Property Developers, Property Investors

Americans living and paying tax in the UK

simon

Simon Misiewicz

7th September 2021

The frequently asked questions about Americans applying for a UK VISA

As expert tax accountants working with clients in the UK and US, we are regularly asked about advice from Americans applying for a UK VISA. We will look to answer the below questions in this Article.

“Are you paying too much tax when moving to the UK?”

“Should you speak to a British accountant before moving to the UK?”

“What are the basics of applying for a UK VISA from the USA?”

“Can Americans get UK VISAs?”

“How long can a US citizen stay in the UK?”

“What are the routes for settlement in the UK as a US citizen?”

“Do different entry regulations into the UK affect Americans?”

“Can I get a UK VISA if I intend to set up a business there?”

“What if my US employer wants to send me to the UK?”

“Does having a British spouse help get a UK VISA?”

“Can I get a UK VISA if I have British ancestry?”

“What are the tax requirements of US citizens living in the UK?”

“How does this affect our UK readers?”

What are the basics of applying for a UK VISA from the USA?

As property accountants serving thousands of UK and US landlords who purchase buy to let properties, we know it can be an intimidating prospect for many American clients looking to apply for a UK VISA.

According to the 2011 UK Census, 173,470 US-born residents were living in England.

The Office for National Statistics estimated that 197,000 US-born immigrants were resident in the UK in 2013.

The regulations around entry to the UK for foreign nationals, including American citizens, are governed by the UK Border Agency (UKBA).

Unlike the US, the UK does not have a ‘VISA waiver programme’, and as such, anyone who enters the UK and doesn’t have the right of abode in the UK will need a VISA to stay.

The US is included as one of the UK’s ‘designated’ countries, which means that in many instances, American citizens coming to the UK in a tourist or business capacity will be able to apply for a UK VISA on arrival.

The process for Americans applying for a UK VISA involves:

– Establish which UK VISA you will need
– Complete the online UK VISA application form
– Book an appointment to provide Biometrics
– Attend a VISA interview

Different types of UK VISAs have different requirements for Americans applying for a UK VISA to consider.

These different types of UK VISA include the following:

– UK Business VISA
– UK Work VISA
– UK Visitor VISA
– UK Transit VISA
– UK Family VISA
– UK Student VISA

Americans applying for a UK VISA should apply here.

If you’re unsure how to relocate from the US to the UK and want tax advice, please book a consultation with us here.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

How long can a US citizen stay in the UK? 

Americans can visit the UK as a tourist and stay for up to six months without a VISA.

To stay longer, you’ll need to qualify for one of the UK VISAs highlighted above.

Family ties, established UK business connections, and dual citizenship with a Commonwealth country such as Canada can all help.

What are the routes for settlement in the UK as a US citizen? 

Several UK VISA categories can lead to settlement for Americans applying for a UK VISA, including:

– Unmarried Partner VISA
– Spouse VISA
– Tier 1 Entrepreneur VISA
– Tier 1 Investor VISA
– Tier 2 Work Permit
– Tier 2 Intra-Company Transfer

All of the above UK VISA categories may lead towards the holder being granted Indefinite Leave to Remain.

This status means that the person does not hold the right to abode in the UK but is admitted without any time limit on their stay and free to seek and take up employment or study in the UK without any restrictions.

Do different entry regulations into the UK affect Americans? 

Different entry types are allowed under different UK VISAs, so it is important to ensure that you apply for the correct type.

UK Tourist VISAs allow Americans to enter the UK without the need for some of the formal routes of immigration.

Tourist VISAs are valid for up to six months, as long as you can prove you intend to visit for no longer than six months and that you have enough funds to support yourself in the UK without working or attempting to draw public funds.

A Business VISA enables Americans to be based abroad but do business in the UK without transferring their permanent base to the UK.

A Business VISA does not allow Americans to sell goods or services directly to public members and does not cover coming to the UK to do work placements or internships.

Gaining a Partner VISA enables an American to apply for a UK VISA to enter the UK for marriage or forming a civil partnership.

UK Work VISAs are specifically for Americans entering the UK to seek employment or take up a job offer in the UK.

Student VISAs are focused on Americans looking to take up studying commitments in the UK.

Can I get a UK VISA if I intend to set up a business there?

Some Americans may be looking to set up a business in the UK, work as freelancers, or be self-employed.

The Tier I Entrepreneur route allows Americans to be self-employed in the UK.

The conditions for this VISA include providing a detailed business plan outlining the proposed business in the UK.

They must also show that they have at least £200,000 of funds available to invest in a viable and genuine UK business that will create at least two full-time jobs for at least 12 months by the end of the person’s initial VISA.

Family members and unmarried partners, and children under 18 can also come with the individual.

This UK VISA does not allow an American to work in other businesses or to take UK employment.

Does having a British spouse help get a UK VISA?

If your partner, spouse, civil partner or unmarried partner is a British citizen, you can apply for settlement through a Spouse VISA to join them in the UK.

It needs to be proven that your partner has already started working in the UK, earning at least £18,600 per year or offered a similar level role in the UK.

Alternatively, it is acceptable for an American couple to demonstrate savings worth the equivalent of £62,500.

These applications can take between three to 12 weeks, and you will need to prove you are in a genuine relationship and that you have suitable accommodation organised in the UK.

Can I get a UK VISA if I have British ancestry? 

Americans apply for a UK VISA that are citizens of a Commonwealth country and have a UK-born grandparent can live and work in the UK.

You must intend to work in the UK and show that a job offer has been made or realistic prospects of obtaining employment in the UK.

Many US citizens have European ancestry, and in some cases, they can obtain EU passports.

Are you an American paying too much tax in the UK?

Our UK and US tax specialists help over 1,000 monthly retained investors to minimise tax whilst building their wealth.

There are many reasons why some Americans living in the UK pay far more tax than they need to.

This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.
– Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

Why do Americans pay tax in the UK?

Americans pay tax in the UK based on set income tax rates ranging from 0% to 45%.

The percentage of taxes paid by Americans living and working in the UK increases as income increases in different bands. These tax bands are called tax brackets in the US.

US ex-pats have to pay tax on income in the UK, including wages, benefits, pensions and savings interest.

Income tax is also paid on any income above the personal allowance.

Americans do not have to pay tax in the UK if only making short business trips, training courses, or work meetings.

If you’re employed in the UK, your employer will deduct Income Tax from your wages.

If you work for yourself or have other UK income, you must send a Self Assessment tax return to HMRC.

Americans living in the UK may also have to send a tax return to HMRC if they:

– made a profit when selling certain assets such as shares or a second home
– have to pay UK tax on foreign income such as savings in an overseas bank account, rent on a property that is let out, or an overseas pension (this depends on being resident in the UK or not)

Americans may also have to pay tax on UK income or gains made while abroad if they have lived in the UK before.

