Financial Planning & Investment Guide For US/UK Citizens
This article is intended for individuals with UK/US assets and provides key information on cross-border financial planning.
Challenges For UK Expats Living In The US
If you are an American living in the UK, or a British citizen with financial ties to the US, financial planning can be complicated, and you may find yourself with tax obligations in both the US and the UK.
Whilst there is a Double Taxation Agreement (DTA) between the two countries designed to minimise the risk of being taxed twice, many expats still face significant challenges. Unlike most countries, the US taxes individuals based on citizenship rather than residency, meaning you could be liable for taxes in both jurisdictions.
As navigating these complex tax rules can be challenging, this guide will highlight everything you need to know to manage your financial accounts and tax obligations effectively.
The Wealth Genesis | Double Taxation Treaties
US-UK Dual Tax Status | Where Do You Need to File a Tax Return?
If you are considered an American ‘person’ or citizen by the US, you are required to file a US tax return with the Internal Revenue Service (IRS), even if you live abroad. US citizens living overseas face strict tax reporting requirements, often needing to report income even when no tax is payable- and in some cases, even if they have never lived or worked in the US. Whether the IRS considers you American depends on factors such as being born in the US, having parents who were US citizens, or acquiring US citizenship or a Green Card.
Meanwhile, your UK tax obligations are determined by your tax residency status. HMRC classifies individuals as either resident or non-resident, each with different tax rules. If you are a UK tax resident, you are generally taxed on your worldwide income, whereas non-residents are typically only taxed on UK-sourced income.
Your UK tax situation may also be impacted by your domicile (where the tax system considers your permanent home to be) and whether you claim the remittance basis. If you are unsure of your tax obligations, seeking advice from a cross-border financial adviser can help ensure you remain compliant while optimising your financial position.
To learn more about how the UK taxes foreign income, click here.
Tax Reporting Issues for US Expats | How to Stay Tax Compliant
There are strict rules as to which types of investments US citizens can hold, even when they live abroad, and how these are reported from a tax perspective. Some key considerations include:
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 and came into effect in 2014, as a crackdown on tax avoidance on foreign assets. This legislation requires non-US financial and investment institutions to report details of their US-linked clients to the IRS.
As a result, many foreign financial institutions and investment firms have chosen to stop accepting American clients rather than navigate the strict reporting requirements and potential penalties imposed by the IRS. If you are a US citizen with foreign financial assets exceeding $200,000 per tax year, you must complete Form 8938 along with your Form 1040 to remain compliant and avoid penalties.
Foreign Bank Account Report (FBAR)
According to the US Internal Revenue service (IRS), all US persons, citizens and those with other US connections are required to file an FBAR (Foreign Bank Account Report) annually if they hold any foreign financial accounts, including bank accounts, investment accounts.
Also known as FinCEN Form 114, the FBAR must be filed if the total combined balance of all foreign accounts reaches $10,000 at any point during the year. This applies to all foreign accounts, regardless of whether they have a balance of zero. Failing to file an FBAR can result in significant penalties, so it is crucial for US expats to remain compliant with these reporting requirements.
Passive Foreign Investment Company (PFIC)
Passive Foreign Investment Companies (PFICs) are entities that expats may establish, but they are subject to complex and stringent US tax rules. Non-US collective investments, such as unit trusts and funds, are typically classified as PFICs, as well as UK ISAs. If you hold a PFIC, you will face additional taxation in the US, making it essential to understand the implications and seek professional advice to ensure compliance and tax efficiency.
Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit
As a UK citizen living abroad, you will typically still be required to file a US tax return, even if you have no tax to pay. Reporting is mandatory regardless of your tax liability.
However, there are ways to reduce your tax burden, such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit. While these exemptions may help eliminate any US tax owed, you must still file a tax return to claim them and remain compliant with IRS regulations.
Non-Domiciled UK Resident
If you are a US expat living in the UK, you may still be considered non-domiciled, meaning that while you reside in the UK, your permanent home is elsewhere. This status can present tax planning opportunities to optimise your position and reduce your overall tax liability.
Strategies such as using the Remittance Basis or setting up an Excluded Property Trust can help protect your estate from UK inheritance tax. However, if you remain taxable in the US, it’s crucial to consult with a professional adviser who can assess the pros and cons and develop a tailored financial plan that is both beneficial and tax-efficient for your unique circumstances.
UK/US Expat Financial Advice
Managing tax obligations in both the US and the UK can be challenging, making expert advice essential to ensure you remain compliant and avoid costly penalties from the IRS or HMRC. At The Wealth Genesis, our advisers are fully regulated to provide financial guidance to expats worldwide.
