Moving across the pond is a romantic endeavor. You picture yourself navigating the Tube like a pro, spending weekends in the Cotswolds, and finally understanding cricket (well, maybe not that last part). But amidst the excitement of your new life in the United Kingdom, a formidable shadow looms. It isn’t the gloomy British weather; it is the terrifying complexity of being a US citizen living abroad.
Most countries base taxation on residency. If you leave, you stop paying. The United States, however, is one of the only countries on Earth that taxes based on citizenship. This means that as long as you hold that blue eagle-embossed passport, the IRS considers you their financial property, regardless of whether you live in London, Liverpool, or on the moon.
This creates a unique and often maddening situation for Americans in Britain. You are effectively serving two masters: Her Majesty’s Revenue and Customs (HMRC) and the Internal Revenue Service (IRS). Navigating the space between these two bureaucratic giants requires finesse, patience, and solid tax advice for US expats in UK. Without it, you risk double taxation, severe penalties, or simply drowning in paperwork.
In this guide, we are going to break down this complex web. We will explore the treaties that protect you, the forms that haunt you, and the investment traps that are waiting to snap shut on your wallet.
The Fundamental Clash: Citizenship vs. Residency
Let’s start with the basics. Why is this so hard?
The UK tax system is based on residency. If you live in the UK for more than 183 days a year (generally speaking), you are a tax resident. HMRC wants a cut of your income.
The US tax system is based on citizenship. The IRS wants a cut of your worldwide income, forever.
This means that every single year, you must file a US tax return, reporting the salary you earned in British Pounds, the interest from your UK bank account, and even your UK pension contributions. You are legally obligated to tell Uncle Sam everything. The goal of good tax planning is to ensure that while you report everything, you don’t end up paying twice.
The Calendar Chaos: April 5th vs. December 31st
If the dual filing requirement wasn’t bad enough, the UK and US operate on completely different time zones financially.
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The US Tax Year: It is a standard calendar year. January 1st to December 31st. Simple.
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The UK Tax Year: It runs from April 6th to April 5th of the following year.
Why? It dates back to 1752 and a dispute over the Julian vs. Gregorian calendar. While it is a quaint historical fact, it is a nightmare for your accountant.
The Mismatch Problem
When you file your US return in April, you are reporting income from Jan-Dec. However, your UK tax documents (like the P60 form from your employer) cover April-April. This means you cannot simply copy numbers from one form to another. You—or your specialist accountant—must pro-rate your income, splitting your UK salary slips to match the US calendar year. It is tedious, but accuracy here is vital to avoid audit flags.
The First Line of Defense: Foreign Earned Income Exclusion (FEIE)
When you sit down to tackle your Form 1040, your first weapon against double taxation is often the Foreign Earned Income Exclusion (FEIE), legally known as Form 2555.
This provision allows you to exclude a significant chunk of your earned income from US taxation. As of 2024/2025, this limit is adjusting upwards for inflation, generally hovering around the $120,000 to $126,000 mark.
The “Earned” Caveat
Note the word “Earned.” This covers your salary, wages, bonuses, and self-employment income. It does not cover passive income like:
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Interest
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Dividends
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Pension payouts
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Capital gains
If you earn a salary of £60,000 (approx. $75,000), the FEIE can wipe your US tax liability on that salary down to zero. However, to qualify, you must pass one of two tests:
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The Bona Fide Residence Test: You must prove you are effectively a resident of the UK (paying taxes there, having a home there) for an entire tax year.
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The Physical Presence Test: You must be physically present in a foreign country for 330 full days out of a 12-month period.
The Heavy Artillery: The Foreign Tax Credit (FTC)
While the FEIE is popular, it isn’t always the best choice. For many professionals in the UK, the Foreign Tax Credit (Form 1116) is actually superior.
Here is the logic: UK income tax rates are generally higher than US rates.
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If you owe the IRS $15,000 on your income…
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But you already paid HMRC $20,000 on that same income…
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The US allows you to use that $20,000 as a credit.
