A US passport is for many the golden ticket, opening the door to the world’s largest economy. But for others, particularly those that have chosen to relocate permanently to the UK, it can feel like a cumbersome burden with hidden tax consequences.
It begs the question of whether it is ever sensible to renounce that golden US passport. It is never an easy decision to make and is certainly one that should not be taken lightly or without first seeking advice.
There are many good reasons to hold on to US citizenship. Alongside the ability to travel, live and work in the world’s largest economy whenever desired, US citizenship offers individuals the right to access consular support and services should they be needed and the right to vote in US elections. Patriotism and family ties too should not be overlooked.
But, almost uniquely in the world, the US taxes its citizens based on that citizenship rather than on residency or domicile. US citizens and greencard holders who have chosen to permanently relocate to the UK can find themselves facing a complex tax landscape and inadvertently triggering US tax liabilities on everyday financial planning, such as a UK pension or opening an ISA account.
That tax landscape can also extend to the children of US nationals, irrespective of whether they have ever set foot in the USA.
What are the tax implications for US citizens and greencard holders living and working in the UK?
Every year, US citizens and greencard holders will need to complete a tax return if their income exceeds $12,950 (for 2022), and whilst that may not trigger a tax liability there may be penalties for some late or missing submissions. It is a time-consuming and cumbersome process and often the tip of the tax iceberg.
So, what are the areas of taxation US citizens and greencard holders in the UK must consider?
FinCEN 114 (formerly known as the Foreign Bank Account Reporting, FBAR) requirements
Anyone with control over a bank account, life insurance and even gambling accounts with an aggregate value in excess of US$10,000 are required to file an FBAR report to the US tax authorities. It is not uncommon for individuals to believe that a report need only be filed if one or more accounts reaches that threshold. It is, however, the aggregate value of all accounts that trigger reporting requirements.
Gifts and form 3520
Gifts of more than US$100,000 from a non-US persons and US$17,339 during tax year 2022 from a foreign partnership or company will need to be reported to the IRS. Form 3520 is notoriously complex and mistakes can result in an individual being audited and penalties.
UK pension contributions
US citizens and greencard holders working in the UK may find themselves with a UK pension fund where both they and their employer make contributions.
Under certain circumstances a U.S. national living and working in the U.K. who contributes to a qualified U.K. pension could receive a tax deduction in the U.S. for the contribution to the U.K. plan.
This could cause some tax consequences in the US but it is possible to take advantage of the US-UK tax treaty to mitigate these.
ISAs
Cash and stocks and shares ISAs are a tax-efficient way for UK citizens and greencard holders to save. They can, however, create tax headaches for US citizens and greencard holders. Cash held in an ISA must be declared and tax payable on the interest earned and a capital gain on their value.
Stocks and shares ISAs when invested in unit trusts can present particular problems, falling under the Passive Foreign Income Company regime and high tax rates. Please speak with your tax advisor in order to minimise your tax exposure.
Inheritance tax
US nationals enjoy a high inheritance tax threshold of US$11.5 million compared to a UK rate of £325,000. However, if a US citizens and greencard holders renounces their citizenship that rate falls to just US$60,000 for US situs assets. US assets can also be frozen by tax authorities if any outstanding IHT is not paid. IHT planning must, therefore, form part of any planning before citizenship is renounced.
Exit tax.
US citizens and greencard holders with worldwide assets of more than US$2 million may face an ‘exit tax’ when renouncing citizenship. Whilst many might consider it a penalty for leaving the US, it is a little more mundane, designed to ensure US citizens settle any outstanding tax liabilities.
The US tax authorities will expect value assets owned and assume that they are sold on the day citizenship is renounced, with gain payable on gains. It can quickly amount to a sizeable tax liability, meaning expert advice should be taken.
However, there is an exception for some ‘accidental Americans’, for example, certain dual-citizens and certain minors.
Certain dual-citizens can qualify if they meet both of the following requirements:
- Became at birth a US citizen and a citizen of another country and, as of the expatriation date, they continue to be a citizen, and are taxed as a resident, of that other country; and
- Were a resident of the US for not more than 10 years during the 15-tax-year period ending with the tax year during which you expatriated.
Certain minors can qualify for the exception if they meet both of the following requirements:
- Expatriated before they were 18 and a half years old; and
- Were a resident of the US for not more than 10 tax years before they expatriated.
Other considerations
The children of US citizens will in most cases be considered US citizens even if they have never set foot in the country. They may be required to file tax returns, potentially incurring tax liabilities.
Parents may not renounce the citizenship of their minor children, nor may children under 16 years of age. The cases of minors under 18 are very carefully considered to assess informed intent and they may wish to wait until age 18 to renounce their citizenship. It is important to understand that renunciation of U.S. citizenship is in most cases irrevocable.
Whilst it may be a sensible decision, it should not be taken lightly. If, for example, they wished to return to the US to study, they will find it much harder to secure the relevant visas and may find the costs significantly higher as foreign students.
And finally, there are the fees. Currently, US citizens will face fees of US$2,350 to renounce citizenship. Those fees may fall to US$450 but we are awaiting more details.
Renouncing citizenship is an emotionally and financially costly move. It is a process fraught with complexities and tax liabilities and should never be approached lightly or without advice.
Satis has many years of experience assisting with US/UK tax advice and tax return preparation, including expatriation, moving to the UK, or settling in the US. We are happy to have an initial meeting or call at no obligation to you.