment include:
- Treatment of
employer provided allowances and reimbursements
- Moving expenses
- Rental of principal residence
- Sale of principal residence
- Exchange gains and losses
- Temporary versus long term assignments
- Social security taxes