Since the credit ($20k) is larger than the bill ($15k), your US tax bill drops to zero. Even better, the “extra” $5,000 can be carried back one year or carried forward ten years. This creates a bank of tax credits that can save you in the future if UK rates drop or your US liability spikes.
Why Choose FTC over FEIE?
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Flexibility: It allows you to contribute to a Roth IRA (which requires taxable earned income, something the FEIE wipes out).
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Child Tax Credits: If you have children, the FTC path often allows you to claim the Refundable Child Tax Credit, putting actual cash back in your pocket from the US government.
The “Non-Dom” Status: A British Anomaly
We need to talk about “Non-Domiciled” status, or “Non-Dom.” This is a concept unique to UK law and very relevant to Americans.
In the UK, “Domicile” is different from “Residence.” You can live in London for 20 years (Resident) but still consider Texas your permanent home (Domicile). If you are a Non-Dom, you can choose to be taxed on the Remittance Basis.
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The Perk: You only pay UK tax on UK income. Foreign income (like dividends from your US stock portfolio) is tax-free in the UK unless you bring (remit) that money into the UK.
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The Trap: If you use the Remittance Basis, you lose your tax-free Personal Allowance in the UK. Plus, the US will still tax that “tax-free” foreign income anyway.
For most Americans, the Remittance Basis is less useful than it seems because the IRS taxes you on the money the UK ignores. However, for high-net-worth individuals, it can be a strategic tool if used carefully.
The ISA Mistake: It’s Not Tax-Free for You
This is the most common pitfall we see. You walk into a UK bank, and the helpful manager says, “Open an ISA (Individual Savings Account)! It’s tax-free!”
To a British person, yes. To an American, NO.
The IRS does not recognize the tax-free status of a UK ISA. To the US government, an ISA is just a regular taxable brokerage account. You must report all interest, dividends, and gains to the IRS. Even worse, if your ISA holds stocks or mutual funds, it might be classified as a PFIC (Passive Foreign Investment Company).
The PFIC Nightmare: Why You Can’t Buy UK Mutual Funds
If there is one acronym that should strike fear into your heart, it is PFIC.
The US wants to discourage you from investing in “foreign” mutual funds. They view them as tax-avoidance vehicles. Therefore, if you buy a UK Unit Trust, a UK ETF, or a UK mutual fund, the IRS taxes it punitively.
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The gains can be taxed at the highest marginal rate (37%+).
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Interest is charged on “deferred” tax.
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The paperwork to report a PFIC (Form 8621) involves an estimation of hours that is comically high.
The Solution: Most US expats should avoid buying UK-domiciled funds. Instead, stick to buying individual stocks or buy US-domiciled ETFs (if your brokerage allows it, though EU regulations like MIID II make this hard).
Pensions: The Good News (Mostly)
Finally, a silver lining! The US and UK have a robust Double Taxation Treaty. This treaty does a great job of protecting pensions.
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Workplace Pensions: Employer contributions to your UK pension are generally not taxable income on your US return.
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Growth: The growth inside your UK pension is tax-deferred, just like a 401k.
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SIPPs (Self-Invested Personal Pensions): These usually qualify for treaty protection too.
However, you still have to report them. They likely need to be listed on your FBAR (Foreign Bank Account Report) and possibly Form 8938. But at least you aren’t being taxed on the money as it grows.
The “State” of Affairs: Breaking Up is Hard to Do
You left California. You sold your car. You moved to Leeds. You are done with California taxes, right?
Maybe not. Some US states are “sticky.” States like California, Virginia, New York, and South Carolina make it very difficult to break tax residency. If you still have a driver’s license, a bank account, or a voter registration in that state, they might demand a slice of your income. We strongly advise formally severing ties. Surrender the license. Close the accounts. File a “part-year” return marking your exit. Do not leave the door ajar, or the state tax franchise board will kick it open.