It is important to find out about the tax requirements for Americans in the UK before moving here.

UK Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge, and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce them. Download today, save Tax tomorrow.

£9.95 to download

Buy Now

What are the basics for Americans living and paying tax in the UK?

As UK tax accountants serving thousands of landlords that purchase buy to let properties, we know that the basics for Americans living and paying tax in the UK can seem complex and difficult to navigate.

According to the 2011 UK Census, 173,740 US-born residents were living in England.

The Office for National Statistics estimated in 2013 that there were 197,000 US-born immigrants resident in the UK.

In London, most Americans are business people and their families with strong ties to the economic relations between the City of London and New York City and Washington.

Chelsea and Kensington both have large American communities.

What is the UK equivalent to the IRS?

The UK equivalent to the IRS is HMRC, which collects taxes, administers some regulatory systems such as the national minimum wage, and is responsible for payment of some state support and welfare.

To work in the UK and subsequently file tax returns, Americans living in the UK need to file for a National Insurance number. This can be obtained through Jobcentre Plus.

You will need proof of identity, proof of residence or civil partnerships, and residence permits.

The UK tax system is similar to the US tax system whereby tax is levied as you earn your salary, wages, business income and investment income.

Payroll taxes are called Pay As You Earn (PAYE) taxes. PAYE includes your income tax and national insurance contributions. The tax rates are progressive, meaning the more you earn in the UK as an American, the higher your tax rate for each additional dollar of income.

If you’re an American looking to live and work in the UK, speak to a British tax accountant before you move.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

Who needs to file a UK tax return? 

The UK is a popular choice for American ex-pats. It is vital to understand how living in the UK affects your US ex-pat taxes and what taxes you must pay to HMRC while living in the UK.

HMRC issues tax return forms to individuals.

If HMRC determines that you have paid enough tax through your payroll withholding as an American living and working in the UK, they may not send you a tax return.

Employees that earn more than £100,000 will have to file a UK tax return to HMRC. This is because you start to lose your annual personal allowance, which needs to be reflected in the tax calculations.

You will not then have to file a tax return unless you have other income or specific circumstances.

If you have other income sources, such as self-employment or investment income, you will need to file a tax return and pay taxes on that income. That said anyone that has self-employment earning less than £1,000 will avoid the need to file a self-assessment tax return to HMRC.

What other instances would you need to file a UK tax return? 

Other instances where Americans living in the UK would need to file a tax return include:

– Income from renting out property
– Profits earned from selling shares, a second home, or assets resulting in capital gain
– Income earner from non-UK sources while you lived in the UK
– Income of £100,000 or higher

You may also want to file a tax return to claim deductions, which can help reduce your tax liability in the UK or get a refund from HMRC.

Common allowable deductions for Americans living and paying tax in the UK include donations to charity, private pension contributions and work expenses over £2,500.

Do you still need to file a US tax return?

Regardless of where you live, you must file ex-pat taxes in the US.

US citizens and permanent residents are required to file ex-pat tax returns with the federal government every year. Along with the usual tax return for income, many are also required to submit a return disclosing assets held in bank accounts in foreign countries, including the UK, by using FinCEN Form 114 (FBAR).

The US is one of only a few governments that tax international income earned by their citizens and permanent residents living overseas.

The IRS has produced guidelines for Americans living and paying tax in the UK, which are worth reviewing.

What is the difference between a UK resident and a UK domicile?

Defining if you are a UK resident is decided by guidelines produced by HMRC.

Residency in the UK is usually determined by an individuals long-term intentions and how many days they are physically present in the UK.

If you are in the UK and do not intend to stay for more than two years, you are a resident for the tax year if 183 days or more are spent in the UK.

If you spent 91 days or more on average per year in the UK during the last four years, you would be considered by HMRC a resident for tax purposes.

What are the types of UK residents? 

There are two types of UK residents: ordinarily and non-ordinarily.

Resident and ordinarily resident: when you come to the UK and expect to stay for three years or more. This can be proven by purchasing or leasing property.

Resident and not ordinarily resident: when you have been outside the UK and intend to come for at least two years but less than three years.

What is your Domicile Status?

Domicile status is important for UK tax purposes in terms of factoring in your worldwide income.

Domicile is decided by UK law and is defined as an individual’s long-term, permanent home. It is not the same as citizenship, nationality or residence status.

Your domicile of origin is the same as your father’s domicile at the time of birth.

If your father changed domicile while you were still a dependent, your domicile would also have changed.

To acquire a different domicile, you must cut links with your previous domicile, move to a new jurisdiction and have a permanent home in that jurisdiction.

Most US ex-pats in the UK are considered non-UK domiciled.

If you are unsure about the differences between being a resident and a domicile, it’s advisable to speak to one of our UK and US tax advisors before moving to the UK.

Are there tax deadlines for Americans in the UK? 

The UK tax year is different from the US tax year, which is important to note when moving.

In the UK, the tax year is 06 April to 05 April. Tax returns need to be filed with HMRC before 31 October of the tax year if filed by paper.

If you are e-filing, you have until 31 January of the year following the tax year.

HMRC does not offer extensions to Americans living and paying tax in the UK.

The UK has a withholding system (PAYE) that will go through your employer’s payroll for payment.

For non-wage income that does not have withholding, payments are due on 31 January of the tax year. Payments must be completed by 31 July of the following tax year.

If you’re living in the UK on US tax day (which is usually 15 April), you receive an automatic two-month extension from the IRS to file your federal ex-pat tax return. This makes the due date for your US tax return 15 June.

Our UK and US tax advisors can assist in helping to ensure you are not subject to late payment fines.

Is an American's foreign income taxed in the UK? 

The tax paid on worldwide income by Americans living in the UK will depend on their residency and domicile status.

If you are considered a resident in the UK, HMRC will tax you on all of your investment income. This will be the same income reported on your US ex-pat taxes.

If you are a resident but not domiciled in the UK, you can file using the remittance basis for foreign income and capital gains.

If you are a resident and domiciled but not ordinarily resident, you can use remittance for foreign income but not for capital gains.

The Remittance basis allows you to elect to be liable to pay UK tax on investment income remitted in the UK.

It is advisable to speak to a good tax advisor regarding overseas bank accounts to avoid costly mistakes for non-UK domiciled residents.

What is the UK-US tax treaty? 

There is a UK-US tax treaty, but this does not prevent Americans living in the UK from filing US taxes.

It contains provisions that can benefit some Americans in the UK, such as those receiving retirement income, sportspersons, students and entertainers.

For most income, the solution provided in the Treaty for US ex-pats to avoid double taxation of their income arising in the UK is to claim US tax credits to the same value as British taxes they have already paid on their income.

If they have income arising in the US, Americans living and paying tax in the UK can claim British tax credits against US income tax paid to the IRS when they file their UK tax return.

