U.S. citizens face a unique set of challenges because they are taxed on their worldwide income and gains, no matter where they live. We help U.S.-connected clients living in the U.K. assess their current financial situation, understand their long-term goals and objectives, and build a robust and flexible investment plan for the future – all while considering the intricacies (and importantly, the interaction) of the U.S. and U.K. tax systems.
In this article, we tackle tax compliance, discussing the main traps you should seek to avoid when filing your U.S. and U.K. tax returns.
Tax Compliance
If you’re reading this you are probably already aware, but for the avoidance of doubt:
U.S. citizens (and green card holders) are required to file a U.S. tax return every year, regardless of where you live in the world.
This requirement applies even if:
- You live and work entirely outside the U.S.
- You have not lived in the U.S. for many years.
- Your U.S. passport is expired or you do not currently possess one.
There may also be additional forms to file, if you meet certain thresholds. If you have questions about your obligations, it is wise to consult a professional tax adviser with cross-border experience.
Accidental Americans
This requirement also applies to so-called “accidental Americans” – individuals who hold U.S. citizenship by birth but may have never lived in the United States or only resided there briefly during early childhood.
If you fall into this category and were unaware of your U.S. tax filing obligations, don’t worry. The IRS offers the Streamlined Foreign Offshore Procedures, a program specifically designed for non-wilful delinquent filers. Through this program, you can become compliant by correctly filing (and paying any tax owed) for the past three years of U.S. tax returns and the last six years of FBARs (Foreign Bank Account Reports). There are a handful of highly qualified accountants who specialize in helping individuals subject to both U.S. and U.K. tax regimes—they can help you determine your eligibility for the streamlined program and manage all necessary filings on your behalf.
Considering Expatriation
If you are thinking about expatriation and have (non-wilfully) never filed a U.S. tax return, you may also be eligible for the streamlined program to get compliant before formally renouncing your U.S. citizenship. Please get in touch with us if you would like to find out more.
Monitoring Your U.K. Tax Status
When speaking with Americans who have relocated to the U.K., we often hear versions of a similar story:
"We moved here for a job and assumed we would stay for a few years. Next thing we know, we bought a house, have two kids in the British school system, and love living in London. It’s been 16 years and we have no plans to return."
A recurring theme in many of the stories we hear is the expectation that the move would be short-term. Unfortunately, this mindset can lead to inadequate tax planning because people often make financial and tax decisions on this assumption. However, by the time it becomes evident that their stay will be longer, it may be too late to implement more effective tax strategies or avoid unintended consequences.
By way of background: currently when you arrive in the U.K. as a qualifying new resident (QNR), it is possible to elect for non-UK income and gains to be exempt from UK taxes for the first four tax years you are in the UK. Importantly, this QNR exemption must be claimed in each relevant tax year by filing a UK tax return.
If you’re interested in learning more, we have written another article that explores the key differences between the U.S. and U.K. tax systems which you can read here. In addition to discussing your initial filing considerations and requirements with your accountant, we also encourage you to discuss your long-term plans with them, especially as your future in the U.K. becomes clearer.
Conclusion
Filing taxes can be complicated, and the complexity increases when you are required to file in multiple countries. However, by familiarising yourself with common tax compliance pitfalls, you can avoid many of the challenges that frequently trip up individuals with U.S. connections.
Whether you plan to spend a few years, a few decades, or the rest of your life outside the U.S., Brown Advisory can deliver a comprehensive cross-border investment plan for you and your family that can move with you wherever life may take you. Learn more >
Billy Mathews, a U.S. expat himself, is a Portfolio Manager in our London office and helps U.S.-connected clients build U.S./U.K. tax efficient investment portfolios to meet their long-term goals and objectives.
This material is not intended to be, and shall not be construed as being, investment or tax advice. Investment decisions should not be made on the basis of it. You should not act or rely on this document but should contact your professional adviser. This article has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. Past performance is not indicative of future performance and there is a risk that some or all of the capital invested may be lost.
The information contained herein is based on materials and sources that we believe to be reliable. We make no representation, either express or implied, in relation to the accuracy, completeness or reliability of that information. The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions including changes in tax law or practice. Brown Advisory does not provide tax advice.