UK Nationals Across the Pond Can Still Get Taxed on Both Sides

In some scenarios, income and capital gains are taxable in both the UK and the US under domestic rules. The UK–US double tax treaty can effectively override domestic legislation and prevent double taxation either by allowing one country to take a credit for the tax paid in the other, or by giving one country exclusive taxing rights. This varies for each source of income and capital gains.

The position is more complex for US citizens or green card holders, but this discussion focuses on British expatriates who don’t fall into this category.

Income Tax

This is restricted to UK source income only—although certain types of UK source income are classified as “disregarded income” and are effectively exempt from UK tax, such as interest and dividends.

UK rental income. Rental income from a property situated in the UK is always subject to UK income tax.

The default position is that the letting agent or tenant must withhold tax at source before this is paid to the landlord. Alternatively, a Non-Resident Landlord application can be made to the UK tax authority, HM Revenue & Customs, to request the rental income is paid gross. If approved, the tax due on the rental profit is paid via a self-assessment tax return.

Under the DTT, the UK has primary taxing rights over the rental income, but the US is still able to tax. To prevent double taxation, credit is given in the US for the UK tax paid.

Employment income. Employment income received by a nonresident can be subject to UK income tax if duties are carried out in the UK. Normally, earnings are prorated between UK and overseas workdays to arrive at the UK chargeable amount. The treaty allocates primary taxing rights to the UK in relation to the UK element.

However, Article 14 (2) of the DTT can prevent a UK tax charge arising if certain conditions are met, in which case earnings are taxable in the US only.

Share options and bonuses. Put simply, if an individual was granted share options while resident in the UK but these are exercised following their departure, the gain may be time apportioned between grant and exercise. The gain that falls within a period of UK residence will be subject to UK income tax.

A similar treatment can apply to bonuses paid while the individual is non-UK resident but the earnings period includes a period of UK residence.

Relief from UK tax is usually claimed via a UK tax return.

UK pensions. The pension rules are complicated, and someone should always seek advice both in the UK and the US before making a withdrawal, especially if it is a lump sum.

The starting point is that the country of residence has the exclusive right to tax pension income. Therefore, UK pension income will normally be subject to US tax only, if received while an individual is resident in the US.

There are special rules where a lump sum is taken, or the amount withdrawn is the 25% tax-free cash element. If structured correctly, the US will be obliged to recognize the UK’s tax-free treatment and won’t apply US tax to the amount withdrawn.

Once a non-UK resident, an individual can continue to contribute to a UK pension scheme (subject to scheme rules). However, if they receive no UK taxable earnings, the amount they can contribute and receive tax relief for is limited to £3,600 ($4,500) gross per year and is only available for up to five years.

Individual Savings Accounts. It is possible to retain existing ISAs following departure from the UK, with the same UK tax advantages. However, it’s not possible to contribute further sums. The US doesn’t recognize the same tax-free status, so any income and capital gains realized within the ISA while the individual is resident in the US will be subject to US tax.

Capital Gains Tax

Non-UK residents are generally outside the scope of UK CGT with some exceptions:

UK land and property. Gains realized on UK land and property will always be subject to UK CGT.

For UK residential property, the default method for calculating the gain is to use the market value on April 5, 2015 as the base cost. If the property was at some point used as a main home, principal private residence relief may apply.

For non-residential UK land or property, the individual will only be liable to CGT on any gain accrued post April 5, 2019.

To avoid double taxation, any CGT paid in the UK will be allowed as a credit against the US tax due on the same gain.

A UK property return must be submitted to HMRC, and any CGT paid within 60 days of completion (even if there is no UK CGT due).

Property rich entities. UK CGT is also levied on disposals by nonresidents of an interest of 25% or more in a UK “property rich” entity—broadly a company that derives at least 75% of its value from UK land. Again, the gain is calculated with the benefit of rebasing to April 5, 2019.

The position is more complex in relation to collective investment vehicles (such as UK real estate investment trusts), where the gain can be caught even if the investment is below 25%.

Inheritance Tax

Exposure to IHT is dictated by domicile status and not residence status. Even though UK residency has ceased, an individual may still be exposed to UK IHT.

There is a separate estate and gift tax treaty to consider should the person fall within the scope of US estate tax and UK IHT.

Temporary Nonresidence Rules

The TNR rules apply where someone was UK resident for at least four out of the previous seven tax years prior to departure and nonresident for five years or less. In some cases, a nonresident period of six complete tax years is required to avoid these rules.

If these rules apply, certain types of income and gains received during a period of nonresidence are taxable in the UK in the tax year of return, including:

Dividends from a close company (controlled by five or fewer shareholders).
Chargeable event gains on life insurance policies.
Certain types of pension income.
Capital gains realized on assets held prior to departure.

If the asset sold benefited from rebasing (for example, UK land or property), the gain will need to be recalculated using the original base cost. This may result in further CGT falling due.

Where the TNR rules apply, the UK–US DTT won’t protect from a UK tax charge.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alice Pearson is a partner in the private client team at Mercer & Hole accountants.