The US-UK tax treaty has a clause allowing the two countries to share tax information, meaning the IRS can see what British taxes US ex-pats are paying and vice versa.

British banks also share their US account holders’ contact and balance information with the US Treasury.

The country that receives the tax payment is usually determined by the taxpayer’s resident status in each country.

If you’re unsure of your tax status, speak to one of our experienced UK tax accountants today.

How can Americans save on US taxes while living in the UK?

The US has one of the few governments that tax the international income of their citizens and permanent residents who live overseas.

Certain provisions help protect US ex-pats from double taxation, including the following for US citizens living in the UK:

– The Foreign Earned Income Exclusion allows you to decrease your taxable income on your 2021 US ex-pat taxes by the first $108,700 earned due to working in the UK as a resident.
– A foreign tax credit could allow you to lower your tax bill on the remaining income by certain amounts paid to the UK government.
– A Foreign Housing Exclusion allows an additional exclusion from income for certain amounts paid for household expenses occurring due to living in the UK.

With the many forms of taxation applied to Americans living and paying tax in the UK, it is important to apply all of the exclusions, deductions and credits to your US ex-pat taxes.

Speaking to an experienced US and UK tax advisor can also help minimize or eliminate your US tax bill.

You may be interested in our main Article on UK Tax status if you want to move to the UK or from the UK. You may also be interested in knowing more about our property tax services if you want to invest in the UK buy to let properties.

IRS Form 8938 and FBAR reporting

IRS Form 8938 and FBAR reporting are essential tax considerations for ex-pats with foreign investments.

Form 8938 is used to report specified foreign financial assets if the total value of all specified foreign financial assets is more than the allowed reporting threshold.

FBAR stands for Foreign Bank Account Report and is also known as FinCEN Form 114. If you are in the reporting threshold, it must be submitted annually.

FBAR exists to combat tax evasion, particularly with reporting money and assets held in foreign banks. FBAR must be filed online at the Financial Crimes Enforcement Network (FinCEN).

FBAR dates back to 1970, when it was created as part of the Bank Secrecy Act.

It is not filed with a federal income tax return. FBAR filing requirements apply whenever a US person has a financial interest in or signature authority over a foreign financial account with a value over $10,000 at any time during the calendar year.

Form 8938 is only filed when a person meets the threshold for filing and has to file a US tax return.

If a person does not have to file a tax return, then Form 8938 is not required in that current year.

Should I speak to a tax specialist about IRS Form 8938 and FBAR Reporting?

Certain US taxpayers holding specified foreign financial assets with an aggregate value over $50,000 need to report information about those assets on Form 8938.

This must be attached to the annual 1040 US income tax return.

Since December 2015, certain domestic corporations, partnerships and Trusts that are formed to hold (directly or indirectly) specified foreign assets must file Form 8938.

Since 1970, the Bank Secrecy Act (BSA) requires US persons to file an FBAR if they have a financial interest in bank accounts, brokerage accounts and mutual funds in a foreign country.

FBAR reporting also applies if the aggregate value of all foreign financial accounts exceeds $10,000.

If you’re unsure how to proceed with filing Form 8938 or FABR reporting, it is recommended that you speak to our UK and US tax advisors to ensure your overseas financial affairs are tax-efficient.

UK Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge, and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce them. Download today, save Tax tomorrow.

£9.95 to download

Buy Now

You may be interested in our main Article on UK Tax status if you are looking to move to the UK or from the UK. You may also be interested to know how more about our property tax services if you are looking to invest in UK buy to let properties.

What are the basics of Form 8938 and FBAR reporting?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that many US ex-pats are concerned about their reporting requirements concerning foreign investments held in the UK.

In recent years, the IRS has stepped up efforts to track down delinquent taxpayers and enforce the payment of overdue taxes. American ex-pats have come under increasing scrutiny.

One of the main initiatives introduced was the Foreign Account Tax Compliance Act (FATCA).

FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act, designed to enforce higher tax compliance among US taxpayers with foreign accounts and assets.

FATCA created Form 8938, an additional foreign account reporting requirement over and above FBAR that must be filed with the US Treasury annually.

If a US taxpayer has more than a certain amount of foreign assets, Form 8938 is included as part of their annual Form 1040 filing.

It requires an expanded list of foreign assets not covered by FBAR.

Our UK and US tax specialists team recommend that every ex-pat be aware of FATCA and how it could affect their foreign investments and tax liabilities.

Called a Statement of Specified Foreign Financial Assets, Form 8938 is used by ex-pats to tell the IRS about financial assets held abroad.

When living and working abroad, it is common for Americans to gain different types of foreign financial assets, such as a foreign pension plan or shares in a foreign company.

As a US taxpayer, you must report those foreign assets in your annual taxes and filing Form 8938 is a common way to do this.

The main points to remember about Form 8938 are:

– Not every US ex-pat needs to fill one out
– There’s a hefty fine for not filing Form 8938 (up to $50,000)
– Review the different requirements between Form 8938 and FBAR

An FBAR must be submitted yearly if you are within the reporting threshold.

To complete an FBAR form, you will need your name, Social Security Number (SSN or ITIN), address, details of all joint owners of the account, foreign bank names and addresses and the type of accounts held.

We recommend that you review what the IRS says is required for US taxpayers to do when filing Form 8938, as well as the rules around FBAR reporting.

To speak to one of our UK and US tax advisors about Form 8938 or FBAR, book a consultation here.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

Who needs to file Form 8938?

If you’re a US taxpayer who lives outside of the US and holds a total combined value of foreign assets worth more than $300,000 at any time during the year (or $200,000 on the last day of the year), you need to report it on Form 8938. This is typical of our American clients that invest in property and live in the United Kingdom (UK)

If you live outside of the US and have qualifying assets, including any bank, investment or retirement accounts maintained outside of the US, it is essential to know when the tax year starts and stops.

It can be different in different countries and speaking to the UK and US tax advisor will help clarify this.

What is the difference between Form 8938 and FBAR? 

There are differences between Form 8938 and FBAR, so it is vital to understand them.

Form 8938 is filed with the IRS, but you file FBAR with FinCEN, the US Treasury Department’s Financial Crimes and Enforcement Network.

Form 8938 requires you to report the maximum value of specified foreign financial assets, including foreign financial accounts.

FBAR requires you to report the maximum value in foreign financial accounts maintained by a foreign institution physically located in a foreign country.

Form 8938 is attached to your annual income tax return and is due by the ex-pat tax filing deadline. FBAR must be received by April 15th with a six-month automatic extension available to October 15th.

What needs to be reported on Form 8938? 

Financial accounts held in a foreign financial institution must be reported on Form 8938.

Foreign stock held in a foreign brokerage account needs to be reported, but the stock within the account does not need to be reported separately.

