ARE YOU AN AMERICAN LIVING IN LONDON, UK?

In the UK there are two types of Americans…

The first is Americans that have recently moved to the UK. They could be here for just a few years on a work consignment or have moved permanently. The second type is a US citizen that has been in the UK for many years, they may be a dual national or Accidental American.

An Accidental American is a person who has US citizenship, but they may not have been aware of it. Perhaps they were born in the United States and moved to the UK when they were very young, or simply inherited US citizenship from one of their parents. As an example, if you have an American mother and British father, you could have US citizenship without knowing about it. Either way, once you’re a US citizen, you’re open to the US taxation system.

Boris Johnson MP left the United States when he was 5 years old and moved to London with this parents. When he was 55, he sold his London apartment. The IRS came after him for Capital Gains Tax. The amount he paid is undisclosed, but based on the profits from the sale of his London apartment, we estimate it was in the tens of thousands.

The US tax system is based on US citizenship. Almost every country has its taxation system based on residency, except the United States and Eritrea. The US tax system requires all US citizens and Green Card holders to declare their worldwide income each year on a US tax return.

Not everybody has to file a US tax return! The IRS (Inland Revenue Service) set out filing thresholds which determine who has to file and who does not. Your filing threshold depends on your filing status. We’ll go through different filing status types later. As a broad rule, if you’re working and earning, you’ll need to file US tax return.

There is a big difference between filing a US tax return and paying US Tax. Hundreds of thousands of Americans based in the UK file US federal tax returns every year. Only a very small percentage have to actually pay any US tax.

Income tax rates are much higher in the UK than they are in the United States for the equivalent salary. We take the tax that you’ve paid in the UK, and we raise something called a foreign tax credit. We use the foreign tax credit to offset your US tax liability. Tax rates in the UK are much higher than they are in the US, so for the large majority, there is always enough “credit” to offset their US tax liability.

Things can get a little more complicated if you own a limited UK company. Many company owners pay themselves a small salary and the rest in dividends to take the best advantage of the UK tax system. Dividends are not classified as earned income, they are classified as investment/passive income, so you need two types of foreign tax credit, both earned and passive.

If you’re self-employed or a contractor, you can still use the foreign tax credit method.

The foreign tax credit method is not the only way to file a US tax return from the UK, but it is the most beneficial. Parents with children under the age of 17 may be eligible for the US child tax credit refund, even without paying any US Tax. This is only possible with the use of foreign tax credits.

Be very careful of filing a US tax return using Form 2555 from the UK. This form is also known as the Foreign Earned Income Exclusion. This form is really designed for American citizens living abroad in a very low or zero tax country. Get professional US taxation advice before using this form, you could be missing out!