3 Tax laws US expats need to know

For US citizens wanting a long-term change of scenery, the UK is a popular destination. However, thanks to a complex US tax system that taxes its citizens and green card holders when they live and work in different countries, it’s vital for US expats to understand their tax liability.

The amount of admin involved in moving to the UK from the US can seem overwhelming. From Visa applications to securing somewhere to live, there is a lot to contend with. And tax liabilities can fall by the wayside. Understanding the dynamics of US expat taxes before you move to the UK is a good idea, as it can smooth your transition into UK life.

Taxes for US expats living in the UK

In this blog, we’ll discuss a number of tax laws you must be aware of as a US expat. Due to the complexity of both US and UK taxes, it’s advisable to engage a tax specialist to ensure compliance.

1. FinCEN Form 114 (aka Foreign Bank Account Report, FBAR)

Every US citizen must file an expat tax return with the Federal Government of the United States. There are no exceptions to this, regardless of where you live and work. The filing date for all US citizens is 15 April, but US expats get an automatic extension until 15 June. Although it’s possible to extend this further, an application must be made at this stage.

In addition to the regular federal tax return, many US expats are also legally obliged to file a FBAR by submitting FinCEN Form 114. This is a formal declaration of assets held in foreign bank accounts. For example, as a US expat in the UK, you must file FinCEN Form 114 if you are an account holder of a UK bank account or have signatory authority over one.

Other types of assets that must be covered by a FBAR include unit trusts, securities accounts, chequing accounts and savings accounts.

2. Legally ensuring you don’t pay twice

The US does tax on most foreign earned financial assets. However, there are legal steps you can take to ensure you don’t pay double taxations. None of these are automatic, and the onus is on you to ensure the right forms are filed. By preparing your tax return in advance of the deadline you can take advantage of the following:

  • Foreign Tax Credit (FTC) – when living and working in the UK, you will have to pay UK tax unless you earn below a certain threshold. If this amount is higher than, or the same as, the US tax rate, then the FTC will help you become exempt.
  • Foreign Earner Income Exclusion (FEIE) – if you apply this exemption correctly, then you don’t have to pay tax on the first $105,900 of your foreign earned income. This is the 2019 threshold.
  • Exclusion on Foreign Housing – if applied correctly on your tax return, this allows you to not pay a certain percentage of tax on your income if you live in the UK. It’s in place to help you cover the living costs that are a consequence of living overseas.

3. The tax laws in the UK

You must understand the UK’s own tax laws if you are living and working here. HMRC is the UK Government entity in charge of the nation’s revenue. It also manages taxes.

The Personal Allowance under UK tax laws is the amount of your income that is allowed to be earned before you start paying tax. This tax year (2019-2020), the first £12,500 is designated as the Personal Allowance. More information on income tax and how it’s applied in the UK can be found on the Government’s website.

It is essential that you understand the ramifications of both US and UK tax law if you are a US expat living in the UK. It is a complex and lengthy process, but by being prepared you will avoid being overtaxed and ensure compliance on both sides of the Atlantic.

For assistance with your US expat taxes in the UK, contact Ingleton Partners. We are specialist tax advisors with decades of experience in ensuring compliance for our clients.

Tom Griffiths

Tom is a member of the Association of Tax Technicians in the UK, an Enrolled Agent admitted to practice before the Internal Revenue Service and a member of the National Association of Tax Practitioners in the US. He is a specialist in the UK and US tax implications for individuals and in particular those who have interests in partnerships, corporations or trusts. Tom has a wealth of experience in private client tax issues and he previously practised at PwC, KPMG and Grant Thornton.