The UK is an attractive jurisdiction for overseas investors looking to diversify their portfolios and this is a trend we are seeing more broadly. However, for US taxpayers, additional care is required to ensure your investments remain tax efficient in both the UK and the US.

Passive foreign investment companies

The US has a set of rules known as Passive Foreign Investment Companies (PFICs) which are relevant to US taxpayers investing outside of the US. PFICs are any non-US company or non-US investment trust where the majority of income is generated from passive sources (e.g., interest, dividends, and gains) or most of the assets held are passive in nature (e.g. investments).

PFICs can be taxed penally in the US, with certain distributions and gains being taxed at the highest rate of tax, plus interest charges depending on how long the PFIC has been held.

PFICs are not only heavily taxed, but there are also significant annual US compliance requirements when it comes to these types of investments. PFICs are required to be reported on Form 8621 as part of a taxpayer’s US tax return. A separate form is required for each PFIC held during the year, even if no distributions or gains were received from the investment. As a result, investing in PFICs can significantly increase both compliance obligations and costs, and may therefore be something you wish to avoid.

UK sourced investment income and gains

Non-UK residents are taxed only on their UK sourced income, and gains from UK sited land and property. This includes UK sourced investment income, however, the UK imposes a limit on the extent to which non-residents can be taxed on this type of income. This investment income is known as ‘disregarded income’ and often results in no UK tax due on UK sourced interest and dividends.

As a US taxpayer, any investment income and gains will be taxable in the US, and must be reported correctly on your US tax filings. This includes the filing of a ‘foreign bank account report’ (FBAR) and Form 8938, if relevant thresholds are met, which disclose the existence and maximum value of any non-US accounts owned during the year.

There are various wealth management firms in the UK that are SEC registered, allowing them to advise and invest on behalf of US residents. We recommend speaking to an appropriate investment adviser prior to making any investment decisions.

Investing in UK sited property

The UK property market can be an appealing proposition and you may be exploring purchasing UK property to rent out and sell in the future. As a non-resident receiving UK rental income, the ‘Non-Resident Landlords Scheme’ (NRLS) will apply. This scheme requires 20% tax to be withheld by letting agents or tenants on gross rental income when the landlord’s usual place of abode is outside of the UK. This tax withholding does not necessarily reflect the tax liability for the year, and a self-assessment UK tax return will still be required to be filed each year to report the rental income and expenses. This may result in a refund of tax, or additional tax due, depending on the total level of net profits for the year. It may be possible to avoid the non-resident landlord tax withholding, but approval will have to be sought directly from HMRC.

As a US taxpayer, any UK rental income will also be taxed in the US. One expense that is allowable in the US, but is not allowable in the UK, is depreciation. This usually results in rental profits being lower in the US compared to the UK, and in fact often causes a rental loss from a US tax perspective. However, correctly claiming the depreciation expense can be complex, requiring identification of the correct base cost, converting to USD at the appropriate exchange rate, and applying the correct depreciation methodology and lifetime of asset.

Sale of UK sited property

Upon final sale of UK residential property, a non-resident capital gains tax return must be filed with HMRC to report the disposal or the property. This filing, and any capital gains tax liability, must be paid within 60 days of the completion date of the sale. This is tight timeframe, and so understanding the required calculations and filing obligations will be important to meet the deadline.

The capital gain will also be taxable within the US. However, if the property has been rented out, then any depreciation expense and any rental losses need to be taken into account when calculating the US taxable gain. This can be a complex calculation, and can cause different levels of taxable gains from a US and UK tax perspective. Depreciation and rental losses therefore need to be reported and carefully tracked within your annual US tax returns so the capital gains calculation can be performed and reported correctly.

Year-end planning

If there are income or gains taxable in both the US and UK, the US/UK double tax treaty needs to be considered to determine which jurisdiction has the primary taxing rights. For rental profits or capital gains from UK sited property, the treaty concludes that the UK will have the primary taxing rights. This means that any UK tax paid will be allowable as a ‘foreign tax credit’ (FTC) in the US to reduce the US tax liability and avoid double taxation. An important factor here for US taxpayers is that FTCs are, by default, claimed using the ‘paid’ basis in the US, which means they are recognised based on the payment date of the foreign tax. For example, if UK tax is paid in December 2026, this is picked up on the 2026 US tax return.

It therefore may be important to pre-pay UK tax in the same calendar year in which the income or gain arose to ensure enough FTCs are available to offset the US tax and avoid double taxation. Year-end planning calculations are often performed at the end of each calendar year, with UK tax payments advised to be made on, or prior to, 31 December.

UK tax residence

As well as for investment purposes, you may be considering a purchase of UK property for the intention of spending time within the UK. The UK has a complex set of residency rules known as the ‘statutory residency tests’ which determine whether someone is resident or non-resident in each tax year. Prior to spending time in the UK, analysis of these rules may be required to understand your UK residency position, along with the maximum number of days you can spend in the UK during a tax year without triggering tax residence.

Setting up a UK company

One option you may consider when investing in the UK is setting up a UK company to hold the various investments or properties. This will not only create UK corporate tax consequences and filing requirements, but it will also cause complications from a US tax perspective.

Non-US companies controlled by US people are known as ‘controlled foreign corporations’ (CFCs). These types of entities are subject to the ‘Net CFC Tested Income’ (NCTI) tax regime (formerly known as GILTI), which can result in double taxation. There are various elections available to mitigate this exposure, but careful planning and ongoing management may be needed to avoid such issues.

Moving to the UK

If you decide to move to the UK, there will be additional US and UK tax considerations to take into account to ensure you remain tax efficient across both jurisdictions. In particular, the new ‘Foreign Income and Gains’ (FIG) regime became available in the UK from 6 April 2025 for any person who has not been resident in the UK for at least the previous 10 years.

This allows individuals to claim an exemption from their overseas income and gains from UK tax for up to the first four tax years they are UK resident. This can be very beneficial, however careful pre-arrival planning will be important to ensure tax efficiency and awareness of tax filing obligations.

Please see our stepping stones article on ‘Tax on investments for Americans in the UK’ for more details on how a move to the UK may impact you.

Get in touch

If you are considering investing in the UK and would like advice on how to structure this efficiently across both jurisdictions, or require support with your tax filings, please get in touch. One of our dual-qualified US/UK tax specialists will be happy to discuss how we can support you.