UK Citizens Moving to the U.S.: Tax Issues to Understand Before Arrival

The migration from the United Kingdom to the United States is often driven by professional ambition, family ties, or the pursuit of a different lifestyle. However, this move can carry a hidden weight: the sudden transition into the most complex tax jurisdiction in the world.

While the UK and the U.S. share a common language, their approaches to taxation are fundamentally different. The UK system is largely territorial and domicile-based; the U.S. system is citizenship-based and aggressively global. For a UK citizen, the moment you trigger U.S. tax residency, the Internal Revenue Service (IRS) effectively becomes a silent partner in your global financial life.

To protect your wealth, you must understand the interplay between HM Revenue & Customs (HMRC) and the IRS before you set foot on American soil.

At Antravia, we have operations in both the UK and US, so can help expats with their move.

The Residency Threshold: When does the Clock Start?

The most common mistake UK expats make is assuming their tax liability begins only when they start a U.S. job or receive a Green Card. In reality, the U.S. uses a mathematical formula known as the Substantial Presence Test (SPT) to determine residency.

Substantial Presence Test (SPT)

You are considered a U.S. tax resident if you are physically present in the U.S. for at least 31 days during the current year and 183 days during a three-year look-back period. The calculation is weighted as follows:

• All the days you were present in the current year.

• One-third of the days you were present in the first year before the current year.

• One-sixth of the days you were present in the second year before the current year.

If you have been scouting for homes or visiting the U.S. office frequently in the years leading up to your move, you might become a tax resident much sooner than you anticipated.

The Residency Start Date (RSD)

Your RSD is typically the first day you are present in the U.S. during the calendar year you meet the SPT. From this date until December 31st, you are a "Dual-Status Alien." You are taxed as a non-resident for the first part of the year and as a resident for the second. Navigating the filing requirements for a dual-status year is notoriously difficult and requires professional coordination to ensure you aren't paying twice on the same pound of income.

The Income Timing Strategy: Accelerating and Deferring

Timing is everything in cross-border tax planning. Once you become a U.S. resident, you are taxed on your worldwide income. This includes UK rental income, dividends from British companies, and interest from high-street savings accounts.

Bonus Payments and Deferred Compensation

If you have earned a bonus for work performed in London, but the payout is scheduled for after your move to New York, the IRS will claim a right to tax that income. Because the U.S. tax rates (when including state taxes in places like California or New York) can exceed UK rates, this can lead to a higher total tax burden. Therefore, we also suggest that you negotiate with your employer to receive all bonuses, commissions, and outstanding salary payments before your U.S. residency start date.

Dividend Distributions

For those who operate through a UK Limited Company, the timing of dividends is a critical lever. Dividends received while you are a UK resident are subject to UK dividend tax rates. Once you move, those same dividends may be subject to U.S. federal income tax and potentially the 3.8% Net Investment Income Tax (NIIT). Distributing retained earnings while still a sole UK resident is often the more tax-efficient path.

The Capital Gains Trap and the Cost Basis Problem

This is perhaps the most significant "hidden cost" of moving to the U.S. In the UK, you are likely used to the idea that if you move to a new country, your assets are "stepped up" to their current market value for tax purposes. The U.S. does not offer a step-up in basis upon arrival.

The Basis Gap

If you purchased shares in a UK company 20 years ago for £50,000 and they are now worth £500,000, the IRS considers your "basis" to be the original £50,000 (converted to USD at the historical exchange rate). If you move to the U.S. and sell those shares a month later, the IRS will tax you on the £450,000 gain and this is even though 99% of that growth happened while you had no connection to the United States.

The "Wash Sale" and Re-basing

To avoid this, many UK citizens engage in a "strip and clean" strategy. They sell their appreciated assets while still a UK tax resident (utilizing their UK CGT allowance or paying UK tax at lower rates) and then immediately repurchase them. This resets the "cost basis" to the current market value. When you eventually sell those assets as a U.S. resident, you only pay U.S. tax on the growth that occurred after the repurchase.

Real Estate: Selling your UK Home

For most UK citizens, their primary residence is their largest tax-free asset, thanks to Private Residence Relief (PRR). However, the U.S. view of your home is much less generous.

