Q: Do I have to pay tax on capital gains from UK investments?
A: Yes, all UK investments are subject to UK capital gains tax. The tax rate is 20% (or 28% for residential property) if you are a higher rate taxpayer, and 10% (or 18% for residential property) if you are a basic rate taxpayer.
Q: Am I permitted to take the UK Annual Exempt Allowance (AEA) when calculating taxable capital gains?
A: Yes, capital gains from investments are only taxable in excess of the AEA. The 2017 AEA was £11,500, so individuals with capital gains in the UK will pay tax on their net capital gain less the AEA.
Q: What happens if my investment resulted in a loss for the taxable year?
A: As in the US, capital losses are only deductible against capital gains. If the total amount of gains is greater than total losses, the amount of the loss can be subtracted from other capital gains to reduce net capital gain. If all investments produce a net capital loss, that loss can be carried forward and deducted from capital gains in future years. (Note: A net capital loss from UK investments cannot be deducted from US capital gains.)
Q: How can I pay this tax?
A: HM Revenues & Customs provides a Capital Gains Tax calculator for non-residents that you can use to calculate how much you owe and pay the tax.
Q: What if I received interest or dividends from UK investments?
A: You will pay UK taxes on this investment income, subject to a threshold. The rate for this tax varies depending on which income band you fall in. Use this guide to figure out how much investment income tax you owe.
Q: What if I own real property in the UK? How is my rental income from that investment taxed?
A: The UK automatically withholds their share of UK tax when rental income is paid to the non-resident landlord. If you wish to receive these payments without having to pay UK tax, you can apply here (the income is still subject to US tax).
Q: Should I still report income from UK investments on my US tax return? Can I deduct any of these tax payments from my US taxable income?
A: Yes, you still must report this income on your US tax return. However, in order to prevent this income from being taxed twice, the IRS allows taxpayers to either take a deduction or a credit for any foreign taxes paid during the year. This includes the investment income, capital gains, and rental income taxes mentioned above. In most cases, it will be more beneficial for individuals to take the credit, as it is a direct reduction in tax liability rather than a deduction from taxable income. Use Form 1116 to take this credit.
Q: Do these rules apply to all types of investments?
A: No, the foreign tax credit does not apply to taxes on excluded income, foreign mineral income, and a portion of taxes on oil and gas income. The IRS outlines more taxes that do not qualify here.
Q: What if I am invested in a mutual fund based in the UK?
A: International mutual funds are treated as Passive Foreign Investment Companies (PFIC) if 75% of their revenue is “passive” and 50% of the company’s assets are used to generate revenue. US taxpayers who receive interest, dividends, or capital gains from PFICs must report this income as ordinary income on their US tax return, which is taxed at a higher rate than normal capital gains. They are not subject to UK taxation. This law was designed to bring tax revenue back to the US and disincentivise foreign investment.
Q: Are there any timing differences for filing a return in the US versus the UK?
A: The US taxable year runs from January 1 to December 31, while the UK tax year is from April 6 to April 5. Due to this difference, individuals paying taxes in both countries get an automatic 2-month extension on their US return, meaning it is due June 15 rather than April 15. If necessary, taxpayers may apply for an additional extension which would give them until October 15 to file a return for the previous year.
Q: What other general rules should I know about investing and paying taxes in the UK?
A: UK taxes must be paid in pounds; US paid in dollars. Necessary currency conversions can use an annual average of the exchange rate or the rate on the day of each transaction. The taxpayer may use whatever conversion method they like as long as it is consistent throughout.
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As a US citizen living and working outside of the US, it is often possible to exclude part- or even all of your foreign income and self-employment income from federal tax through the Foreign Earned Income Exclusion (FEIE).