Moving from the United States to the United Kingdom or moving from the UK to the US: Either way this journey may cost you more tax than you bargained for. Have you planned ahead?
Paying taxes across the Atlantic
Living or investing in the UK: Americans need to remember that they still need to file 1040 US tax returns to the IRS each year. Depending on the number of days living/working in the UK will determine if you also need to pay tax to HMRC.
Living or investing in the US: Depending on the number of days that you choose to live in the United States will determine your US tax residence with the IRS. British people that become tax residents will need to apply for an ITIN number and submit 1040 tax returns to the American IRS.
Our international tax advisors can save you tax in the United States and tax in the United Kingdom
What do you need to consider when moving from or to the United States
VISAs and residency
You will need to file and submit tax returns in both the UK and the US based on the number of days that you reside in each country. You may have heard that you only need to pay tax in the UK or in the US once you exceed 183 days. This is not the case and you need to check the small print to see if your case results in a requirement to file and pay tax to either the IRS or HMRC
There is a double tax treaty between the UK and the US. However, you may not get full tax relief in one country for the tax you have paid in the other. You need to be aware of the foreign tax credits and foreign tax deductions that the IRS and HMRC provide to you. Most people find that they pay more tax in the UK than they do to the IRS in the US.
The United States and The IRS work on a calendar basis for tax purposes. This means your income is taxed from 1st January to the following 31st December. This is not the case in the UK where income is taxed by HMRC from 6th April to the following 5th April. Not only do you need to consider different timings but you also need to consider the foreign exchange rate differences too
Tax treatments of income and investment
You may have certain tax concessions in the UK where ISAs and pension incomes are tax free (for those over 55) but they may not be relieved from tax in the United States by the IRS. The same applies to certain investment in the United States that are not fully relieved from tax by HMRC.
IHT and legacy planning
It is clear and obvious that the HMRC in the UK charge a lot more inheritance tax on death than the IRS in the United States. You need to carefully plan where you live and how you can mitigate this death tax.
International tax advice
It is important that you understand how income and investments are taxed in both the United States and United Kingdom to avoid horrific tax charges and penalties. You can use certain tax structures that will help you become tax efficient in both countries
Paying tax to the IRS: US citizens that need to file 1040 tax returns to the IRS each year need to declare the money they earn in the UK. It is possible to accidentally pay tax to HMRC and again to the IRS if you are not careful. There are tax treaties that allow you to claim a tax credit or a tax deduction with the IRS for the tax paid in the UK
British people moving to the US need to consider Capital Gains Tax. The IRS in the United States only provides a Capital Gains Tax allowance of $250,000 for singles and $500,000 for married couples on their UK main home. This is compared to a 100% Capital Gains Tax relief that HMRC provides when selling your UK main home.
Tax considerations if you are investing in the United Kingdom or moving to the UK as an American. There are also tax issues as Brits either moving to the United States or investing in the US.
We are sure that you have considered many things about leaving the United States to the United Kingdom. Vice versa applies if you are leaving the United Kingdom to move to the United States
We appreciate that it is not a priority or natural to think about the tax being paid to The IRS in the US or tax paid to HMRC in the UK with the excitement of a new country.
That said the oversight of financial planning could cost you more tax than the cost of moving to a different country. Think about it another way. You may spend up to £30,000 or $40,000 moving to or from the United Kingdom / United States. However, the overpayment of tax could dwarf this amount time and time again and may be compounded over time.
You need to consider the basics. Do you need to pay tax in the country you are moving to? Fortunately, both the UK and the US gave similar tax treatments to residency. There are nuances in both counties so please get some advice from our international tax advisors before you move.
You may need to register with HMRC in the United Kingdom or with the IRS in the United States to file and pay your taxes. It is more straightforward in getting a Unique Tax Reference (UTR) code from the HMRC in the UK. it is a little more challenging to get an Individual Taxpayer Identification Number (ITIN) from the IRS in the US.
The tax years are different in the US as they are in the UK. The IRS American tax system uses a calendar basis from the 1st January (or if you are American reading this January, 1) to 31st December (December 31). The HMRC British tax system uses a fiscal year that starts from 6th April (April, 6) to the following 5th April (April, 5).
Hopefully, you will see that you cannot simply transfer data from one tax return to another. If life was simple, you would be able to get your investment income on your 1040 tax return, which is submitted to the IRS, onto your HMRC SA100 tax return. Sadly, this is not the case, and you will need to take your earnings on a month-by-month basis. This could of course mean that you will pay different levels of tax in the US and UK.
