American Expats In The UK


Taxes

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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.

The Inland 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.

 


TAXATION OF US EXPATRIATES

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 employment income:

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).

Longer Term Visitors

Longer-term visitors to the UK are taxed according to their residence status.

Broadly, someone 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.

Ordinary Residence

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.

Example:

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.

Domicile

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:

Overseas investment income is not taxable in the UK as long as it is not remitted here,
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).
Social Security

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 the UK.

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.

Tax administration

Arrival forms

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.

Tax returns

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 July.

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

US expatriates 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.

These exclusions 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 home requirement.

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


The information provided above has been prepared by Expatriate Tax Solutions Ltd, a specialist firm of tax advisers assisting individuals moving to and from the UK with tax planning and compliance. The information is intended as an overview and should not be relied upon for tax purposes without professional advice, due to the continually changing nature of tax legislation in both the US and the UK.

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