Taxation is one of the most complex elements of moving abroad. Not only are you responsible for ensuring you are caught up with your taxes in your home country, but you also need to ensure that you keep up with the regulations of your destination country.
With the tax systems so different in the UK and the USA, making sure you’re declaring everything correctly can feel like a mammoth task, especially with worries about couple taxation and fines for getting things wrong.
But the good news is that by thinking ahead and preparing, you can avoid a lot of hassle. It’s simply a case of knowing what to expect, when to call in the experts and how to manage the tax responsibilities of UK expats in the USA in a streamlined way.
Here we’ll take a look at everything to get you started, from your tax responsibilities when buying and selling properties to the difference between state and federal taxes and the best states to live for lower taxes. We will also touch on other aspects of moving such as finding a new home, key documentation you’ll need and sorting bank accounts.
Table of contents
- How are UK Expats Taxed in the USA?
- Understanding Double Taxation for UK Expats in the USA
- What Taxes Do UK Expats Need to Pay in the USA?
- Breakdown of Taxes by State for UK Expats in the USA
- Implications of Remote Working for a UK Company While Living in the USA
- How are Overseas Investments and Bank Accounts Taxed for UK Expats in the USA?
- Tax Implications for UK Expats Selling Property in the UK
- How Are UK Pensions Taxed in the USA?
- National Insurance Contributions for UK Expats in the USA
- Essential Documents for UK Expats Moving to the USA
- Tips on How to Find a Place to Live in the USA for UK Expats
- Planning Your Move to the USA as a UK Expat
How are UK Expats Taxed in the USA?
Taxes in the USA are complex, even for those born and raised in the country. Unlike at home, you have to pay taxes at both the state and federal levels. Furthermore, the tax rates differ by state, making it even more complex.
Some of the taxes you are required to pay at the federal level include income tax, estate tax, and capital gains tax.
Then at the state level, you are taxed on income again, and the amount you pay differs significantly according to the state in which you reside. For example, states like New York and California have some of the highest tax rates in the USA, while Florida has zero income tax.
Even within the same state, certain types of taxes can vary depending on the city in which you live. This is especially true for sales tax.
As you can see, there is a lot of learning to be done if you are moving across the pond to make your life in the USA. And, as with every country, failure to fulfil your tax responsibilities can have severe repercussions including persecution, fines, and high interest rates.
A common question that comes up for Brits moving from the UK to the USA is: do I pay taxes in both countries? The answer isn’t a simple yes or no. The good news is the US and the UK have a tax agreement that allows citizens to move between the countries without having to pay taxes to both parties. This agreement, also known as the UK USA double tax treaty, seeks to solve the issue of double taxation.
Working with an expert in international taxation can help you optimise your tax return, as they can run calculations for different methods and scenarios to determine the most tax-efficient approach.
Understanding Double Taxation for UK Expats in the USA
Like we have seen above, double taxation is often a concern flagged by both American and British expats when they’re living in the UK and USA. To understand what’s at stake, let’s define double taxation. Double taxation is when an individual gets taxed on the same income by two countries.
To solve this problem, the UK and the USA have a double tax treaty. The UK tax treaty with the USA was signed to prevent double taxation but in some cases, it doesn’t hold up due to the discrepancies between the two countries’ tax codes.
In practice, this is more of an issue for Americans living in the UK, and the double taxation treaty can be complex for them as it involves understanding which country has ‘first taxing’ rights.
As a British citizen living in the USA, you shouldn’t have to worry too much about double taxation. However, there are other issues such as pensions, ISAs and other investments that can trip you up (more on these below) so it’s always best to get advice from a professional specialises in taxi advice between the USA and UK.
Your tax adviser will provide you with legal ways to protect your income. A good professional will encourage you to keep clean, organised records to make your tax filing process as smooth as possible.
What Taxes Do UK Expats Need to Pay in the USA?
- Income tax: There are two types of income tax in the USA, depending on what state you reside. States like California require income tax at the state level and the federal level. However, if you live in an income tax-free state like Florida, then you will only have to pay federal income tax.
- Social Security and Medicare tax: This is a form of tax that finds social programs for services such as health, social security, and support for the elderly.
- Sales tax: This is a tax applied whenever you purchase something. This should be no cause for concern as it is deducted at the point of purchase. In some places, there is even no sales tax at all.
- Excise tax: Similar to sales tax, you usually don’t have to concern yourself with excise taxes since they are deducted at the point of purchase. Goods with excise taxes include tobacco, luxury goods, and alcoholic beverages.
- Property tax: This is one of the most complex forms of taxes as it varies greatly from case to case. A qualified tax consultant should be able to help you navigate how much you owe every year on your property holdings.
Breakdown of Taxes by State for UK Expats in the USA
Taxes play a huge role in choosing which state to reside in, even for Americans.
If having low or no income tax is a priority for you, consider states like Alaska, Nevada, Florida, Wyoming, South Dakota, Texas, Washington.
