Changes to US Taxation and it’s Impact to UK Tax

In this latest blog on US Taxation we will address queries about when the changes may come into effect, who they apply to, and how they may interact with UK tax rules. 

The United States is one of only two countries (alongside Eritrea) that taxes individuals based on citizenship, regardless of where they live. Proposed legislation seeks to give Americans living abroad the option to opt out of this citizenship-based taxation system. 

The ‘Residence Based Taxation of Americans Abroad Act‘ was introduced by Illinois Republican Congressman Darin LaHood on December 18 2024, It follows a broader Republican Party agenda to reduce the tax burdens of US citizens residing outside the United States. 

The bill is designed to lay the groundwork for an updated version which was presented at Congress on January 3, 2025. 

This legislation could potentially affect around five million Americans who currently reside abroad, including thousands living in the UK. 

Who Will It Apply To? 

The proposed bill aims to stop requiring US citizens living abroad to file income tax returns solely based on their citizenship. Instead, they would be treated like non-US-resident foreign individuals for US tax purposes. 

US citizens residing outside the US would need to make a one-time election to change their tax status to that of a ‘non-resident US citizen’, while meeting residency requirements in their country of residence (such as the UK). 

Applicants must also certify that they have complied with all US tax obligations for the past five years and, in some cases, pay a ‘transition tax’. 

Once this new status is elected, it will remain in place unless the individual returns to the US and resumes residency or voluntarily reverts to being a resident for tax purposes. 

Does It Apply Worldwide? 

Yes, the proposed legislation applies globally to US citizens living abroad who meet the eligibility criteria. 

If I Am a US Citizen Living in the UK, Will It Exempt Me From All US Tax and Filing Requirements? 

The bill proposes exempting US citizens living abroad from several key US tax obligations: 

• FBAR (Foreign Bank Account Report): You would no longer need to declare your UK bank accounts to the US tax authorities. 
• FATCA (Foreign Account Tax Compliance Act): UK banks would no longer be required to report account details of US citizens to the US Internal Revenue Service (IRS). 

Additionally, Americans living in the UK who elect for the new status would no longer need to file annual US tax returns or report their worldwide income, unless they have US-sourced income. 

That said, income originating in the US-such as rental income from a US property-will still need to be declared and may be taxed by the US. 

What Are the UK Tax Implications? 

While the proposed legislation aims to reduce administrative burdens and eliminate the need for US tax filings for non-US income, Americans living in the UK must still meet UK tax obligations. 

1. UK Residency Rules: 

Under UK law, individuals are taxed based on their residency status. This means that US citizens residing in the UK are subject to UK income tax on their worldwide income.

2. Double Taxation Treaty: 

The existing US-UK Double Tax Treaty helps to prevent double taxation by allowing tax paid in one country to be offset against tax due in the other. However, the treaty applies primarily to income that is taxed in both jurisdictions. Under the new US tax rules, income generated in the UK would likely not be subject to US tax, but the treaty will still be relevant for US-sourced income, such as dividends, pensions, or rental income. 

3. Transition Tax and UK Capital Gains: 

The bill introduces a ‘transition’ or ‘departure’ tax for certain individuals. This tax treats some assets as though they were sold at fair market value before a person elects for non- resident status. 

In the UK, this could trigger a capital gains tax (CGT) event. Even if no actual sale takes place, HMRC may consider any deemed disposal under US law as a CGT event for UK tax purposes. This could result in additional UK tax liabilities, especially if the individual owns high-value assets. 

4. Inheritance and Estate Planning: 

The UK has its own rules on inheritance tax (IHT), which apply to worldwide assets if you are domiciled in the UK. While the US offers certain exclusions for inheritance and estate taxes, UK-resident Americans should seek professional advice to ensure there are no unforeseen liabilities when navigating the differences between UK and US tax systems. 

Will There Be a Departure Tax? 

Yes, but only for certain high-net-worth individuals and under specific conditions. 

The ‘transition’ or ‘departure’ tax would apply when a person elects to become a non- resident for US tax purposes. This tax assumes that certain assets were sold at fair market value the day before the election. 

However, individuals with a net worth below $13.99 million (as of 2025) would be exempt. 

Additional exemptions include: 

• Those who have not been US residents since turning 25 years old or since March 28, 

2010. 

• Those who have been tax residents in a foreign country (e.g., the UK) for three of the last five years. 

• Individuals who can certify compliance with US tax laws for the past three years. 

Americans in the UK should consider the implications carefully, particularly if they hold significant assets such as property, investments, or pensions that could trigger a departure tax under US law. 

When Will This Act Come Into Effect? 

The legislation is still at an early stage. 

The initial bill provides the framework for a more developed version to be debated in 2025 by the US Senate and House of Representatives. 

Congressman LaHood has expressed optimism that the bill could form part of a reconciliation package in the coming year. However, the exact timeline for implementation remains unclear. 

Next Steps for UK-Resident US Citizens 

If the bill passes, it could significantly reduce the administrative burden of filing US tax returns and reporting UK income. However, UK-resident US citizens must still: 

1. Comply with UK tax rules, including annual self-assessment returns if required. 

2. Monitor the US-UK tax treaty for potential changes in tax relief provisions. 

3. Seek professional advice to navigate any potential transition or departure taxes, 

particularly if they hold significant assets. 

This proposed legislation offers exciting opportunities for Americans abroad, but it’s essential to fully understand how it interacts with UK tax law to avoid unexpected liabilities. 

If you have any queries or questions relating to US Taxation changes please get in contact with Graham Cook at Jarem Accountants Limited