FBAR and FATCA: The Compliance Dragnets
Beyond the tax return (Form 1040), there are two informational forms that carry massive penalties if ignored.
1. FBAR (FinCEN Form 114)
If the aggregate value of your foreign (non-US) financial accounts exceeds $10,000 at any point in the year, you must file an FBAR.
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This includes: Bank accounts, pension accounts, joint accounts, and business accounts where you have signature authority.
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The Penalty: Willful failure to file can result in penalties of $100,000 or 50% of the account balance. It is not worth the risk. File it.
2. FATCA (Form 8938)
This is similar to FBAR but filed with your tax return. The thresholds are higher (starting at $200,000 for expats living abroad), but it requires more detail.
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Note: The UK banks share data with the IRS. They know what you have. Do not hide assets.
Selling Your Home: The Phantom Gain
When you sell a house in the UK, you might face a “Phantom Gain” due to currency fluctuations.
Imagine you bought a house for £500,000 when the pound was strong ($1.50). Cost basis: $750,000. You sell it years later for £500,000 when the pound is weak ($1.20). Sale price: $600,000. You have a loss, right? No tax.
Now reverse it. You bought when the pound was weak ($1.20). Cost: $600,000. You sell when the pound is strong ($1.50). Sale: $750,000. In British pounds, you made zero profit. But the IRS sees a $150,000 capital gain purely because of the currency swing. You could owe tax on a profit you never actually saw in your bank account.
Self-Employment and Social Security
If you are a freelancer or contractor in the UK, you have to pay Social Security. But to whom? Thanks to the Totalization Agreement, you generally only pay into one system.
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If you are hired by a UK company, you pay UK National Insurance. You are exempt from US Social Security/Medicare taxes.
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However, you generally cannot claim the Foreign Earned Income Exclusion to wipe out Self-Employment Tax unless the Totalization Agreement applies. You need to ensure you are paying Class 2/Class 4 National Insurance to be exempt from the 15.3% US self-employment tax.
Conclusion: Making Peace with the Tax Gods
If your head is spinning, that is a perfectly normal reaction. Tax advice for us expats in uk is not about finding a magic loophole; it is about damage limitation and compliance. The goal is to sleep soundly at night knowing that neither the IRS nor HMRC is going to send you a scary brown envelope.
The interplay between the UK and US systems is a minefield, but it is a navigable one. By using the Foreign Tax Credit effectively, avoiding PFICs like the plague, and keeping your FBARs up to date, you can live a financially healthy life in Britain.
Do not try to DIY this. The cost of a specialist accountant is a fraction of the cost of an IRS penalty. Enjoy your time in the UK—eat the fish and chips, visit the castles—and let the professionals handle the paperwork.
FAQs
1. Will I definitely be double taxed? No. While you must file two returns, the mechanisms of the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE) are designed to offset this. Most US expats in the UK pay little to no US income tax because UK tax rates are higher, generating excess credits.
2. Can I still contribute to my US IRA while living in the UK? Yes, but with caveats. You need “earned income.” If you use the FEIE to exclude all your income, you have technically earned $0 in the eyes of the IRS, so you cannot contribute. If you use the Foreign Tax Credit, your income remains “visible,” allowing you to contribute.
3. Do I have to report my UK bank account if it has less than $10,000? For the FBAR, you look at the aggregate total of all foreign accounts. If you have three accounts with $4,000 in each, the total is $12,000. Therefore, you must report all three, even though individually they are under the threshold.
4. What happens if I haven’t filed US taxes for years? Don’t panic. The IRS has an amnesty program called the Streamlined Foreign Offshore Procedures. It allows you to catch up on the last 3 years of tax returns and 6 years of FBARs without facing late-filing penalties, provided your failure to file was non-willful.
5. Are my UK lottery winnings taxable in the US? Sadly, yes. In the UK, lottery and gambling winnings are tax-free. However, the IRS taxes “income from all sources.” So, if you win the National Lottery, Uncle Sam will expect his share, even though HMRC does not.