On the other hand, states such as California, New York, New Jersey, and Connecticut tend to have higher income tax burdens – which incorporates all the different taxes you are charged such as income tax, sales and excise etc.
Retirees may want to explore states that offer tax benefits specifically for you. For instance, Florida and Arizona do not tax Social Security benefits and may provide exemptions or deductions for other retirement income.
The overall tax burden also varies across states, with high-tax states like New York and California, and low-tax states like Wyoming and Florida. Rankings differ, so it’s essential to assess income tax, property taxes, sales tax, and excise tax to evaluate the complete tax impact.
Here is an overview of the states with the highest tax burden:
- New York
- New Jersey
And with the lowest tax burden:
- New Hampshire
- South Dakota
Implications of Remote Working for a UK Company While Living in the USA
Working remotely for a UK company while living in the USA can be a great option for many UK expats. However, it is essential to understand the tax implications of this setup.
As a general rule, individuals are tax residents in the country where they spend the most time. This means that UK expats living in the USA may still be considered tax residents in the UK, depending on the amount of time they spend in each country.
The US follows the Substantial Presence Test, which is similar to the Statutory Residence Test in the UK. If you spend more than 31 days during the current tax year and 183 days during the three-year period that includes the current year and the two years before that, you may be required to file a US tax return.
Navigating the tax implications of working for a UK employer while living in the USA can be tricky, but it is crucial to get it right to avoid any potential penalties or fines.
For example, when a foreign employer engages the services of an individual working remotely from the US, the employer may be required to withhold US income and social security taxes, as well as pay unemployment insurances. Registering for an employer identification number (EIN) and complying with state tax authorities may also be necessary.
The advice of a qualified tax professional can help to ensure that you are compliant with both UK and US tax rules and are not paying more than necessary. With the right planning and advice, working remotely for a UK company while living in the USA can be a viable option for you.
How are Overseas Investments and Bank Accounts Taxed for UK Expats in the USA?
When moving to the USA, it’s crucial to understand the tax implications of maintaining UK savings accounts, ISAs, and current accounts.
Other investments in the UK such as mutual funds can also be taxed heavily in the US if they are considered Passive Foreign Investment Companies, so it is important to check these and be aware of whether you will owe tax on them. Failure to report overseas investments and bank accounts in Foreign Bank Account Reports (FBAR) can result in significant penalties.
The FBAR used to report these accounts to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The purpose of the FBAR is to combat money laundering, tax evasion, and other financial crimes by ensuring that US taxpayers disclose their foreign financial accounts.
The Internal Revenue Service (IRS) does not recognise ISAs as a tax-proofing wrapper, and they will apply tax as if the investments held inside the account were not within an ISA. Seeking advice from a specialist investment advisor before leaving the UK can help to mitigate these issues.
One possible course of action is to switch investments within an ISA into new holdings that meet the IRS’s requirements. It’s crucial to seek advice to ensure that any new investments still meet your risk criteria and long-term objectives.
Tax Implications for UK Expats Selling Property in the UK
If you are permanently moving to the US from the UK and decide to sell your house, there are tax considerations that must be taken into account. Even if the property is not subject to capital gains tax (CGT) in the UK, it may be subject to it in the USA.
The exception to this would be if the property sale qualified for the ‘Home Sale Tax Exclusion’ rule, which enables individuals up to $250,000 and married couples up to $500,000 of tax-free gain.
The tax rates for capital gains vary depending on your taxable income for the year. As of 2023, the capital gains tax rates are zero per cent, 15 per cent, or 20 per cent. The specific rate you will be subject to depends on your income level. Since the average property price in the UK is over both thresholds, it is highly likely that US capital gains tax would apply to any UK property sale.
It is also essential to understand that capital gains tax may still apply as a ‘non-UK taxpayer’ if you are to return to the UK at some point. In general, you are only fully in scope of UK capital gains tax if you are resident in the UK. However, if you dispose of an asset while temporarily non-resident in the UK, you may be liable to CGT when you return. This may apply to you if you decide to live abroad for a few years or if you are posted overseas.
Non-resident individuals are also liable to CGT on disposals of UK land or property. If you have been resident in the UK for at least four tax years out of the seven tax years prior to departure, and you leave the UK and become non-resident, you will be temporarily non-resident in the UK.
However, if you then return to the UK after a period of non-residence lasting five years or less, you may still be liable for CGT on any disposals of assets located in the UK.
If you decide that you’d prefer to rent out your property in the UK, remember that rental income will need to be reported to the IRS. Additionally, when you sell your UK property in the future, you may incur capital gains tax liabilities under the US tax regime. This means you could potentially have capital gains tax liabilities in both the UK and the US.
How Are UK Pensions Taxed in the USA?
The IRS requires you to declare your overseas investments and bank accounts, and you could face significant penalties if you fail to do so.
While ISAs are tax-free in the UK, the IRS doesn’t recognise them as tax-proof, which means you may be subject to tax on the interest earned. The same goes for UK pension funds, and unfortunately, there is no legal way to transfer them to the US. However, you can transfer your pension to a Recognised Overseas Pension Scheme (ROPS) via an offshore location like Malta.
