Case study 

To give you an idea of what we mean by this, the case study below highlights some of the things we did to help one of our current clients who recently moved to the UK from New York. In the end, our client benefited from the following: 

• Tax compliance being much simpler;  
• no UK tax in respect of US investment income on their UK tax return;  
• making higher pension contributions;  
• minimising current taxation; 
• saving £9,000 on a £30,000 Enterprise Investment Scheme investment; and  
• avoiding hefty penalties for non-compliance, especially with respect to the Foreign Bank Account Reporting forms. 

Scenario

When Mr Burton’s employer assigned him to the UK, he had already accumulated wealth and a large investment portfolio in the US. Having never been a UK-resident before, he did some research on the differing UK tax system. When he approached us, he was naturally concerned about the tax implications around his investments and his new tax residence status.

Minimising UK tax on investments 

We explained that for the first four years of his UK tax residence, there would be no UK tax on his foreign income and gains. Our advice allowed Mr Burton to fully benefit from the Foreign Income and Gains (FIG) regime during his first four years, which minimised his UK tax liability. 

However, it is important to note that Mr Burton should still calculate his foreign income and gains under UK tax principles and report this on his UK tax return to benefit from the FIG regime exclusion. Failure to report the correct amount of foreign income and gains could mean those amounts are eventually taxable.  

Due to Mr Burton’s tax status under the FIG regime, he is no longer required to track his foreign income and gains (sometimes held within what was previously known as a complicated mixed fund). This is something he would have needed to do previously under the old remittance basis regime (which ended on 5 April 2025). In addition, there is now no further tax burden if Mr Burton wishes to bring the funds to the UK (within the first four years or otherwise). 

The new FIG regime also provides helpful relief from potential differences in tax rates between the US and UK systems. One common example here is where capital gains are realised on non-reporting offshore (potentially US) funds or mutual funds. This type of capital gain is referred to as an Offshore Income Gain or OIG. 

These OIGs can be subject to tax at a maximum 45% UK income tax rate, whereas in the US, the highest long-term capital gains tax rate is 20% - a significant difference. These clients now have much more time to reorganise their affairs to align the tax rates on income and gains in both countries. The FIG exclusion gives a four-year period to reorganise without fear of higher 45% OIG tax rates at any time. Whereas under the old remittance basis regime, our advice may have extended as far as reorganising their investments prior to UK arrival. 

Another example of different tax rates and tax treatment is with respect to US limited liability companies or LLCs. A UK tax resident owner of an interest in an LLC could be taxed on distributions (not necessarily profits) at ordinary UK income tax rates (39.35% for dividends).  HMRC views these types of entities as opaque entities by default, where the entity is liable for tax on its income and the members are taxed only if they receive a distribution. At the very least, this is already more than the highest US tax rate of 37% and since there are issues with crediting US tax in this instance, this can lead to significantly higher tax rates and double taxation. The FIG regime allows those with LLC interests four years to obtain advice and potentially restructure without fear of additional UK tax on distributions received. 

For a more detailed breakdown on the above, read this article. 

Minimising tax on employment 

As an American living abroad, you will still be taxable in the US on employment income. However, you can use the foreign earned income exclusion to exclude in the region of $120,000 (indexed annually for inflation) from US taxation. For those earning more than this amount (including the foreign housing exclusion), taxes paid in the UK are used to offset the US tax due, generally meaning that those who are employed in the UK don’t have to pay US tax on employment income. 

In Mr Burton’s case, as with all our clients, we considered whether it is better to utilise the foreign earned income exclusion, or to rely on claiming UK taxes paid as foreign tax credits, to offset the US taxes. The latter made the most sense, as not using the foreign earned income exclusion but relying wholly on UK taxes paid, meant that there were more UK taxes paid than needed in order to offset the US taxes. 

These unused foreign tax credits can be very useful as they can be used to offset the US tax on tax relief opportunities in the UK. This includes schemes such as pension contributions and investments in enterprise investment schemes (EIS), both of which are UK tax-advantaged but are not on the US side. With our assistance, Mr Burton made use of these opportunities, allowing him to contribute more to a UK pension and also make a £30,000 UK investment (which saved him £9,000 tax). The excess foreign tax credits he did not use can now be carried forward for up to 10 years. 

Taxation of investment income on the US tax return 

As Mr Burton is still a US citizen, he is required to report his worldwide income and gains on the US tax return each calendar year. As mentioned earlier, credits are available in certain cases (e.g. UK employment income) to offset the US tax due. However, for investment income and gains, where there are no UK taxes due, there is nothing to offset the US tax with. This means that an individual resident in the UK using the FIG regime will likely continue to owe US taxes in respect of foreign (non-UK) income and gains. 

It is important to bear in mind that in the same sense that there are US investments that are inefficient for UK tax purposes, there are also UK investments that are inefficient for US tax purposes. We commonly see our clients setting up cash, and in some cases, stocks and shares ISAs which can have dramatically different US tax rates to the current UK ISA rules (nil tax position).  

Complying with UK and US tax laws 

No two cases are ever the same and for Mr Burton we spent some time understanding his situation and determining the US and UK compliance requirements. One important aspect of this was the Foreign Bank Account Reporting (FBAR) form. FBAR compliance is required where the aggregate balance of all non-US accounts exceeds $10,000 at any point during the year, whether or not the non-US account has any income. Failure to file these forms where required can result in large penalties. Mr Burton not only had his own accounts but also had signatory authority over some of his employer’s accounts. We collated the necessary information and prepared the FBAR reports for him, together with his US and UK tax returns. 

For more information on the FBAR application, read this insight.  

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The full Stepping Stones series can be found here.