Expat Taxes Pros and Cons while living in the UK
Updated on April 16, 2025
Reviewed By
Rose-ann De Villa, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UK.
Rose-ann has been mentioned in the Daily Express UK news wherein she talked about Stimulus payments and Child Tax Credit refunds for US expats in the UK. *Schedule a consultation with Rose-ann today.
*30-minutes US$347.
Table of Contents
What are the pros and cons of US taxes while living in the UK?
Pros:
- The US-UK tax treaty
- Claiming Foreign Tax Credit (FTC) & Additional Child Tax Credit (ACTC)
- Claiming the Foreign Earned Income Exclusion (FEIE)
Cons:
- Potential double taxation
- Complex reporting requirements on certain investments
- Worldwide taxation
Residing in a foreign country such as the UK can be challenging for a US citizen because of the tax implications it brings. Proper planning and staying informed in both countries can effectively manage the cons and maximize the pros of living in the UK.
How does the US tax system compare to the UK?
The US tax system operates differently from the UK system but they also have some structural similarities. Both countries operate on a progressive tax system for income and corporate taxes.
The US taxes individuals based on citizenship, while the UK system emphasizes residency and domicile status. As a US citizen living in the UK, you will automatically be subject to US and UK taxes.
Additionally, they differ in tax year so US citizens will have to take note of more dates and deadlines. This discrepancy can affect how and when US expats file their taxes.
What tax obligations do US citizens face when living and working in the UK?
Below are common tax rules that expats encounter:
- Income tax: You will be taxed by the HRMC as a UK resident earning income in the UK. Additionally, the same income is subject to US tax laws as a US citizen.
- VAT: You will be taxed by the HRMC on goods and services that you consume in the UK.
- Capital gains tax: Your capital gains will be taxed by both the UK and the US, but the two countries handle capital gains differently.
How can I avoid double taxation?
Since it was established that all income you generate is potentially taxed by both countries, paying taxes to both countries doesn’t mean you will owe double. Here are tools to offset one with the other and avoid double taxation:
- Foreign Tax Credit (FTC): This is a dollar-for-dollar credit on your US taxes for the taxes you already paid to the UK. This applies to earned income, dividends, interests, capital gains, and others.
- Foreign Earned Income Exclusion (FEIE): This will allow you to exclude your UK-earned income altogether when paying US taxes. However, this does not apply to your passive income or capital gains in the UK.
- US-UK tax treaty: This can resolve which country gets to tax you on your pensions, social security, dividends, and interests. This can reduce tax on specific income types.
- US-UK totalization agreement: You now get to pay only for one country’s social system.
You’re essentially in a unique position of being required to file and potentially pay taxes to two countries on the same income. Thankfully, these tax provisions and smart planning can help you avoid paying taxes twice.
Need help with your US tax obligations in the UK?
Chat with our experts today.
What do I need to report as a US citizen living in the UK?
Here is a list of the compliance requirements you may need to report:
- FBAR (FinCEN 114): If you have foreign accounts (UK account) with a combined highest balance that exceeds US$10,000.
- FATCA (Form 8938): If you hold foreign financial assets above US$200,000 for single filers. (US$400,000 for married filing jointly)
- Foreign pensions: If you hold foreign pensions, such as Self-Invested Personal Pension, they may need to be reported on Form 3520 or 8938.
- UK ISAs: These accounts are not tax-free under US law, so interest/dividends must be reported and if you invest in a Stocks and Shares ISA, you can be heavily taxed along with expensive US tax compliance filing requirements.
Are there tax considerations for US citizens owning property in the UK?
Yes, there are significant tax considerations that can lead to unexpected liabilities or reporting obligations. Property taxes in the UK are known as Council Tax for residential properties.
You can benefit from Private Residence Relief when you sell your primary home in the UK, which means little or no capital gains tax (CGT) in the UK. The US has a similar tax benefit: a home sale exclusion of up to US$250,00 for single filers (US$500,000 if married filing jointly).
Rental income from UK property is subject to UK income tax. US citizens and Green Card holders must declare this income on their UK tax returns and report it to the IRS using Form 8858. Usually, foreign tax credits are available to prevent double taxation.
How do pensions and retirement savings affect US expat taxes?
UK pensions always work under UK tax laws; however, this can be different when these are translated into US tax laws.
One subject that catches out US citizens is the UK 25% lump-sum tax-free pension withdrawal. UK residents with a pension can withdraw 25% of the balance tax-free upon retirement. The bad news for US citizens and Green Card holders is that the IRS considers the 25% lump sum taxable income.
Additionally, reporting these pensions and savings is where many people get it wrong. Some UK pensions (especially SIPPs) may be classified as foreign trusts, which could result in additional reporting requirements such as Form 3520 / 3520-A. These forms are very complex, and failure to file can mean US$10,000+ penalties per year.
It’s essential to understand how the UK-US tax treaty may affect this, as it can provide relief from double taxation.
How can a tax professional help me?
A tax professional, especially one trained in both US and UK tax law, can be your strategic partner in tackling taxes for both countries.
They can help you with your annual tax return filing with different deadlines. Maximize the benefits available for your situation and discover more ways to effectively minimize your tax obligations.
Additionally, when you plan on retiring or moving out of the UK, there are necessary steps and obligations you’ll need to fulfill, which can take years of careful planning in which a tax professional can guide you to what you will need to do.
Seeking professional tax advice for US expats can help them navigate complex tax systems and ensure compliance with tax laws in the UK and their home country.
FAQs
What are the advantages and disadvantages of living in the UK as an expat?
- Access to NHS (National Health Service), the UK’s healthcare service.
- Public transport is more affordable than car ownership in urban centers.
- Expensive housing, high taxes, costly groceries/utilities.
- Cars and petrol (gas) are much more expensive than in the US.
What is the concept of double taxation?
Double taxation happens when two countries tax the same individual on the same income. For US expats, it most often refers to being taxed by both the US and the country you live in (like the UK).
Do I lose US citizenship if I live in the UK for the long term?
No, you are still a US citizen unless you formally renounce it through the US Embassy and file an exit tax return.