ROPS has some limitations, but it provides you with more control and flexibility over your pension funds. If you have your pension in a Self-Invested Personal Pension (SIPP), keep in mind that many of the UK’s major SIPP providers may not work with US residents, even if they were originally UK customers.
Additionally, it’s worth noting that the IRS does not automatically recognise a SIPP as a pension structure entitled to favourable tax treatment. However, it is possible to apply to the IRS to have your SIPP recognised as a pension, which would protect its tax-advantaged treatment.
You should also be aware of the new overseas transfer charge, which could affect many ROPS transfers requested after March 9, 2017.
National Insurance Contributions for UK Expats in the USA
It’s worth considering paying National Insurance contributions if you’re planning on moving to the USA but might return to the UK or claim a UK pension in the future.
Depending on where you’re working and for how long, you might have to pay National Insurance in the UK while you’re abroad. And in the USA, you will also be expected to pay social security. However, paying social security only in the country you’re working in could affect your entitlement to UK benefits and healthcare when you return.
If you’re working abroad temporarily, you’ll usually continue to pay National Insurance in the UK, and you might be able to make voluntary National Insurance contributions while you’re paying social security abroad.
These payments will protect your benefit entitlement if you return to the UK, as well as your State Pension, whether you choose to return to the UK or stay living abroad. If you work for the UK government or armed forces, you’ll usually pay National Insurance while you’re working abroad.
Essential Documents for UK Expats Moving to the USA
Moving to a new country can be a daunting experience, but having all your important documents sorted out beforehand can make the process a lot smoother.
This includes your passport, visa and work permits (if applicable), birth certificate, marriage certificate, medical documentation (including dental and immunisations), university degree(s), and police background check.
Additionally, it’s important to have an inventory of your belongings for customs declaration, as well as any other relevant documentation that may be required for your specific situation.
Tips on Navigating the USA Visa Process for UK Expats
The most important step in moving to any country is securing the right visa. As a UK citizen, we don’t need a visa in order to visit the USA, but will need to investigate carefully when it comes to moving across the Atlantic.
There are so many different types of visa available, but they all come with stringent criteria, so you’ll need to be sure you can comply with everything needed.
For example, for an E1 visa, you need to be classed as a person of extraordinary ability in the sciences, arts, education, business or athletics, while the E2 is also open to people with advanced degrees.
The E3 visa is submitted by your potential employer, who will often have to show that there are no workers available in the USA who could carry out your role.
And the E5 visa if for investors, but you’ll have to be able to show how you can invest upwards for $500,000 in a venture that will create jobs for Americans.
You can find out more about the different visa types and the requirements you must meet on the US Department of State website for the Bureau of Consular Affairs. Remember, it is an expensive and time-consuming process, and if you don’t meet even one of the requirements, your application is very likely to be denied, especially if you don’t seek expert guidance.
In addition to the requirements, ensure that you have all the necessary documents for your application. This usually calls for both originals and copies so make it a point to have both. A few backups might also come in handy in case of any unexpected surprises.
Tips on How to Find a Place to Live in the USA for UK Expats
When moving to the USA from the UK, your first choice to make will be the state in which you live – if that isn’t already dependent on your job offer or visa conditions.
If you have the luxury to choose, you may want to opt for one with lower taxes, or perhaps just one that offers the lifestyle you’re looking for. Before committing to a home or even a neighbourhood, remember to thoroughly research first. Factors to look at include safety, transport links, local amenities, and of course, taxation.
When it comes to investing in property in the USA, there are tax implications that you’ll need to be aware of. The Foreign Investment in Real Property Tax Act (FIRPTA) imposes taxation on foreigners when they sell or receive income from a USA-based property interest.
So if you plan on later selling a property you have bought in the USA, under FIRPTA, then settlement officers are required to withhold 10 per cent (for distributions before February 17, 2016) or 15 per cent (for distributions after February 17, 2016) of the amount realised on the deposition (which means the cash paid or to be paid).
The IRS should receive this information to ensure that any potential CGT is paid fully.
In addition to a good tax consultant to ensure you honour all your commitments in the USA and the UK, you’ll also need a reliable realtor to advise you on the best investment opportunities, great areas and local rules and regulations. If you’re lucky, you might find a realtor that offers tax advice as an add-on service.
Click here for more tips on how to choose the right place to live in the USA.
Planning Your Move to the USA as a UK Expat
Moving abroad can be a daunting task, especially when it comes to tax-related planning and customs clearance. However, with proper research and preparation regarding your tax obligations in the USA, you can make the right choice for you financially, whether that is choosing the right state or ensuring your investments are properly declared, making the process much smoother.
At 1st Move International, we can take one thing off your mind. We provide expert international moving services that can handle your shipping most effectively, with faster and safer weekly shipping services and expert packing methods.
We’ll ensure your possessions are safely and securely packed and help you with customs clearance forms so your move goes smoothly. Simply get a quote on our website or contact 1st Move International today for a stress-free move overseas.