The United Kingdom and the United States enjoy a special relationship that is founded on the ideals of democracy, competition, and mutual cooperation. Both countries are bound together by a shared history and cultural heritage that date back centuries.Â
Millions of Americans trace their ancestry back to the British Isles, and it is no surprise that the U.K. has become a top destination for American travelers. The U.K. hosts one of the largest American expat communities in the world, with over 139,000 American citizens living in the country. It is also the third most popular destination for American tourists.
Here are a few things that U.S. citizens living in the U.K. need to know, including expat taxes, the British tax system, and how to file an expat tax return.
U.S. taxes for expats in the U.K.
U.S. citizens and permanent residents (also known as Green Card holders) are obligated to file a federal tax return, even if they live and work in the U.K.
For the tax year 2021, the minimum income requirement for filing a return is $12,400. If you are self-employed, the minimum is $400.
While the regular deadline for filing a return is April 15, expats are granted a filing extension until June 15, with an optional second extension until October 15.
Your assets in the U.K. are subject to reporting requirements
If you own financial assets in the U.K. (e.g. real estate held through a foreign entity, stocks and securities, partnership interests) valued at $200,000 and higher, you are subject to Foreign Account Tax Compliance Act (FATCA) reporting requirements.
You may also need to file a Report of Foreign Bank and Financial Accounts (FBAR) if you own British financial accounts (e.g. bank accounts, securities accounts, retirement accounts) with a combined worth of over $10,000.
U.K. tax season
Unlike the U.S. tax year, which follows the calendar year (January 1 to December 31), the U.K. tax year starts on April 6 and ends on April 5 of the following year.
U.K. tax returns that are filed on paper are due on October 31, while electronic returns must be filed on or before January 31. Since the American and British tax seasons are different, it is highly recommended that you take advantage of the IRS filing extensions available to expats.
U.K. taxes for U.S. citizens
Your income tax in the U.K. depends on your residency and domicile status. U.K. tax residents pay income tax on their worldwide income, but there are special rules for residents who are domiciled abroad. Meanwhile, non-residents only pay tax on U.K.-sourced income.
American expats qualify as tax residents of the United Kingdom:
- if they spend 183 or more days in the U.K. in the tax year, or
- if they are domiciled in the U.K.
While residency is determined by your long-term intentions, there are other factors that may affect your residency status. It is highly recommended that you consult a professional if you have any questions about your U.K. residency status.
U.S.-U.K. tax treaty
The U.S.-U.K. tax treaty was enacted to prevent double taxation and tax evasion among American and British taxpayers. The tax treaty helps clarify situations when expat taxpayers are unsure to which country taxes should be paid. Please consult a tax expert if you wish to take advantage of the perks provided by the treaty.
Tax exemptions for expats living in the U.K.
U.S. citizens who pay income tax to Her Majesty’s Revenue and Customs (HMRC), the British equivalent of the Internal Revenue Service (IRS), can lower their U.S. tax liability by making use of exemptions and credits available to expats.
Foreign Earned Income Exclusion
By invoking the Foreign Earned Income Exclusion, you can exclude up to $108,700 (for tax year 2021) of foreign-earned income from U.S. federal tax if you live and work in the U.K.
Foreign Tax Credit
Another option for minimizing your tax liability is by taking a Foreign Tax Credit. You may claim a tax credit of the same value for every dollar of income tax paid to the HMRC.
Child Tax Credit
Taxpayers with dependents under 12 years old can claim a child tax credit, also known as the Child and Dependent Care Credit, to reduce their tax bill. To qualify for the child tax credit, the child dependents must have a U.S. Social Security Number (SSN).
How to file an expat tax return in the U.K.?
Paying British taxes as an expat can be difficult, especially if you don’t have any support. The tax season is different and the residency rules are confusing. If you want to ensure an accurate tax return, you need to talk to a tax expert.
At TFX, we have been preparing U.S. tax returns for Americans living abroad for over 25 years. Our team of specialists knows the ins and outs of the British tax system, and they can answer any questions you may have about your tax return.
