U.S. Tax on UK Income & Reporting (IRS UK Summary Tax Guide)
The tax laws between the UK and the United States are comprehensive. That is because there are various different agreements tax in place between the U.S. and the UK, including:
- Bilateral Tax Treaty
- FATCA Agreement
- Totalization Agreement
- Specific Visa and travel rules
It would be impossible to provide a comprehensive detailed summary in one article (and still keep you awake).
U.S. Tax on UK Income
Therefore, we will summarize the main aspects of international tax law as it involves the UK. and the United States.
If you are seeking information specifically on US/UK retirement and pensions, please click here for a detailed article we prepared.
- Income Tax Treaty
- Estate Tax Treaty
- FATCA Agreement & Reporting Institutions (FFIs)
- Totalization Agreement
- IRS Offshore Voluntary Disclosure Options
Income Tax Treaty
The United States has entered into an income tax treaty with the UK. The treaty deals with many different issues involving how each country taxes the other’s citizens/residents on many different issues, including:
- Taxation of Business Income
- Taxation of Retirement
- Passive Income
- Exempt Income
- Investment Income
For example, in a country such as Singapore, where there is no tax treaty, even a Singaporean compulsory retirement plan (CPF) does not receive tax deferred treatment (even though it is a retirement plan, and even if the person resides in the U.S.) Conversely, if the same person invested in an various pension plans then the retirement will generally receive tax deferred treatment until distributions are taken. As to deferral of contributions, it is more complicated depending on who is making the contribution, the status of the individual at the time of the contribution, etc
The UK and U.S. Bilateral Income Tax Treaty can be found here.
Estate Tax Treaty
The United States has entered into 19 estate tax treaties with various different countries, including the UK.
You should speak with an estate planning attorney prior to executing an estate plan, if you are a US person who has significant assets in the UK.
The UK and U.S. Bilateral Estate Tax Treaty can be found here.
Receiving a Gift or Inheritance From a Foreign Person
If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).
Resources: Form 3520
FATCA is the Foreign Account Tax Compliance Act. It is a US tax law designed to combat offshore tax evasion and facilitate the reporting of foreign accounts.
There are more than 110 countries that have entered into FATCA agreements with the United States, and the UK was the first country to sign the FATCA Agreement.
What Does This Mean to You?
It means that hundreds of thousands of Foreign Financial Institutions (FFIs) worldwide (including UK) are proactively reporting US account holder information to the United States.
Many FFIs appear to simply be gathering and reporting individuals to the U.S. if there are any ties between the account-holder and United States (current U.S. address, former U.S. address, U.S. citizen or U.S. Legal Permanent Resident status).
FATCA Reporting can have very serious consequences for many reasons:
– Non-Reporting of FBAR (Penalties range from a penalty waiver, all the way up 100% value of the penalty in a multi-year audit and determination of willfulness)
– Penalty Non-Compliance with FATCA Penalties ($60,000 Max)
– Discovery of Nominee or other Unreported Companies not properly reported on Form 5471 or 8865
– Discovery of PFIC (Passive Foreign Investment Companies) and penalties under 8621 (non-monetary, but still intrusive)
– If an Account was used to receive or transfer a monetary gift (s) to the U.S., it may lead to various penalties as well
The United States has made international tax compliance a key enforcement priority, and recently announced several new tax compliance groups designed to focus on offshore and foreign money.
Which Banks in the UK Report U.S. Account Holders?
As of now, there are more than 30,000 Foreign Financial Institutions, within the UK that report US account holder information to the IRS. The list can be found here: UK FFI List.
What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR Reporting, it may involve a much more broad spectrum of assets and accounts, including:
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Direct Stock Ownership
- ETF and Mutual Fund Accounts
- Pension Accounts
- Life Insurance or Life Assurance Policies
The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).
As provided by the IRS: “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”
The United States has only entered into 26 Totalization Agreements, including the UK.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.