Foreign stock held outside a foreign brokerage account, foreign partnership interests, foreign domestic funds, foreign-issued life insurance, as well as foreign hedge and private equity funds all need to be reported under Form 8938 to the IRS.

If you’re unsure how to complete Form 8938, we recommend that you get professional tax advice.

What are the penalties for failing to file Form 8938?

Failure to file Form 8938 can result in a $10,000 fine with additional penalties of up to $50,000 for continued failure after IRS notification.

Underpayment of tax attributable to non-disclosed foreign financial assets will be subject to an additional underpayment penalty of 40% by the IRS.

Please speak to our UK and US tax advisors to get a clear picture of where your tax liabilities stand.

What are the penalties for failing to file under FBAR?

There are severe consequences if you do not report your foreign accounts as an American ex-pat.

If the IRS decides that you have committed a willful violation, the consequence can include a penalty of $100,000 or 50% of the account value, whichever is higher.

If you don’t disclose offshore accounts, you could be caught through an IRS audit, resulting in freezing all foreign accounts.

The IRS can also impose penalties for failure to comply with offshore account disclosure requirements.

If you’re unsure where you stand with FBAR, book a consultation with our specialist tax team today.

Do I have to report foreign property on Form 8938?

You do not have to report foreign property on Form 8938 or other FATCA forms, even if it is a rental property.

Under certain circumstances, you may be required to file Form 3520 to report a distribution from a foreign trust, foreign estate, or gift from a foreign person in excess of $100,000 during the year.

Visit this link to see more common questions and answers from the IRS on Form 8938.

Suppose you’re unsure what constitutes a foreign financial asset to the IRS. In that case, it includes any financial account maintained by a foreign financial institution, other foreign financial assets such as stock or securities issued by someone other than a US person, any interest in a foreign entity and any financial instrument or contract that has an issuer who is not a US person.

Please speak to our UK and US property tax advisors today.

Can the IRS check foreign bank accounts? 

The IRS can find a foreign bank account.

This is why interest and dividends from your foreign bank accounts must be reported on your annual tax return, including foreign disclosure forms and statements on Form 1040.

Foreign accounts are taxable, so the IRS and US Treasury have rigorous processes in place for declaring overseas assets.

Any American citizen with foreign bank accounts totalling more than $10,000 in aggregate is required to report such accounts.

One of the main catalysts for the IRS to learn about the foreign income, which was not reported, is through FATCA.

In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.

The purpose of FATCA is to force managers of foreign financial institutions to report all American clients to the IRS or be severely punished with high withholding taxes.

If the information reported is not 100% accurate or complete, the fund manager will still be penalised.

Some countries have data protection laws that would be broken if the fund manager cooperates fully with the IRS.

A fund manager may not realise that he has an American client if represented by a non-American third party.

The client may not provide the fund manager with the required information in the first place.

The penalty is solely applied to the fund manager and not the US ex-pat client.

A non-cooperative American ex-pat client could be seen to be more hassle than they are worth to a UK fund manager.

FATCA can cause fund managers to deal differently with US ex-pat clients, but it is in the best interests of fund managers to be able to continue to work with American clients in the UK.

How does this affect Hong Kongers looking to move or invest in the United Kingdom from Hong Kong?

The IRS Form 8938 is a United States reporting requirement to inform the US government of the financial assets owned by an American or Green Card holder.

There are times that Hong Kongers need to file a Form 8938 in the US. This is where they have financial interests in the United States or have a Green Card.

Hong Kongers will need to file a Form 8938 and possibly the FBAR, too, if this is also the case.

Learn more about our International services to help Hong Kongers move or invest in the United Kingdom

How does this affect American readers looking to move or invest in the United Kingdom from the United States?

Americans that live or invest in the United Kingdom will still have to meet their financial and 1040 taxation reporting requirements.

Learn more about our International services to help Americans move or invest in the United Kingdom

You may be interested in our main Article on UK Tax status if you are looking to move to the UK or from the UK.

You may also be interested in knowing more about our property tax services if you are looking to invest in UK buy to let properties.

You may be interested in services where we help Americans move to the UK with tax in mind. There are several legal matters and tax issues that you need to consider.

We have also written a helpful article about people moving from the US to the UK and getting a VISA.

The frequently asked questions about IRS form 5471 Global Intangible Low-Taxed Income (GILTI)

The regulations seek to broaden the GILTI high-tax exception by excluding all other CFC gross income deemed high-taxed.

The effect of this may have been limited. The US corporation tax rate has historically been 35%.

The high-tax exception applied only where the effective tax rate imposed by a foreign country on the income was at least 31.5%.

Since most foreign jurisdictions had significantly lower corporate tax rates than the US, the high-tax exemption was rarely relevant.

One of the main changes of the Tax Cuts and Jobs Act (TCJA) in 2017 was to reduce the US corporate tax to 21%.

The effective rate to meet the high-taxed exemption is now just 18.9%.

This has brought CFCs to several jurisdictions within the scope of the exception, including those in the UK.

The window for US shareholders to benefit from the exception could be short-lived.

President Biden wants to increase the US corporation tax rate to 28%, which could be in effect from early 2022.

That would require a tax rate of 25.5% for an exemption.

Under the March 2021 Budget, the headline rate of corporation tax in the UK is due to increase to 25% from 01 April 2023.

The high-tax exception for UK-taxed income of CFCs could cease to be available from 2022.

US Expats in the UK: You may be interested in services to help Americans move to the UK with Tax in mind.

There are several legal matters and tax issues that you need to consider. We have also written a helpful article about people moving from the US to the UK and getting a VISA.

Global intangible low-taxed income (GILTI) Tax

The Inland Revenue Service (IRS) Global intangible low-taxed income (GILTI) Tax is a complex subject. We are often asked to assist with expert tax accountancy advice in this area.

Regarding GILTI Tax, the GILTI tax rate and using QBAI (Qualified Business Asset Investment) to reduce GILTI tax, speaking to specialist US and UK tax advisors can help reduce or completely mitigate your tax liability.

GILTI is a category of income earned abroad by US-controlled controlled foreign corporations (CFCs) and is subject to special treatment under US tax law.

The US tax on GILTI is intended to prevent erosion of the US tax base by preventing and/or discouraging multinational companies from shifting their profits on easily moved assets, such as intellectual property (IP) rights from the US to foreign jurisdictions, with tax rates that are lower than the US.

Should you speak to a British accountant about GILTI tax?

The Tax Cuts and Jobs Act (TCJA) brought many changes to US taxpayers, including American ex-pats.

Due to TCJA, US entrepreneurs have become used to the term GILTI.

US shareholders who own at least 10% of a CFC are now taxed annually on the CFC’s GILTI.

There has been a negative impact on individual US shareholders of a CFC due to the TCJA’s treatment of individual vs corporate shareholders.

Corporate shareholders have a GILTI tax rate of 10.5% compared to US individual rates of up to 37%.

