I am a dual US and UK citizen and have been working in Hong Kong, but I plan to return shortly to live permanently in the UK for my child’s schooling. Will I have to pay both UK and US taxes?
Camilla Wallace, partner at law firm Wedlake Bell, says US/UK dual citizens living and working in London cannot avoid the requirement to pay tax and, in some instances, file returns in both countries. This can be a headache from both a cost and administrative perspective — not least because the two jurisdictions have different tax years.
The US tax year goes by the calendar year and the UK tax year runs from April 6. Filing and payment deadlines also differ. In the US, April 15 is the deadline for the payment of tax and June 15 for filing your accounts, as there is an automatic two-month extension for US citizens living abroad.
In the UK, the deadline is January 31 for tax payments and filing (if done online) and extensions are not available without incurring a penalty and possibly interest charges.
As a US citizen living in the UK, you will also need to file a US Report of Foreign Bank and Financial Accounts (FBARs) with the US Treasury, disclosing assets held in foreign bank accounts.
However, there are a few reliefs which can help prevent double taxation. First, in certain circumstances the US/UK Double Tax Treaty permits tax paid in one jurisdiction to be offset by tax paid in the other by claiming a foreign tax credit.
Under the treaty, rental income from the US would also only be taxed in the US while you are UK resident. The US also has a Foreign Earned Income Exclusion and an exclusion on foreign housing which can help reduce your overall tax bill while abroad.
Second, those who have retained a non-UK domicile of origin can elect to be taxed in the UK on the “remittance basis” which means that UK tax applies to your UK income and gains only, for up to 15 years of UK tax residence. Thereafter, you would be deemed to be UK domiciled and would be taxed on an “arising” basis in the UK, meaning that your worldwide income and gains would be subject to UK tax.
Of course in some scenarios there might be tax payable in only one jurisdiction and even this might come as a surprise — as Conservative MP Boris Johnson found out when he sold his UK family home as an “accidental American” (he was born in the US, but relocated when he was five).
Relief from capital gains tax on the disposal of your main home, available in the UK, does not exist in the US. One way around this is to ensure that the non-US citizen spouse owns the home. This and other planning tips can help dual US/UK citizens manage their US and UK tax liabilities efficiently, and it is essential that such individuals seek co-ordinated professional advice.
Frederick Bjørn, private client partner at Payne Hicks Beach, says Mr Johnson referred to his US tax bill on the sale of his UK property as “absolutely outrageous”. As a US citizen he was liable to US taxes on his worldwide assets and suffered because the US does not recognise the UK capital gains tax (CGT) “main residence relief”. This will apply equally to you as a US citizen, regardless of where you are resident.
UK taxes are based on residence and domicile — and it appears likely you will be a UK resident domiciliary following your return. Broadly, the former governs income tax and CGT and the latter inheritance tax (IHT).
While you will always be liable to US tax on your worldwide income and gains, once you are UK resident you will also become liable to UK tax on these, and where available you will need to seek credits in your US/UK tax returns to avoid double taxation. It is important that the US and UK returns dovetail to ensure proper reporting and it is useful to understand where exemptions exist so as not to fall foul of numerous potential pitfalls.
As a UK domiciliary, you will be liable to IHT on your worldwide estate. As a US citizen, your worldwide estate would also be in the US’s estate tax net. However, provided the US and UK taxes arise on the same event — of which there is no guarantee — there will generally be a credit available to avoid double taxation. A trap here is settling assets in trust — a common, benign estate planning tool in the US but one which carries a potential upfront 20 per cent IHT charge in the UK.
Currently, there is a US estate tax exemption of over $11m per person, which takes many US persons’ estates out of the net. However, the UK equivalent is only £325,000. In the absence of any reliefs, it is likely that you will have a worldwide IHT exposure of up to 40 per cent. While there are various exemptions in the UK, these may not be available in the US. In the case of the UK spouse exemption and the US marital deduction it is key that these can be claimed in full on the first death to avoid a charge of around 40 per cent on both deaths.
In certain cases, the US/UK tax treaties may come to your rescue — but do not count on it.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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