Representative Darin LaHood introduced a Residence-Based Taxation for Americans Abroad Act on 18 December 2024. The recent bill proposals could fundamentally change how UK resident US citizens are taxed.
What the bill could mean for US citizens in the UK
The bill, which is designed to ease US reporting and compliance burdens on US citizens abroad, could, if passed, be extremely beneficial for US citizens resident in the UK. The proposal is that qualifying citizens would be able to elect for Residence-Based Taxation (RBT), which would not only impact their US tax position but also, as a consequence, affect their UK position.
In essence, the bill proposes that US citizens living abroad ‘long-term’ can elect for a reporting procedure that allows them to limit their US tax liability to US-sourced income. In addition, those individuals – and their business – would be relieved of certain complex US reporting requirements such as Foreign Account Tax Compliance (FATCA) and Foreign Bank Account Report (FBAR).
Wider impact for non-US residents
Although a US bill, the benefit would likely not be limited to the US. Many UK resident UK citizens face complex UK reporting as a consequence of the need to harmonise their US and UK affairs. Indeed, whilst a well-advised US citizen can navigate many of the numerous pitfalls – such as paying UK tax a month early (Happy New Year) or avoiding PFICs on their ISAs – there are some, particularly for those who own a business, which require a much higher degree of planning and foresight.
The challenges of the UK/US double tax treaty
The UK/US double tax treaty is comprehensive, but, at nearly 25 years old, the evolution in each country’s laws means that it simply doesn’t cover even some of the most commonly encountered issues. More often than not the double tax issue arises not as a result of an attempt to avoid taxes but simply down to incompatibility or timing. Consequently, many of the standard planning opportunities afforded to UK residents are generally not recommended for US citizens. If enacted, the rules would hopefully allow US citizens who are long-term UK tax residents to organise their affairs in the same way as other UK residents, providing them with the certainty of treatment needed for managing their international affairs.
In addition to simplifying the overall tax situation, the new rules would also help reduce complications related to matters such as the purchase of a UK home, where current rules can lead to unexpected tax liabilities.
Additional benefit: Improved access to financial advice
Another common problem encountered by UK resident US citizens is the ability to access financial advice, with many institutions unable (or unwilling) to take on such clients. The bill should hopefully make it easier for UK resident US citizens to access financial advisors in the UK, which comes at a very opportune time as many US citizens consider whether they should take advantage of some of the UK’s new rules introduced in the October 2024 budget.
Whether this bill is passed (whether on its own or as part of a bigger tax bill) remains to be seen. However, it is clear that this would be welcomed by many. At its most basic, it could save considerable compliance costs related to reporting to the US; for those with more complex affairs, it may help reduce their global tax burden for themselves and their families, in particular where they are able to take advantage of the UK’s Foreign Income and Gains regime
What happens if the bill is not passed?
If the bill is not passed, then US citizens still have the ability to renounce citizenship – but of course, this is not a decision to be taken lightly, not least for its potential tax consequences. Renouncing US citizenship could also have a detrimental impact on an individual’s domicile status for UK purposes, although, after April 2025, with the scrapping of the UK’s remittance basis, domicile will be less relevant in the UK.
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