This is why US shareholders living in the UK should speak to US and UK tax advisors about how GILTI impacts US ex-pats as soon as possible.

Our team of British accountants can assist you on all matters relating to GILTI tax.

UK Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge, and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce them. Download today, save Tax tomorrow.

£9.95 to download

Buy Now

What are the basics of GILTI?

As property accountants serving thousands of landlords that purchase buy to let properties, we know that tax law can be confusing and complex. GILTI tax is no exception.

Before the enactment of TCJA in 2017, US businesses and individuals were subject to US income taxes on their worldwide income.

Income earned by the foreign subsidiaries of US corporations was subject to Tax only when repatriated to America as dividends.

The TCJA changed the tax rules for multinational corporations by generally exempting the earnings of foreign subsidiaries’ active businesses from US taxation, even if repatriated.

GILTI is typically foreign income earned by CFCs from intangible assets such as copyrights, trademarks and patents.

CFCs are foreign corporations in which more than 50% of the value is owned by US shareholders.

Each of these US shareholders owns 10% or more of the CFC.

This type of shareholder is liable for the Tax on GILTI, which usually applies at a rate between 10.5% and 13.125%.

If you’re a US ex-pat and are unsure how you might be affected by GILTI, speak to one of our team today.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

Who does GILTI apply to?

GILTI rules contained in Section 951A require a 10% US shareholder of a CFC to include in current income the shareholder’s pro-rata share of the GILTI income of the CFC.

The GILTI rules apply to C corporations, S corporations, partnerships and individuals.

The GILTI is allocated between the shareholders, who pay tax on it at their tax rates up to 37%.

GILTI is calculated on Form 8992.

GILTI came as an unwelcome surprise to many American business owners located outside of the United States in 2017, and this is why it is critical to speak to our US and UK tax advisors to minimise your tax liability.

How is GILTI calculated?

GILTI is calculated as the total active income by a US company’s foreign subsidiaries that exceed 10% of the company’s depreciable tangible property. US Income from a UK perspective is the profits made.

GILTI tax is not aimed directly at income from specific intangible assets.

It operates as a type of minimum tax on the profits of some CFCs.

GILTI taxation requires a complex calculation.

GILTI typically equals the amount of the CFC’s total income over a CFC’s net tangible income return, which equals 10% of the CFC’s investment in depreciable tangible business assets minus specific interest expense.

GILTI tax is significant for CFCs whose profits are high due to their investment in intangible fixed assets such as providing services, procurement, distribution and technology.

Special reduced foreign tax credit rules apply concerning GILTI.

The GILTI tax calculations entail challenging and detailed expense and credit allocations.

This can result in higher than 13.125% tax rates, especially where income is subject to high foreign tax rates.

We recommend that you seek expert tax advice on GILTI as soon as possible if you are an American business owner located in the UK.

How does GILTI affect US shareholders in the UK? 

GILTI affects many US ex-pats who have formed a corporation in a foreign country.

Many are already filing Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations) with their annual US tax return.

If you’d like to discuss how GILTI tax affects your foreign corporation and ways in which you can mitigate the GILTI, speak to our US and UK tax experts today.

Can I use QBAI to reduce the GILTI Tax?

Qualified Business Asset Investment (QBAI) is the average of a tested income CFC’s aggregated adjusted bases as to the close of each quarter of a CFC’s financial year in specified tangible property.

There is a 10% allowance based on the value of your fixed assets in the company. This helps reduce the UK profits of the CFC for GILTI tax purposes.

What is the Section 962 Election?

American ex-pats who registered their corporation in a low-tax jurisdiction can minimise their tax bill by making a Section 962 Election.

This means that their allocation of the corporate profits will be taxed at the US corporation tax rate but with a 50% deduction applied.

Using Section 962 Election, US taxpayers can take foreign tax credits for corporate Tax paid on their business tax profits.

When corporate profits are extracted as dividends in the future, the shareholders will have to pay US tax on them again, paying a second tax on the same profits and potentially increasing the total tax rate.

If the US ex-pat shareholder pays foreign Tax on future dividends, they can claim US tax credits to offset the US tax due on them. This can make a Section 962 Election worth considering.

These tax calculations are complex and require a detailed appraisal of each foreign business owner’s circumstances.

How can I avoid GILTI? 

There may be other options available to avoid GILTI depending on a US-expat’s situation.

This could include transferring major ownership of a foreign corporation to a trusted foreigner such as a spouse. This effectively removes the CFC entirely from the jurisdiction of US tax laws.

What is the GILTI High Tax Exemption?

One tax mitigation possibility for reducing GILTI tax is making a Section 954(b)(4) election, known as the GILTI High Tax Exemption.

This allows US ex-pats who pay foreign corporation tax rates on the profits of their foreign-registered corporation at a tax rate of more than 90% of the US corporate rate to be exempt from paying GILTI.

Many countries have corporation tax rates above 18%, so making a Section 954(b)(4) election provides American ex-pats relief from GILTI tax by the IRS.

Renounce US Citizenship UK

Americans may wish to renounce US citizenship in the United Kingdom as they are forced to pay the IRS tax on their worldwide income.

There are currently estimated to be more than nine million Americans living overseas.

Giving up US citizenship means they no longer need to file a 1040 tax return to the IRS or pay tax on their worldwide income.

Renouncing US citizenship is a legal process that must be done at a US Embassy or Consulate Office outside the US.

It is permanent. Once US citizenship has been renounced, you cannot rescind, retract or reverse it.

A record 6,075 Americans renounced their US citizenship in 2020, which according to industry sources, represented a 260% increase from 2019.

Renunciations tripled despite US Consulates being closed for large parts of the year due to Covid-19.

This was the highest year of Americans renouncing US citizenship on record.

The frequently asked questions about renouncing US citizenship to save tax on your worldwide income

As property accountants, we are regularly asked about ex-pat tax, particularly paying US tax to the IRS in the United States. We will look to answer the below questions in this Article.

“Are you paying too much US tax to the IRS when living in the UK?”

“Should I speak to a British accountant before renouncing US citizenship in the UK?”

“What are the basics of renouncing US citizenship to prevent the payment of US tax to the IRS?”

“How do I renounce US citizenship in the UK?”

“What are the benefits of renouncing US citizenship?”

“Will I need to fill out Form 8854 before renouncing US citizenship?”

“Will I have to pay US Exit Tax?”

What are the basics of renouncing US citizenship to prevent the payment of US tax to the IRS?

As property accountants serving thousands of landlords who purchase buy to let properties in the UK, we know that the frustration over US taxes and FATCA pushes more US ex-pats to consider renouncing US citizenship.

It is possible to renounce US citizenship, avoid most future US taxes and still receive income and benefits from the United States.

Renunciation can be a positive and attractive option for individuals looking to simplify their lives.

