WEALTH // Key Considerations for US Expats in the UK
Moving to the UK as a US expat comes with exciting opportunities—but also unique challenges. From understanding visa requirements and tax obligations to adapting to cultural differences and the UK’s healthcare system, there’s a lot to consider. Whether you're relocating for work, study, or a fresh start, this guide will help you navigate the key financial aspects of expat life, ensuring a smoother transition across the pond.
Key Considerations for US Expats in the UK Before and After April 2025 Changes
Before April 2025:
Residency & Taxation Changes
There are substantial changes to the current taxation of non-domiciled individuals. The remittance basis will no longer be available and inheritance tax on worldwide assets will start at an earlier time.
People who have used the remittance basis should review investments before April to ensure tax efficiency.
After April, there are transitional relief rules that might allow tax-efficient moves of assets into the UK where the remittance basis has been claimed.
Inheritance Tax Rule Change
Previously applied after 15 of the last 20 years of UK residency; this will be reduced to 10 years.
Consider restructuring assets accordingly.
National Insurance & UK State Pension
Check gaps in your National Insurance record—topping up can secure full UK state pension without affecting US Social Security.
Retirement & Tax Planning for US-UK Couples:
Keep options open by structuring pensions tax-efficiently under the US-UK tax treaty.
Four-year FIG rules allow tax-free withdrawal from non-UK pensions for the first four years of UK residency, enabling strategic planning.
For New Arrivals After April 2025:
To qualify for the full four-year tax-free period for non-UK income and gains, you must have been out of the UK for 10 full tax years.
A tax year counts if you arrive part way through the year, so arriving too early might reduce your tax-free years, so timing your move strategically can result in significant tax savings.
Accidental Americans & US Tax Obligations:
US citizens (including those born there to foreign parents) must file US tax returns, even if unaware.
The IRS offers catch-up filing programs with low/no penalties.
Green card holders remain subject to US tax unless they formally renounce their status.
Renouncing US citizenship or a green card may trigger exit taxes, so seek tax advice before making any decisions.
UK vs. US Inheritance Tax and Planning Considerations
Inheritance Tax Differences:
US: Generous exemption of $13 million per individual (or $26 million for couples), allowing large estates to avoid taxes.
UK: Much lower exemption of £325,000, meaning estates above this amount are subject to inheritance tax.
UK Inheritance Tax Considerations:
After 10 years of UK residency, individuals become subject to UK inheritance tax.
Lifetime gifting in the UK allows individuals to gift assets away, and if they survive 7 years, the gift is exempt from inheritance tax.
The US imposes gifting limits that reduce the estate exemption amount.
Estate Tax Treaty:
The US-UK estate tax treaty helps avoid double taxation by coordinating how inheritance tax is handled across both countries.
Pre-April Planning:
Review how many years you've been in the UK and assess worldwide assets.
FBAR (Foreign Bank Account Report):
US citizens must file an FBAR if the aggregate balance in non-US accounts exceeds $10,000. This applies to bank, investment, and pension accounts, and penalties can be severe for non-compliance.
There are a range of other foreign asset forms also required for US people holding foreign assets, so speak to your advisers.
W-8 and W-9 Forms:
W-8 forms are used by US and non-US individuals to disclose treaty relief on US income.
These forms are necessary for information sharing with the IRS and ensuring the correct tax withholding is applied.
Mortgages, Foreign Tax Credits, and Investment Planning for US Nationals in the UK
Mortgage Complexity for US Nationals in the UK:
Exchange rate fluctuations can lead to phantom gains on UK mortgages. For example, if the exchange rate changes, paying off a mortgage could result in a gain or loss due to the difference in the dollar value of the debt.
Foreign tax credits may help offset this phantom gain, but the availability depends on the historic taxes paid in the UK and how long the individual has been living there.
It's essential to be aware of how these fluctuations might impact tax filings.
Foreign Tax Credits:
Foreign tax credits allow you to offset UK taxes paid against US taxes on the same category of income. These credits are carried forward for up to 10 years or can be carried back for one year.
This mechanism helps avoid double taxation, especially for higher tax rates in the UK versus the US.
Accidental Americans:
If you haven't filed tax returns in the UK (especially as an "accidental American"), you must ensure that you catch up on the last five years of returns. The IRS offers procedures to help individuals re-enter the system non-willfully.
The FATCA regulations require banks to ask if you're American, which may trigger reporting to the IRS.
Tax-Efficient Ways to Save/Invest for US Nationals in the UK:
ISAs (Individual Savings Accounts) are not as tax-efficient for US citizens due to reporting requirements, so alternative strategies are needed.
US retirement plans and UK pensions can be tax-efficient for both countries, as long as they are set up correctly.
A joined-up approach between US and UK wealth managers and tax advisors is crucial for seamless management and tax efficiency, ensuring both sides' reporting requirements are met.
Practical Steps:
Seek guidance from advisors who can coordinate wealth management and tax issues across both jurisdictions.
Work with a team that understands both US and UK regulations to avoid confusion and complications related to tax filings, mortgages, and investments.
Efficiently Handling Fees and Planning Ahead for US Nationals in the UK
School and University Fees Planning:
University fees: A potential option for tax-efficient saving is using a 529 plan (common in the US). However, for UK residents, a 529 plan may not be very tax-efficient since the UK treats it like a trust, not a savings plan.
Grandparents' involvement: If there are American grandparents, they can open a 529 plan for their grandchildren. This could help in paying for university or college fees without incurring tax inefficiencies.
School fees: Less focus on planning school fees, but similar strategies may apply for educational expenses.
Key Advice for Tax Planning:
Plan ahead: If you're moving to the UK, start planning at least 18 months in advance. Tax planning becomes difficult if you're only thinking about it a month or so before the move.
For those already in the UK: Don’t delay in reaching out to advisors for help with tax and investment planning. The sooner you clean up any issues, the less stress you'll face in the long run.