The US UK Tax Treaty – Double Tax Agreement (DTA) Treaty

Simon Misiewicz

Expat & Property Tax Specialist

14th September 2021

Do you know with US/UK double tax treaty? Explained here

US and UK tax treaties should interest all American ex-pats living in the UK. The US has dozens of treaties with countries around the world. The US and UK treaty is one of them. The tax benefits with the treaty is explained here.

The UK/US double tax treaty protects US ex-pats in the UK from paying more tax than they need to.

US and UK tax treaties have been in place since 1945 as an essential tool for preventing the double taxation of income on individuals. It covers US persons’ activities in the UK and British ex-pats in the US.

For US ex-pats in the UK, the UK/US treaties offer credits, deductions, exemptions and reductions in the income tax rate to prevent the double taxation of income in the US and the UK.

Resourcing income is also another significant benefit of the US-UK tax treaties.

For most American ex-pats, utilization of the treaty for US tax purposes must be disclosed to the IRS on Form 8833, which is included in the Federal income tax return.

Failure to disclose a treaty-based return position can result in a penalty for an individual of up to $1,000.

You should review US and UK double tax treaties to ensure you know your tax liabilities.


What are the basics of UK/US treaty agreement?

As international tax accountants serving thousands of investors who purchase buy-to-let properties, we know that the basics of US/UK treaties can seem complex and confusing.

Income tax rates in many countries increased significantly during World War I and stayed higher. UK multinationals with subsidiaries based abroad, such as in the US, suffered because the UK did not provide foreign tax relief until 1945 when a treaty was signed with the US.

The double income tax discouraged British investment and reduced their competitiveness in the US from 1914 to 1945.

Under US and UK double tax treaties, since 1945, residents of foreign countries have been taxed at a reduced rate or exempt from the US on certain items of income.

These reduced rates and exemptions vary among countries and specific items of income.

Under the same treaties, residents or citizens of the US are taxed at a reduced rate or are exempt from foreign taxes on certain items of income they receive from sources within countries such as the UK.

What are the main treaties?

Most income tax treaties contain what is known as a Saving Clause, which prevents a citizen or resident of the US from using the provisions of a treaty to avoid taxation of US-sourced income.

The US/UK have entered into several different international treaties.

The two main treaties are the Double Tax Treaty and the Foreign Account Reporting Act.

The US and UK tax treaties most impact individuals are the UK/US Treaty.

This US and UK double tax treaty impacts many issues, including passive income, foreign pension, and double taxation.

The treaty is good for assessing issues between the US and the UK, but there can be hidden problems, such as applying the Saving Clause.

Why do US and UK treaties exist?

The US and UK have an income tax that residents are obliged to pay.

This can create difficulties because American ex-pats pay US income tax and what they might pay in the UK.

The US is one of the few countries that taxes based on citizenship, not a place of residency.

Specific tools like the Foreign Earned Income Exclusion and the Foreign Tax Credit help to alleviate this.

US citizens living in the UK ran into trouble regarding pension taxation. To resolve this, the US entered into individual treaties.

The primary purpose of the US/UK double tax treaties is to solve the double taxation issue.

The US-UK Treaty – formally known as the ‘Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion concerning Taxes on Income and Capital Gains’ also addresses tax evasion, income and capital gains taxes between the two countries.

We recommend reviewing relevant documents to learn more about the US and UK tax treaties.

What are the benefits of the US and UK DTA?

Professional use of the US and UK treaties can reduce someone’s overall liability.

Because the UK/US tax systems are not the same and have different rules on what constitutes income and what income can be recognised, double taxation is still possible without the right advice from US and UK advisors.

The US and UK have tax treaties designed to reduce overpayments to HMRC and the IRS. The US also gives credit. Speaking to experts to minimise your tax bill in the US and UK is still essential.

How do I avoid double taxation in the US/UK?

The US and UK allow for a tax credit against their domestic and foreign taxes paid on foreign-sourced income.

The domestic law and foreign credit systems will sometimes reduce the impact of double taxation.

Countries such as the US and UK enter into treaties to clarify and formalise the use of foreign credits.

Within the US-UK treaty are specific provisions addressing individual tax issues.

There are more than a dozen provisions, although the ones that affect Americans in the UK the most are Article 17 (US taxation on UK pensions) and the Saving Clause.

Thanks to the treaty, contributions to a pension in the UK can be tax-deferred, just like the US 401K and other tax-deferred retirement vehicles.

Even though distributions are usually taxable, Article 17 will help prevent American ex-pats from paying taxes twice.

Another benefit of the US and UK tax treaties is that it allows your social security (UK state pension) to only be taxable in the country where you reside.

What is the Saving Clause?

The Saving Clause states that a country may tax its citizens as if the UK US treaty never existed.

As a result, most treaty provisions are rendered ineffective for Americans living in the UK but provide coverage for UK citizens living in the US.

The Foreign Tax Credit (FTC) is available for American ex-pats to claim against British taxes.

The FTC is possible because of the exceptions of the Saving Clause.

If you’re an American ex-pat unsure of your position in the UK, speak to one of our UK accountants today.

Can I avoid being taxed under US and UK treaties?

US citizens and permanent residents must file ex-pat tax returns with the Federal Government every year regardless of where they reside.

Whether you need to pay income tax to HMRC depends on if you are classed as a resident in the UK.

You will not have to pay UK tax on your foreign income if you’re not a UK resident.

You may be interested in services where we help Americans move to the UK. There are many legal matters 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.


Is there a treaty between UK and USA?

Yes, there is a treaty between the United Kingdom and the United States of America. The tax treaty is designed to prevent double taxation of income, and to promote trade and investment between the two countries. The current tax treaty between the UK and the US was signed on 24 July 2001, and it came into force on 31 March 2003. The treaty covers a wide range of taxes, including income tax, capital gains tax, and inheritance tax. It also provides for the exchange of tax information between the two countries to prevent tax evasion.

How does the US UK treaty work?

The US-UK treaty is designed to avoid double taxation of income for individuals and businesses that have income from both countries

Do I have to pay both UK and U.S. taxes?

Whether you need to pay both UK and US taxes depends on your individual circumstances, such as your tax residency status, type of income, and other factors. However, in general, if you are a tax resident of both the UK and the US, you may be subject to double taxation, which means you may need to pay taxes in both countries on the same income.

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UK/US tax treaty | All you need to know about the double taxation agreement with the United Kingdom (UK) and the United States (US).

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