This often includes situations where US citizens have lived and worked in a different country for an extended period, raised a family there, owned property, and possibly other assets in that country.

Renouncing US citizenship can provide a way to simplify the burdens of maintaining ties to the US through nationality.

Before undertaking to renounce US citizenship, it is worth fully understanding how this will impact your rights and legal obligations.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

How do I renounce US citizenship in the UK?

The renunciation process comprises two key stages:

* Submission of documents including Form DS 4079

* In-person interview at a US Embassy outside the US

Failure to meet any of these requirements, such as applying within the US, will not constitute renunciation.

The processing fee of $2,350 must also be paid. This is the highest renunciation fee in the world.

Renunciation becomes official on reciting the Oath of Renunciation; then, you are issued a Certificate of Loss of Nationality.

What are the benefits of renouncing US citizenship? 

One of the most significant benefits of renouncing US citizenship is that non-covered ex-pats have no immediate US tax liability.

You must file Form 8854 with your final tax return to determine if you are a ‘Covered Expatriate’ or ‘Non-Covered Expatriate’.

A Covered Expatriate may be subject to an exit tax. This is a way for the IRS to ensure that individuals are not renouncing their US citizenship to avoid a hefty US tax payment.

To be considered a Non-Covered Expatriate (and exempt from exit tax), the following conditions must be satisfied:

* You must have filed taxes for the five years preceding the year you renounce US citizenship

* If you were born a dual citizen and are taxed as a resident of another country, you cannot have lived in the US for more than 10 of the last 15 years

If you are a Covered Expatriate, you may be required to pay an exit tax based on the gain on items you own, such as property, stocks and bonds.

Even after you renounce US citizenship, you may still have US tax filing requirements and potential US tax to pay if you hold property, investments or financial assets located in the US.

Another benefit of renouncing US citizenship is that you don’t need to liquidate assets and investments in the US.

After renunciation, you are considered a non-resident alien (NRA), so the US’s financial activity on investments and/or assets need to be reported on Form 1040NR instead of the previously-used Form 1040.

Your tax rates for various items will depend on the tax rates in the UK in which you are a resident and any tax treaty the US has in place with the UK.

Non-business related income will be taxed at 30% unless the US-UK tax treaty states otherwise.

Business-related income is taxed using the tax tables provided by the IRS. It uses similar tax rates as Form 1040.

A third benefit of renouncing US citizenship is that Social Security benefits are available to those who qualify.

If you have paid into Social Security for a full 40 quarters, you are eligible to collect benefits when you retire.

As an NRA, you can usually continue to collect US Social Security just as you would if you remained s US citizen.

Will I need to fill out Form 8854 before renouncing US citizenship? 

Before you can renounce US citizenship in the UK, you must fill out Form 8854 and attach it to your final US 1040 tax return.

To qualify as a Non-Covered Expatriate, you must meet the following criteria:

* Your net worth (retirement accounts, bank accounts, property values owned inside and outside the US) is below $2M on the date of your renunciation.

* You are allowed to gift up to $145,000 to an NRA spouse every year and avoid paying gift taxes.

* You must file Form 8854 in the year following the year when you renounce US citizenship.

The frequently asked questions about FATCA Reporting

As specialist tax accountants, we are regularly asked about FATCA Reporting. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of FATCA Reporting?”

“Who is FATCA Reporting aimed at?”

“What needs to be filed under FATCA?”

“Are there reporting thresholds for FATCA?”

“How does FATCA affect Americans abroad?”

“Are there penalties for FATCA non-compliance?”

“How can I avoid FACTA tax?”

“How does this affect our UK readers?”

What are the basics of FATCA Reporting?

Many of our clients find FATCA Reporting overwhelming and difficult to understand.

The Foreign Account Tax Compliance Act (FATCA) is a US federal law that targets US persons concealing assets held in foreign accounts.

FATCA was created as part of the 2010 HIRE Act and as a result of FATCA legislation, the IRS has recovered billions of dollars owed from those housing assets overseas.

Under FATCA, all US citizens must report specified foreign assets to the IRS if they exceed certain thresholds.

These thresholds are different depending on whether the person is living in the US or living abroad.

In addition to reporting requirements for individuals, foreign financial institutions must also report their American clients’ assets to the IRS.

Failure to do so can result in a 30% withholding on certain payments from the US. The primary goal of FATCA is to force tax evaders to come forward.

One of the unfortunate elements of FATCA Reporting is that some US ex-pats have been targeted and experienced additional scrutiny due to this tax legislation since 2010.

It is perfectly reasonable that US ex-pats will have assets and accounts overseas as part of their daily lives.

Because of the extra reporting, FATCA has been called a violation of privacy by some.

FATCA has dramatically changed the financial and tax environment abroad for Americans.

These changes cannot be ignored and have forced many Americans to consider maintaining more investments in the US.

Who is FATCA Reporting aimed at?

FATCA is aimed at US persons.

This broad category includes US citizens, US residents, Green Card holders, and Trusts controlled by US persons. For example, this includes British people that live in Florida, within the United States of America.

FATCA regulations also mean that banks must screen all of their clients to determine which ones appear to be US citizens. This must then be reported directly to the IRS.

FATCA is a complex and broad set of rules designed to increase tax compliance by Americans holding financial assets outside the US.

The legislation was drawn up mainly as a response to the 2009 UBS offshore banking scandal, which highlighted that many Americans were maintaining significant financial holdings in Swiss bank accounts reporting or paying the US taxes due on those overseas assets.

FATCA created new self-reporting requirements and raised penalties for failure to fully comply with reporting rules.

Some of these reporting rules are complex.

The legislation imposes on all foreign financial institutions a new legal mandate to outline who among their clients are US persons and provide the IRS with information on those accounts.

FATCA is backed up with harsh enforcement mechanisms to ensure that all non-US financial institutions adhere to the reporting requirements.

US taxpayers are also subject to significant penalties if they fail to fully comply with the special rules relating to non-us financial assets.

FATCA legislation defines foreign financial institutions broadly and includes every kind of financial institution outside the US.

Captured under FATCA are banks, brokerage firms, trust companies, insurance companies, retirement plan administrators and mutual fund companies.

Non-publically listed corporations and business entities registered outside the US but owned 10% or more by a US person must also report the details of the stake held by the US person meeting that threshold to the IRS.

A useful summary of FATCA Reporting for US taxpayers has been produced by the IRS, which is worth reviewing.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

What needs to be filed under FATCA?

Filing requirements under FATCA are classed as any items that are specified foreign assets.

Although this is quite broad, the IRS defines these assets as:

– Foreign pensions

– Foreign partnership interests

– Foreign stockholdings

– Foreign mutual funds

– Foreign-issued life insurance

– Foreign hedge funds

– Foreign real estate held through a foreign entity

It is important to note that your foreign home does not need to be filed under FATCA.