Not only do British people need to think about paying the IRS federal tax but they also need to consider state tax. That is right. British people need to pay two levels of tax on their worldwide income. This is Federal Tax and State Tax.
Many people assume that you pay less tax in the United States than you do in the United Kingdom. This may be true if you live in places like Florida where there is no income tax. However, if you live in sunny climates such as California you start to see tax rates of over 50% of your worldwide income. This could be even more than the tax you pay in the UK.
Not only do you need to work with our international tax advisors to think about federal tax you also need to work out how much state tax you will be paying. Choose wisely as the sun may cost you an awful lot more tax than you thought.
An additional consideration here is the exchange rates. Americans that leave the US to the UK may cause themselves financial problems by exchanging their money with a low exchange rate. The vice versa clearly applies. It is important to work with a financial specialist to help you get the right exchange rate when converting American dollars to British pounds.
The exchange rate also provides potential problems to people that wish to do their tax returns. This is because HMRC and The IRS have exchange rates that need to be adhered to. Be sure to get this right to avoid investigations from either tax authority. Our international tax advisors are here to help you do your tax returns in either country.
It is entirely possible for you not to pay tax either in the United Kingdom or in the United States as a British person moving to the US with some careful tax planning of when you actually move.
Americans moving to the United Kingdom may pay tax on their worldwide income in error because they know that The IRS demand that you pay tax on worldwide income. HMRC in the UK does not have this rule and allows you to pay tax on a remittance basis. This means that you do not need to pay UK tax to HMRC on money earned in the United States.
We have clients that have paid Capital Gains Tax to the IRS in the United States when they sold their main home in the United Kingdom. This is because they assumed that the tax laws of selling a home in the United States were the same as the United Kingdom. They paid thousands of unnecessary taxes to The IRS. With a little more tax planning with our international tax advisors, they would have sold their UK home and not paid tax anywhere in the world.
We need to also consider you buying a home in the UK. In the UK you pay a tax called Stamp Duty Land Tax, also called SDLT, when you buy a home. There is also a special surcharge of 3% higher rate if you already own a home anywhere else in the world. The 3% SDLT higher rate applies to the total value of the property if the value is greater than £40,000. Let’s be fair this basically means you pay 3% on the entire property value.
Buying a UK home will mean you pay the extra unnecessary 3% SDLT surcharge if you keep your home in the United States. It is important to think about selling your US home before buying a home in the United Kingdom.
There is also another SDLT surcharge that you need to be aware of. This is called the 2% foreign surcharge. Like the 3% SDLT higher rate the 2% SDLT foreign surcharge applies to the total value of the property. This may easily be avoided if you wait to buy a UK home when you get into the country from the US.
Americans moving to the United Kingdom need to consider the longer-term tax effects on their wealth. The IRS does not charge estate tax on American families that pass assets down to their children on their death unless the assets are in excess of $11m (increased for couples and gifting of assets).
HMRC in the United Kingdom charges 40% inheritance tax on potentially worldwide assets above their UK lifetime allowance. This could cost many Americans a lot more tax than they bargained for.
Imagine that you are in your fifties and move to the UK from the US. 16 years later you pass away and think that there are no estate taxes or inheritance tax to worry about. Your loved ones then receive a tax demand from HMRC for millions of pounds because the worldwide assets exceed their IHT lifetime allowance.
As you can see that there is a great saying in the world of international tax that applies to all financial decisions: Fail to plan and plan to fail. Tax is not the biggest concern for many families but could be the death of your family wealth if you do not focus on it.
Whether you wish to live in the United Kingdom or the United States you need to think about tax on your investments that receive special tax treatment in your home country.
Depending on the type of investments that you may have in the United Kingdom such as pensions, ISAs, VCTs or even EIS schemes, these investments may not be recognised in the United States. As such any money that you receive from tax-efficient investments in the UK may be taxed by The IRS in the United States.
The same applies to the United Kingdom whereby you have tax-efficient investments in the United States such as the various health plans. The IRS provides a tax deduction on the money invested into these plans, HMRC will not give a tax deduction.
Where you get a tax relief in one country on your investments be it in the US or the UK please do not assume that you will receive the same tax benefits in the other country. You may be tax-efficient in one country but tax inefficient across the Atlantic. Our international tax advisors will help you understand the transatlantic tax effects of all your worldwide incomes and financial decisions
This is why it is important to do effective tax planning to ensure that you do not pay too much tax to the IRS in the US or HMRC in the UK. You may be tax efficient in one country but end up paying more tax across the Atlantic.