Section 121 Exclusion

The IRS allows an exclusion of up to $250,000 (or $500,000 for married couples) of gain on the sale of a primary residence. Given the rise in some UK area property prices, many UK homes have gains far exceeding these limits. If you sell your London home, for example, after becoming a U.S. resident, any gain above those thresholds is subject to U.S. Capital Gains Tax (usually 15-20%).

The Currency Exchange Phantom Gain

Under IRC Section 988, foreign currency fluctuations can create taxable gains/losses on foreign-denominated debt. If the pound weakens vs. USD, repaying the loan may result in a "phantom" USD gain (debt discharged for less USD equivalent), taxable as ordinary income. This surprises many expats and isn't symmetric (phantom losses may not be fully deductible). So, in summary, even if your home doesn't gain value in GBP terms, you can still owe U.S. tax due to currency fluctuations. If you have a mortgage in GBP and the Pound weakens against the Dollar, the IRS considers the "reduction" in your debt (in USD terms) as a taxable gain when you pay off the mortgage. This "phantom gain" has caught many expats off guard, resulting in tax bills on money they never actually "made."

The ISA and PFIC Issue

The Individual Savings Account (ISA) is a staple of UK financial planning. It is tax-free, simple, and effective. However, the U.S. does not recognize the tax-exempt status of an ISA.

Loss of Tax-Free Status

In the eyes of the IRS, an ISA is simply a foreign brokerage account. All interest, dividends, and capital gains occurring within the ISA must be reported and taxed on your U.S. return.

The PFIC Trap (Passive Foreign Investment Companies)

Most ISAs and UK brokerage accounts hold "OEICs" or "Unit Trusts" (the UK equivalent of Mutual Funds). The IRS classifies these as PFICs. PFICs are subject to the most punitive tax regime in the U.S. tax code. Instead of standard capital gains rates, PFIC returns can be taxed at the highest marginal income tax rate (up to 37%), plus compounding interest charges for "deferred" tax. The reporting requirement (Form 8621) is so complex that most accountants charge significantly more just to process a single fund. Our advice is recommended that UK citizens liquidate their ISA holdings and PFIC-compliant funds before becoming U.S. tax residents (although seek personal advice as your circumstances can vary)

UK Pensions and the Tax Treaty

There is a silver lining: the UK/U.S. Double Tax Treaty. This treaty is one of the most robust in the world and provides significant protection for UK pension schemes.

SIPP and Occupational Pensions

Under Article 18 of the treaty, the U.S. generally recognizes UK registered pension schemes (like SIPPs or employer-sponsored plans). This means:

1. Growth within the pension remains tax-deferred.

2. Contributions made by you or your employer may be deductible or excludable from your U.S. income.

The 25% Tax-Free Lump Sum

In the UK, you can typically take 25% of your pension as a tax-free lump sum. The U.S. does not necessarily respect this. There is significant debate and conflicting case law on whether the treaty protects the "tax-free" nature of this lump sum for a U.S. resident. If you are approaching retirement age, it may be beneficial to take that lump sum before you move.

Disclosure and Transparency: FBAR and FATCA

The U.S. government is less concerned with how much you have and more concerned with where you have it. Failure to disclose foreign assets is often a bigger legal risk than underpaying the tax itself.

FBAR and FATCA does not just apply to US Expats.. this also applies to British citizens living in the U.S. The confusion often stems from the term U.S. Person. In tax law, this isn't just a label for citizens; it's a net that catches almost anyone living in the States. Here is why it applies to you and how the "automatic" part actually works.

1. You are a U.S. Person (even without a Green Card)

The moment you meet the Substantial Presence Test (generally 183 days over a three-year period), the IRS legally classifies you as a Resident Alien. For FBAR and FATCA purposes, a Resident Alien is treated exactly the same as a U.S. Citizen.

• Your UK citizenship does not shield you from these rules while you are a tax resident.

• Your "privacy" expectations in the UK do not apply to your U.S. tax filings.

