Taxes in move to UK

[F4mandolin]

After being in the US for a little over 2 years, we are starting to think about moving back to the UK in another 3 years or so. I have just started the search on what kind of taxes we would have to pay while living there. My wife is UK and I am US. We would of course have to continue paying US taxes on my pension/mutual funds.I noticed that folks like nun and Alan post on a couple of the other forums pertaining to this subject. The subject seems to be more than a bit confusing/complicated. I think I already know the answer to this question.....but is there and easy/simple guide (or at least a one stop shopping version) to what taxes would have to be paid in the US and the UK? Our income would be very low ($20k last year). Is it worth contacting sites like Nicki Reynolds/Tower Tax and other sites I noticed that seem to specialize in US/UK taxes?

 

[theOAP]

I see you've not had a response, so I'll offer my 2 cents worth (although it's probably not worth that amount).

I'm guessing you do know the answer,.... there is no easy/simple guide. The fact that you're talking about the UK adds an additional challenge since the UK taxes its residents on worldwide income as well. You'll need to investigate UK residency regulations (which have just changed).

Two suggestions:

First: Isolate every type/source of income (and every potential type/source) for both you and your wife, and then research all aspects for each type as regards the US. Do the same for the UK. Then consider where the double taxation treaty will play a part in taxing rights. When looking for answers within IRS information, be prepared to not find an answer. There often isn't one to be found in all the materials provided by the IRS, nor in Title 26 of the Tax Code. For international issues, this is not unusual. Tax professionals take a 'position' (or interpretation) on many issues.

Second: You will now have a taste of what you are up against. You have a choice; you can determine to do your returns yourself (and all the time/research that entails), or you could have a professional do your returns for you. If you select the professional route, you'll still need to be aware of what you need to do as regards 'effective planning'.

When choosing a professional, it may be wise to select one with dual US/UK qualifications. A tax stance taken in one country can cause problems in the second. Be careful of 'tax return mills'. They advertise low rates (they're usually located in the US), but their knowledge of UK consequences is often lacking. For anything other than a basic 1040 return, their rates may grow substantially.

Research (for the US) FBAR and Form 8938 reporting as well. The penalties for not filing these and other informational forms are extortionate. Also remember, you can not file jointly in the UK.

 

[Dd852]

Professional help is a must, I think. I've lived in the UK and the best thing is as a non-domiciled resident (ie your permanent home is the US) you can chose to be taxed on a remittance basis (ie money you bring into the UK) rather than on world wide income for seven years before big fees click in. But it is a non-trivial thing to work out which way is better for you in any given year. The fact that the UK is on an April-April tax year instead of a calendar year makes it all the more tricky to get the two countries' filings right.

 

[F4mandolin]

Don't know if I would fit into the non-domiciled category. If we do make the move back to the UK it would be for good and I would cut all my ties here. We have a few years to think about it though......figure at least 3 more years. I have lived in the UK for a total of about 14 years, both in the South and in the North so am comfortable living there. I can certainly see checking with a tax expert WELL before hand to see what the best way of making the move money-wise would be. I thought I read something that said the costs of keeping things like my Vanguard funds (expense ratio) in the UK were starting to go down. Guess I could move my TSP money to another account as well.....but the expenses on that fund are very low.

 

[theOAP]

@F4mandolin
You've posed a slightly different question elsewhere today, but for consistency with the above response, I'll answer here.

Your comment elsewhere:
"I wouldn't be surprised that we move back to the UK within 3-5 years but a lot of that has to do with how much of a hit I would take in taxes.....If our taxes would be noticeably higher....then that could kill the move before we get going too far."

If I understand your situation correctly, you will have no earned income. That means all your income for US purposes will be passive. As such, you will only be concerned with UK foreign tax credits for the US. For the UK, all income is treated the same within the general concept of taxation, whether it is from employment, pensions, or investments.

