Many Americans moving to London think they’ll only be liable for UK taxes rather than the US. Not so. The United States is one of the only countries to impose taxation on its citizens living abroad, so American expats have to file tax returns in both the US and UK.
TAX PROVISIONS FOR US EXPATS MOVING TO LONDON
You’re best advised to enlist the help of a tax professional after moving to London to help you sort the complexities. As an American expat myself, I consult advisors in both the UK and my home country to have any semblance of a grip on the situation, but I can at least tell you the following in brief…
As US citizens, our worldwide income is taxable by the US no matter where we live or where our earnings are paid. And, of course, any income you continue to receive in the US is taxable: e.g., rent, interest, capital gains, etc.
However, as US expatriates, we do have a couple of special provisions to minimize our overall liability:
- Foreign tax credit – The US and UK governments have a tax treaty that ensures Americans in the UK don’t face double taxation. That is, we aren’t taxed on the same dollar of income twice.
- Exclusions on foreign-earned income and housing– To a certain extent, those of us moving to London can elect to exclude either or both our foreign earnings and housing costs from US taxation. However, we can’t claim these exclusions against the same dollar of income as we claim the foreign tax credit mentioned above. Electing these exclusions is also contingent on qualifying for the following conditions:
- tax home: Our tax home (principal place of employment/business) must be established in a country outside the US (presumably the UK if you’re moving to London), a requirement that is generally met if working abroad for over a year.
- bona fide residence OR physical presence test:
- We pass the bona fide residence test if considered a valid UK resident for an uninterrupted period of time covering at least one calendar year.
- We pass the physical residence test if physically residing outside the US for at least 330 of 365 days (the 330 days need not be continuous, and the tax home must be outside the US during that time)
Another tidbit to bear in mind when it comes to filing your taxes after moving to London: the two countries’ tax years are different. The US tax year is based on the calendar year beginning/ending January 1st – December 31st, whereas the UK tax year runs April 6th – April 5th. You’ll, therefore, need to calculate your UK earnings during the twelve months of the calendar year (not April-to-April) and convert them to USD for your US tax return.
Also, if you’re living and working in the UK full-time, you have until June 15th to file your US taxes rather than April 15th. This is an automatic extension granted by the IRS. If you need more time, you can then file an extension for October.
WHAT HAPPENS IF YOU DON’T FILE US TAX RETURNS AFTER MOVING TO LONDON
Uh, let’s just say file your US taxes every year that you live abroad. Yes, it’s a nuisance. And, yes, it can be expensive (and seem nonsensical) to pay a tax advisor when you don’t even owe US taxes.
However, the IRS is closing the tax net on those American expatriates who haven’t filed their US tax returns while living in the UK. Per an agreement reached last week between the two nations, foreign banks have until 2015 to identify all of their US clients, whose information (name, address, income, account numbers and balances) must be reported to HM Revenue & Customs (HMRC), which then transfers these details to the IRS. Banks will start by pinpointing their highest-wealth clients (those with holdings exceeding $1m) and determining whether they’re American; they’ll also search their databases for US addresses, places of birth, phone numbers, and pending fund transfers to the US. This process must start as of 2013.
HOWEVER: Only those US expats with foreign bank holdings of over $50,000 are affected by this new ruling. And, among them, those estimated to owe less than $1,500 in taxes for any year during which they didn’t file are deemed “low risk” and can bring their reporting up to date without penalty.
If that’s the best-case scenario for low-compliance risks, the worst-case for higher-risk citizens are penalties of half (if not exceeding) the overseas account balances they’d failed to report. Ouch! And anything between best and worst will be severe enough, though varying substantially case by case.
ANY EXIT RAMPS OFF THIS ROAD TO REPORTING?
First of all, if you’re an American moving to London for the long-term and will ultimately apply for citizenship, becoming a UK citizen does NOT mean renouncing your US citizenship. You can be both. A primary reason why some dual citizens will relinquish their US citizenship, however, is to avoid US taxation. If this could be you down the road, just be aware that the US government won’t allow you to give up your US citizenship unless all your tax obligations are met.
Second, now that tax lawyers are getting inundated with concerned calls, they’re advising that US citizens living in Britain not try to remain under the radar by spreading their funds around—there are voluntary disclosure schemes that can make achieving compliance easy enough.
Moral of the story, if you’re moving to London from the US, just remember you are still accountable for your US tax returns, so compile your relevant documentation in tandem with what you need for your UK taxes. Too many US expats have received the unpleasant shock of the IRS’s reforms—not because they deliberately evaded US taxes but because they simply didn’t know they had to file. I know, it’s not fun adding one more complication to moving abroad to London, but the more you’re aware, the less “taxing” it will be!