Rose-ann De Villa, CPA, EA
Tax Manager | Filing from the UK | Renunciation
✔ IRS qualified Enrolled Agent (EA)
✔ Federally authorized to practice before the IRS on all US tax matters
✔ Philippine Certified Public Accountant (CPA)
✔ Degree in Bachelor of Science in Accountancy (BSA)
Meet Rose Ann…
2023 marks my 12th year of expatriate taxes experience in a career which started with SGV & Co. (an Ernst & Young affiliate based in Makati City). Since obtaining my Philippine CPA license in 2011, I have specialized in taxation for Philippine and American expatriates and have become knowledgeable in Philippine and U.S. federal and state tax returns preparation. To further enhance my knowledge in U.S. taxation, I passed the Internal Revenue Service (IRS) Special Enrollment Examination (SEE) in 2017.
In recent years, I have been working with American clients based in the United Kingdom with high salaries and UK-based business ownership.
Watch Rose Ann in action…
American expat living in or arriving to the UK
If you are an American expat living in or arriving to the UK, you will need to file your US taxes. This goes for any US citizen, dual national or Green Card Holder in the UK, even if you are no longer earning US income. Just because you are not earning income in the US, your US tax filing requirements do not stop. The US tax system works on a citizenship basis, so if you hold US citizenship, you are taxable on your worldwide income. For example, if you are not earning US income but have an employment contract in the UK, this must be reported on a US tax return.
Who doesn’t have to file?
A typical example of an American in the UK who does not have to file a US tax return is a university graduate, who has come to the UK for an internship. With an internship you likely only earn $6,000 for the calendar year. As a single filer, this is below the $12,200 threshold (even once converted from GBP to USD), and you do not have to file.
When do ISAs become a problem for American expats?
ISAs are very common in the UK, as no further UK tax is due on the income generated in an ISA and they are free of capital gains tax. However, they can be very problematic for US citizens or Green Card Holders.
When ISAs become problematic for US citizens or Green Card Holders depends on the type of ISA. If it is just a cash-based ISA, then there is no issue – you will just have to report the value of the ISA on your FBAR or Form 8938 (Statement of Specified Foreign Financial Assets). Whatever interest the cash-based ISA generates will be reported as interest income on your US tax return.
The more common type of investment ISA, a Stocks and Shares ISA, is more complicated for US citizens or Green Card Holders. The UK does not tax these ISAs, but the US does tax these and taxes them more harshly than a regular investments account.
A Stocks and Shares ISA is considered a Passive Foreign Investment Company (PFIC) and you will therefore have to file additional paperwork attached to your US tax return. In this additional paperwork you will need to compute the account earnings that are taxable in the US – which, if you don’t have any other regular investment account that you pay UK tax for, you will have US tax on. Income and gains will be taxable as under US PFICs.
If I’m an American living in the UK, is it worth having a stocks and shares ISA?
The benefit of having a stocks and shares ISA in the UK is outweighed by the costs on the US side
This is because the US does not want US persons to invest outside of the US, so they impose harsh taxes. If you do not do paperwork properly, you can be subject to the highest US tax rate of 39.6%.
The IRS will tax you on the profits of the PFIC even if you have not sold them. Effectively, you could make a profit on paper in your ISA that the IRS will want to tax you on before you have the funds in hand. Your unrealised gain is being taxed, so you may wonder if there are any exemptions or exclusions to tax on your PFIC. There are ways in which you can have the income taxed at a lower level, but it is dependent on each individual situation and respective income. You can elect either a mark-to-market or Qualified Electing Fund (QEF) treatment for your PFIC.
For the small returns of an ISA, it is outweighed by the reporting fees and harsh US taxes. We recommend that you make sure you only have a cash ISA.