Again, you need to do adequate planning (example: as nun points out, the utilization of ROTH's) prior to any tax reporting. Because of foreign tax credits in both the UK and US, and the benefits of the US/UK tax treaty, it's generally accepted that the aggregate tax bill for a year will be no higher than the maximum amount due to one or the other of the two countries, whichever may be higher for that year. The additional cost will be the fees charged by a professional tax adviser if you elect to go that route. I assure you, they will be higher than what you are now paying in the US.

There will be instances, primarily on the US return, where you will not be able to offset tax paid in the UK (such as VAT at 20%, very high fuel duty, etc.). There will also be items that are tax free in the UK, but which will be taxable in the US (ISA's, [winter fuel] benefits, the sale of your home if above the US thresholds, some capital gains if below roughly $15,000, etc.). The UK government encourages people to save by offering tax free financial options. They are NOT tax free on a US return.

Lastly, and I don't mean to be harsh, but if you are serious about this you must do the research yourself for the basic understanding, and you must discover what best applies to your situation. No one can answer for your specific situation on a public forum. (Nun, and others, can offer very worthwhile advice as to what to look out for.) If you feel unable to do that, then start seeking professional tax/financial advice (preferably a tax adviser, not a financial adviser) now.

As always, all the above is only IMHO.

 

[Dd852]

Re domicile - it is complex and in fact difficult to change Anyway, some background reading here http://www.hmrc.gov.uk/international/domicile.htm

 

[theOAP]

An additional page concerning the remittance basis:

HM Revenue & Customs: Paying tax on the remittance basis - an introduction

Note the loss of the Personal Allowance if you elect the remittance basis (£2,000+).

And a new page on the recently released SRT (Statutory Residence Test). This has only now (May 2013) come into existence. The category of ordinary residence has been abolished.

http://www.hmrc.gov.uk/international/rdr3.pdf

 

[F4mandolin]

Thanks folks....I will get to reading.

theOAP- nope.....you are not being harsh, that's why I am cranking things up NOW for something that is likely 3+ years away. It will be another year or so before we even have to sit down and make a decision to go or stay. From what I have seen online so far..... the US/UK tax issues are pretty confusing.....and I thought getting my wife through the immigration process was needlessly confusing/expensive/time wasting.

 

[F4mandolin]

Just thought I would update.....got hold of some people I used to know..

Fred,

Your situation is pretty straight forward. As long as you remain a US citizen you must report worldwide income to the IRS. However, that doesn't always mean it is taxed by the IRS. Since there is a tax treaty between the US and UK, noncitizens and residents aren't double taxed.

So if you move to the UK and become ordinarily resident, you will most likely need to file a UK return with the inland revenue. Under the terms of the treaty, your OPM pension is taxable by the US and the UK will either exempt it or give you a credit for US taxes paid. All other income will be taxed by the UK and then you take a credit on your US tax return for UK taxes paid.

Bottom line, you might pay slightly more living in UK depending upon how much income you have as their tas rate is higher than the US.

The IRS has a publication 54 that you can download from their site, Internal Revenue Service. It gives a lot of info for US citizens living abroad and will reference other IRS sources as needed.

 

[BigNick]

With $20K in income, even it is all taxed in the UK, you won't be paying a lot of income tax. The first $15K is non-taxable and then a 20% rate starts.

A non-negligeable factor in the UK is the "Council Tax", which is a sort of property tax. This is unrelated to your income and can represent quite a lot of money, especially if you are taking the high-value-property/low-income approach to your portfolio.

One area where the UK tax system seems to be less grasping is capital gains. Your first $15,000 of gains taken per year are tax-exempt.

 

[nun]

Just thought I would update.....got hold of some people I used to know..

Fred,

Your situation is pretty straight forward. As long as you remain a US citizen you must report worldwide income to the IRS. However, that doesn't always mean it is taxed by the IRS. Since there is a tax treaty between the US and UK, noncitizens and residents aren't double taxed.

.

Ha Ha, cross border taxation is never simple! and you being married to a non-citizen brings in the complication of joint ownership and the complications of IRS taxation being propagated to your spouses investments.

I would definitely talk to a professional. Tower tax did some research for me once and I was happy with the work. Excellent professionals are

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