Specified foreign financial assets also include foreign financial accounts and foreign non-account assets held for investment only.

This covers foreign stocks and securities, foreign financial instruments, interests with foreign entities, and contracts with non-US persons.

There are exceptions to the reporting requirements.

You do not have to report the following assets as the IRS does not consider them to be specified foreign financial assets:

– A financial account maintained by a US-based organisation, such as the US branch of a foreign financial institution, certain foreign subsidiaries of US corporations, or a foreign branch of a US financial institution.

– A beneficial interest in a foreign Trust or Estate, if you do not know of the interest.

– An interest in any social security, any social insurance or similar program of a foreign government.

Comprehensive guidance from the IRS on the reporting requirements under FATCA for individuals, institutions and governments are worth researching.

Are there reporting thresholds for FATCA? 

Reporting thresholds under FATCA vary based on if you file a joint income tax return or live abroad.

If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad, or more than $500,000 if you live in the US.

If you file jointly with your spouse, these reporting thresholds double.

The IRS considers you to be living abroad if you are a US citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days in a consecutive 12-month period.

For taxpayers living abroad, you must file a Form 8938 if you must file an income tax return and:

– You are married filing a joint income tax return and the total value of your specified foreign financial assets or more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad.

– Married individuals who file a joint income tax return for the year will file a single Form 8938 that reports all of these specified foreign financial assets in which either spouse has an interest.

– You are not a married person filing a joint income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.

For taxpayers living in the US, you must file a Form 8938 if you must file an income tax return and:

– You are unmarried and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

– You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than £150,000 at any time during the tax year.

– You are married filing separate income tax returns and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

How does FATCA affect Americans abroad?

Americans living abroad can self-report on their foreign financial assets under FATCA legislation. This is particularly the case where Americans live in a country like the United Kingdom and have investments and savings accounts.

The most common error made by Americans abroad is that since they have been hiding nothing, they need to file the one FATCA mandated reporting form.

For many Americans living abroad, all they need to do is file Form 8938.

The implementation of FATCA has also made the enforcement of old rules applicable through FBAR and PFIC more easily and more commonly enforceable.

In the absence of any real sense of threat of enforcement, individuals and even some tax professionals have been ignorant of the rules. FATCA has ended this ignorance.

Are there penalties for FATCA non-compliance?

The IRS states that penalties for failing to file under FATCA are $10,000 per violation, plus an additional penalty of up to $50,000 for ongoing failure to file after being notified by the IRS, as well as a 40% penalty on any understatement of tax owed on non-disclosed assets.

The most popular option with ex-pats to become compliant under FATCA reporting requirements is to file under the Streamlined Filing Procedures.

This is an IRS program that allows innocent delinquent filers the opportunity to catch up without late filing penalties.

The most important element of FATCA legislation is the severe penalties that the law imposes on foreign financial institutions found to be non-compliant with the mandated reporting on the financial activity of their US clients.

Foreign financial institutions not complying with the rigorous reporting requirements are subject to a 30% withholding tax on all US-sourced payments.

Any financial institution in the world not voluntarily complying with find that 30% of any US-sourced payment will be withheld.

US stocks and bonds are widely owned globally.

This means nearly all financial institutions in the world will receive US-sourced payments, mostly on behalf of clients who have no connection to the US.

Seeing 30% of these payments being withheld by the IRS is not an option for foreign financial institutions.

There has been almost complete compliance by foreign financial institutions to comply with FATCA disclosure requirements.

FATCA has meant a significant rise in the enforcement of these rules.

Americans abroad should become familiar with the penalties for non-compliance.

It is also advisable to speak to a specialist US tax expert who can assist you further in navigating FATCA.

How can I avoid FACTA tax?

Avoiding FATCA is not an option if you wish to remain a US citizen.

There are ways to minimise FATCA tax, including the following measures:

– First, inventory all of your non-US assets and identify which ones are subject to FATCA Reporting by a foreign financial institution.

– Make sure that these assets are not PFICs or foreign Trusts.

– Move investment accounts to US-based financial institutions.

– Build a diversified portfolio to account for long-term residency plans.

The frequently asked questions about IRS Form 5471

As specialist tax accountants, we are regularly asked about Form 5471. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of Form 5471?”

“Who needs to file Form 5471?”

“When should Form 5471 be filed?”

“What information is included in Form 5471?”

“How long does Form 5471 take to prepare?”

“What is the penalty for not filing Form 5471?”

“Are there different Form 5471 schedules?”

“What is a Controlled Foreign Corporation?”

“How does this affect our UK readers?”

UK Tax when moving to the UK

How much tax will you pay in the UK? What is the remittance basis tax charge, and do you need to pay it? We will show you what taxes you need to be aware of and how to reduce them. Download today, save Tax tomorrow.

£9.95 to download

Buy Now

What are the basics of IRS Form 5471?

Form 5471 is officially called the Information Return of US Persons concerning Certain Foreign Corporations.

It is an information return, not a tax return, and its purpose is to file information by US taxpayers that have an interest in certain foreign corporations.

This is so that the IRS has a record of which US citizens and residents have ownership in foreign corporations.

Since being introduced in 1962, Form 5471 has been considered one of the most difficult and time-consuming US tax forms to prepare.

Some industry commentators have claimed that efforts to require US taxpayers to repatriate their foreign earnings under the Tax Cuts and Jobs Act 2017 (TCJA) have further complicated Form 5471.

Before the passing of TCJA Form 5471 was comprised of 11 schedules and three worksheets.

Being aware of what foreign corporation shares are owned by US citizens helps the IRS prevent people from hiding overseas assets. It also shows the IRS in which countries these financial interests are held.

Form 5471 is similar to Form 1120, the US Corporation Income Tax Return, because it requires similar disclosures and large amounts of information.

Form 5471 is informational; it doesn’t usually affect the amount you pay in taxes unless you fail to file it, then heavy penalties are in place.

Reporting requirements under Form 5471 can be as simple as what percentage of stock the US taxpayer owns and company information.

In other cases, the reporting information required can be as complex as the corporation’s entire income from financial statements and balance sheets.

Form 5471 can be due to various factors to be considered when determining which forms and schedules are relevant for an individual US shareholder’s circumstances.

Some of these factors include:

– The ownership % held by the US taxpayer in the foreign corporation

– The ownership % held by the other US and non-US shareholders in the foreign corporation

– Their relationship to the US taxpayer

Each scenario needs to be thoroughly examined and is best done with the assistance of an Expat Tax Adviser.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

Book on a seminar

Who needs to file IRS Form 5471?

Any US citizen, partnership, trust, corporation, or estate with at least 10% ownership in a foreign corporation needs to file Form 5471. The IRS clearly outlines who must file Form 5471. This is particularly relevant to Americans that invest or live in the United Kingdom. Many Americans move from say Florida or New York to London to start employment or a business enterprise.