2. The $10,000 threshold is aggregate

A common trap for British expats is thinking, "I don't have $10,000 in any single account."

• The FBAR rules look at the aggregate (combined) maximum value of all your foreign accounts at any point in the year.

• If you have £4,000 in a Barclays saver, £3,000 in an old HSBC current account, and £2,000 in a Premium Bonds account, you have crossed the $10,000 threshold (depending on the exchange rate) and must report all of them.

3. FATCA: Your UK bank is already talking to the IRS

The mention of "automatic information exchange" is a reality called an Intergovernmental Agreement (IGA).

• The UK signed a "Model 1" IGA with the U.S.

• This means British banks (HSBC, Lloyds, NatWest, etc.) are legally required to identify "U.S. Persons" among their account holders and report that data to HMRC, which then automatically passes it to the IRS.

• If you used your U.S. address or a U.S. phone number to update your UK bank records, you likely triggered a FATCA flag in their system already.

4. The 2026 penalty reality

The penalties mentioned are real and adjusted annually for inflation. For 2026, the maximum penalty for a non-willful (accidental) failure to file an FBAR is approximately $16,536 per violation. Following a landmark Supreme Court case (Bittner v. United States), the IRS generally applies this penalty per form, not per account, which is a small mercy, but still a heavy price for a "forgotten" document.

5. Why the U.S. does this

The U.S. is the only major economy (besides Eritrea) that uses a system designed to prevent people from hiding assets offshore. Because they tax your worldwide income, they insist on seeing your worldwide assets to ensure you aren't earning interest or dividends in the UK and "forgetting" to put them on your U.S. tax return.

FBAR (Foreign Bank and Financial Accounts Report)

If the aggregate value of all your foreign accounts (bank accounts, brokerage, some life insurance policies) exceeds $10,000 at any point during the calendar year, you must file FinCEN Form 114. This is an information-only filing, but the penalties for forgetting it are astronomical—often starting at $10,000 per account per year for non-willful errors.

FATCA (Foreign Account Tax Compliance Act)

FATCA requires you to file Form 8938 with your tax return if your foreign assets exceed certain thresholds (e.g., $50,000 for individuals living in the U.S.). Furthermore, UK banks are now required to report the account details of "U.S. Persons" directly to the IRS. There is no such thing as "hiding" an account in the modern era of automatic information exchange.

Inheritance and Gift Taxes

The UK has a high Inheritance Tax (IHT) threshold but a relatively low "nil-rate band." The U.S., conversely, has a massive lifetime exemption ($13.61 million as of 2024/2025), but the rules for non-citizens are different.

If you are a UK citizen but a U.S. resident, your estate could potentially be caught in a tug-of-war between the two countries. The UK looks at your "domicile" (where you intend to remain indefinitely), while the U.S. looks at your "residency." If you are deemed a U.S. resident but remain UK-domiciled, your global estate is subject to UK IHT, while your U.S. assets are subject to U.S. estate tax.

Conclusion: The Antravia Approach to Relocation

Moving to the U.S. is a "wealth event." Without a pre-arrival strategy, you risk losing a significant percentage of your net worth to avoidable taxes and compliance costs.

At Antravia, we believe that the most successful relocations are those where the tax work is finished before the moving trucks arrive. By re-basing assets, timing income distributions, and restructuring ISA holdings, you can step into your new American life with the confidence that your global wealth is protected.

Your Pre-Arrival Checklist:

1. Determine your RSD: Work out exactly when you will trigger the Substantial Presence Test.

2. Liquidate PFICs: Sell UK mutual funds and ISAs to avoid the Form 8621 nightmare.

3. Reset Basis: Sell and repurchase appreciated stocks to shield pre-move gains.

4. Accelerate Income: Receive all UK bonuses and dividends before the move.

5. Review the Pension: Ensure your SIPP or workplace plan is treaty-compliant.

Our UK Expats in US Series

UK Citizens Moving to the U.S.: Tax Issues to Understand Before You Arrive
ISAs and UK Investments Under U.S. Tax: What Stops Being Tax-Free
Selling UK Property After Moving to the U.S.: Capital Gains and Timing Risks

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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