Americans Moving to the UK – A Guide to FATCA and the Tax Obligations
“Death, taxes and childbirth – there’s never a convenient time for any of them” – Scarlett O’Hara, ‘Gone with the Wind’.
The taxing of Americans living abroad can be traced back to 1861 and the American Civil War. To deter wealthy citizens fleeing the country to avoid being drafted, the Revenue Act called for duties to apply on income:
‘Whether such income is derived from any kind of property, or from any profession, trade, Employment, or vocation carried on in the United States or elsewhere, or from any other source whatever.’
Following the 2008 financial crisis, once again Uncle Sam cracked down on anyone holding a Green Card attempting to move their wealth or income abroad by passing the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR) in 2010 to ensure Americans abroad were paying taxes back home.
American citizens living abroad do not necessarily have to face a tax headache, especially if they move to a country such as the UK which has a tax treaty in place with the US, although the IRS’s obligations on American expats are notoriously complex. For most senior executives transferring from a US to a UK based office, a good accountant will ensure that your self-assessment is complete on time and you only have to pay tax to the HMRC.
For high-net worth individuals and entrepreneurs, the situation can be more complicated. In some situations, if you plan to make the UK your permanent home, becoming a British National and renouncing your American Citizenship may be worth considering, from a financial point of view.
Whatever the case, when planning your move, it is imperative that you discuss your obligations and options with a legal and accountancy professional.
The basic tax requirements of US citizens residing in the UK
No matter where in the world you are, the long arm of the IRS can reach you. America has one of the strictest tax regimes in the world and the starting premise is – if you are an American Citizen then you pay tax to the IRS on your income, no matter where in the world it is earned.
Tax Returns
All American citizens living abroad must file an annual tax return by 15th April (US citizens living abroad are automatically granted a two-month extension (bringing the filing date to 15th June); however, you will have to pay interest on any tax not paid by the regular due date of your return.
Statute of Limitations
If you fail to file your US tax return in any given year whilst you are living abroad, the Statute of Limitations never expires. Failure to file returns can lead to the IRS estimating your income and lead to massive interest and penalties being added to the original tax owed.
For returns that are filed, in the absence of fraud, the IRS can only go back to audit or change those returns within three years.
The best course of action is to file a return every year you reside abroad, even if you are earning no income or do not owe money to the IRS, to ensure the Statute of Limitations runs on each return.
Tax Treaties
The US has signed a number of tax treaties, including one with the UK, to prevent ‘double taxation’ of Americans living abroad.
employees who are paying income tax in the UK can use the foreign tax credit and the foreign earned income exclusion to avoid paying any tax in the US.
Self-employed people will need to opt out of American social security taxes by claiming the benefits of the US/UK totalisation agreement in the US, even though they may be paying National Insurance. Opting out requires filers to obtain a certificate of coverage from HMRC’s National Insurance Contributions Office. A photocopy of this must be attached to the income tax return each year as proof of the US exemption.
Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR)
To claw back an estimated $US8.5 billion in avoided taxes, the Obama administration passed the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR) in 2010.
FACTA require foreign banks to report on how much money is held by American citizens who have bank accounts with them. FBAR requires U.S citizens to file an annual report if their total bank balances exceed $US10,000.
FACTA requirements have proven to cause big problems for Americans living abroad, especially business owners, as many financial institutions will now turn US citizens away rather than face the avalanche of paperwork required to comply with FACTA. If banks do not comply with FACTA requirements the US Treasury will impose a 30% withholding tax.
Property and Pensions
American citizens who sell a property in Britain which is their main home will be expected to pay capital gains tax in the US, even if the tax is not payable in the UK.
Tax-free UK benefits such as ISAs and pensions are treated as foreign trusts by the IRS, and taxed accordingly.
Renouncing American Citizenship?
Although FACTA and FBAR were designed primarily to prevent extremely wealthy people hiding money offshore and not paying tax, the regulations have meant that average American citizens, transferring to UK-based offices or wanting to expand their business to Britain, are now subject to a mountain of paperwork and large accountancy fees.
One of the only exit route available to avoid being subject to these regulations is to renounce US citizenship. The number of people taking this route has increased significantly in the past few years, with 1,131 cases in the second quarter of 2013, compared with 189 in the same period the year before.
Anyone wishing to give up their American citizenship must be up-to-date with their taxes before they apply, and of course, you must be eligible for citizenship in another country.
You can apply to become a British Citizen if you meet the following criteria:
- You have lived in the UK for at least five years
- You meet the residency requirements (i.e. you have not spent more than 450 days outside the UK in the last five years)
- You meet the English language requirements
- You pass a Life in the UK test
- You are of ‘good character’
Conclusion
The impact of your tax obligations to the IRS if you are an American citizen residing in the UK will depend on a number of factors; such as the amount of property you own, whether or not you are self-employed and the amount of money held in your bank account. Owning shares in a foreign company and/or being a beneficiary of a trust can further complicate matters.
It is imperative that you file the relevant returns and reports when they are due and seek sound financial and legal advice regarding your obligations to avoid fines and interest being added to your final tax bill.
OTS Solicitors has a strong reputation for being one of the best Immigration law firms in the UK and we have years of experience advising US Citizens residing in the UK on their tax obligations to the IRS. You can make an appointment with one of our experienced Immigration solicitors by phoning our London office on 0207 936 9960. We can arrange Skype calls if you are currently based in the USA.
Our expert Immigration lawyers look forward to hearing more about how we can assist you with your application.