Certain US persons who are shareholders, officers, officers, or directors of a foreign corporation may also be required to file it.

The categories of US persons potentially liable for filing Form 5471 include:

– US citizen and resident alien individuals

– US domestic corporations

– US domestic partnerships

– US domestic trusts

The term foreign corporation includes an International Business Company (IBC) owned in part by US persons.

It also includes a foreign limited liability company.

Form 5471 is similar to the information return for a partnership, an S Corporation or a trust.

Unlike a C Corporation, the income of a foreign corporation may be either taxed to the shareholders or tax-deferred until there is a distribution or liquidation.

The Form serves multiple purposes and can be confusing to a novice.

Form 5471 should be filed as an attachment to the taxpayer’s federal income tax, partnership or exempt organisation return.

It should be filed by the due date, including any extensions for that return.

There are four categories of persons, including corporate shareholders, that may be required to file Form 5471, including:

– A US person who is an officer or director of a foreign corporation in which any US person owns 10% or more of the stock

– A person who becomes a US person while owning 10% or more stock of a foreign corporation

– A US person who had control of a foreign corporation for 30 days or more

– A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for at least 30 days and who owned that stock on the last day of the year

When should Form 5471 be filed? 

Form 5471 should be filed annually with the income tax return of the relevant shareholder.

For the majority of corporations, that date would be 15 March / 15 April for most individuals.

What information is included in Form 5471?

The information to be included in Form 5471 starts by listing the US shareholder’s identity and details about the foreign corporation.

It should also include information about transactions between the shareholder and the foreign corporation, original capital contributions and other relevant data.

This initial information is four pages long.

Several other schedules are required, which can add an extra seven pages.

Among the schedules to be added are the balance sheet for the corporation and the income and expense sheets for the current year.

It is a requirement of Form 5471 to provide accurate completion of all necessary information.

The required information may be as little as the identification of the US shareholder and the name and address of the foreign corporation.

In other cases, the details required to file on Form 5471 could be comprehensive, including a comprehensive balance sheet and income statement converted from multiple foreign currencies into US dollars.

If the corporation is owned by five or fewer US shareholders and each owns 10% or more of the foreign corporation, it will be deemed to be a Controlled Foreign Corporation (CFC).

More information is provided later in this article on CFCs.

In this case, all or part of the corporation’s income may be taxable to certain shareholders.

How long does Form 5471 take to prepare? 

It has been estimated that preparing Form 5471 could take up to 40 hours, not including record-keeping and the time required to learn relevant law.

The learning time would be much longer for a US person not knowledgeable of US tax law.

For an operating business with extensive transactions, the time spent could be much longer.

If the foreign corporation is dormant, completing Form 5471 should only take a few hours.

It has been estimated that for a CFC owned by one person and used as an investment entity only, around five hours would be sufficient to complete Form 5471.

Each Form 5471  preparation will be individual and bespoke.

Getting the right tax advice is critical, even for an informational return form.

What is the penalty for not filing Form 5471?

The penalty is $10,000 for each late or incomplete Form 5471 and is classed as a disclosure penalty.

It is not necessary for the foreign corporation to have any profits for this penalty to apply.

Form 5471 must be filed even if there is no taxable income to report.

If failure to file continues for more than 90 days after the date of the IRS notice, an additional $10,000 penalty will apply for each 30-day period.

The additional penalty can be added up to a maximum of $50,000 in total.

If you get a notice from the IRS of duty to file and don’t do so within 90 days, there could be a maximum fine of $60,000.

The TCJA implemented two new taxes for US owners of controlled foreign corporations.

The Transition Tax (also called IRC Section 965) and Global Intangible Low-Taxed Income or GILTI (also called IRC Section 951A) that functions as a current-year tax.

Form 5471 has moved from being an informational return to an integral part of reporting these two taxes.

Are there different Form 5471 schedules?

The Form 5471 schedules are used to satisfy the reporting requirements of transactions between foreign corporations and US persons.

The IRS has published all Form 5471 revisions, and whilst this is not essential reading, it does provide a useful insight into the ongoing development of this information return.

Within Form 5471, there are 12 schedules, which include:

– Schedule A – Stock of the Foreign Corporation

– Schedule B – US shareholders of Foreign Corporations

– Schedule C – Income Statement

– Schedule E – Income, War Profits, and Excess Profits Taxes paid or Accrued

– Schedule F – Balance Sheet

– Schedule G – Other information

– Schedule H – Current earnings and profits

– Schedule I – Summary of Shareholder’s Income from Foreign Corporation

– Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations

– Schedule M – Transactions between Controlled Foreign Corporation and shareholders or other related persons

– Schedule O – Organisation od reorganisation of a Foreign Corporation, and acquisitions and dispositions of its stock

The IRS has provided information about the reporting requirements of Form 5471.

What is a Controlled Foreign Corporation? 

A Controlled Foreign Corporation (CFC) is a foreign corporation where US shareholders hold more than 50% ownership of the stock.

CFC rules are features of an income tax system designed to limit artificial tax deferral by using offshore low-taxed entities.

The rules are required only regarding the income of an entity that is not currently taxed to the owners of the entity.

Certain classes of taxpayers must include in their income certain amounts earned by foreign entities they or related people control.

The rules define the type of owners and entities affected, the type of income or investments subject to inclusion, exceptions to that inclusion, and the means of preventing double inclusion of the same income.

CFC rules have been in place in the US since 1962.

Countries with CFC rules include the UK, Germany, Japan, Australia, New Zealand, Russia, Brazil, Sweden and many more.

The CFC rules in different countries vary significantly.

You may be interested in our main Article on UK Tax status if you are looking to move to the UK or from the UK. You may also be interested to know how more about our property tax services if you are looking to invest in the UK buy to let properties.

 

Need advice?
Contact us now

Enquire about our ongoing services

Book a call to discuss our property accountancy services

Get in touch

Book a paid for tax consultation

Use the code “Art25” to get 25% discount

Book now

Book a call to see how we can help you.

Consultation options.

We offer the two following options for initial consultations.

CALL OPTION ONE

Our Ongoing Accountancy Services

Fixed price irrespective of how many properties you have

We charge on a fixed monthly fee

  • - Accounts submitted to HMRC & Companies House

  • - One hour onboarding tax call

  • - Unlimited 30 minute tax calls

  • - An holistic review of your tax structure and future plans

  • - Invitations to regular tax update virtual meetings

Our Monthly Accountancy Services

CALL OPTION TWO

Tax Consultation + Tax Report + Video Recording

(Free for clients)

Want tax advice right now? Book today

  • - Upload your questions in advance

  • - Our Tax Advisors collectively discuss your questions

  • - A qualified tax advisors discuss the very best solution with you

  • - A tax report & meeting recording is sent within 24 hours

  • - Clarification questions are answered via email

Tax call from £199.95

Booking your appointment.