The United States taxes its citizens on worldwide income wherever they live. Move to London, pay UK tax on everything, never set foot in America again — and you still file a US return every year. Around 166,000 US citizens live in the UK, and a substantial number of them discover this obligation years late, usually when a bank asks them to complete a form they have never seen before.
Who is caught
Three groups file US returns from the UK: US citizens, including those who acquired citizenship at birth abroad and have never lived there; green card holders, whose obligation continues until the card is formally surrendered rather than merely expiring; and anyone meeting the substantial presence test through time spent in the States.
The "accidental American" is the category that produces the most distress — someone born in the US to British parents, or born abroad to a US parent, holding citizenship they have never used. The obligation is the same as for anyone else, and the fact that nobody told them is not a defence, though it is often the basis for penalty relief.
The two filings, and the one that carries the real penalties
The income tax return (Form 1040) reports worldwide income. Thresholds are low and the filing requirement is not waived because foreign tax was paid — you file first and eliminate the double tax second.
The one that produces the painful numbers is the FBAR, FinCEN Form 114, which reports foreign financial accounts where the aggregate balance exceeded $10,000 at any point in the year. Aggregate is the operative word: five UK accounts of £2,000 each cross it. It is an information report, no tax attaches, and the penalties for non-filing are nonetheless severe — substantial for non-wilful failures and a percentage of the account balance where wilful. Separately, Form 8938 under FATCA reports specified foreign financial assets at higher thresholds, and duplicates much of the FBAR content without replacing it.
Why there is usually no US tax, and where there is
Two mechanisms normally eliminate double taxation. The foreign earned income exclusion removes a substantial slice of employment income earned abroad, subject to residence or physical presence tests. The foreign tax credit gives credit for UK tax paid against the US liability on the same income — and since UK rates generally exceed US rates, the credit usually covers the liability entirely. Most US citizens in the UK file, and owe nothing.
The exceptions are where the two systems disagree about what income is, and they are worth knowing in advance:
- ISAs. Tax-free in the UK, fully taxable in the US, and — if invested in UK funds — a reporting problem as well;
- UK investment funds including unit trusts, OEICs and investment trusts are usually PFICs for US purposes, taxed under a punitive regime with onerous annual reporting on Form 8621. This is the single most expensive mistake a US person in the UK can make with their savings, and it is made routinely on the advice of UK advisers who have never heard of a PFIC;
- The main residence. Fully relieved in the UK by private residence relief; in the US, gain above the exclusion is taxable, and a gain arising purely from sterling movement against the dollar can be taxable even where the property sold for what it cost;
- Mortgage redemption in a currency other than the dollar can produce a taxable foreign exchange gain on repayment — an outcome that surprises anyone who has just remortgaged;
- Owning a UK company. A US person controlling a foreign corporation faces Form 5471 and potentially current taxation of the company's profits under the GILTI rules, which makes the standard UK owner-manager structure — small salary, dividends from a personal company — considerably less attractive.
Pensions are better news than folklore suggests: the UK–US treaty generally protects UK pension arrangements, though the interaction with employer contributions and lump sums needs care rather than assumption.
Fixing years of non-filing
For those who simply did not know, the IRS Streamlined Foreign Offshore Procedures exist precisely for this: file the last three years of returns and six years of FBARs, certify that the failure was non-wilful, and — for those meeting the non-residency test — no penalties apply. It is a genuinely favourable route, and the key word is non-wilful. Someone who knew and chose not to file is in different territory and needs specialist advice before making any submission.
Renunciation of citizenship is the other end of the spectrum, and it is not a shortcut. Separate the two things it involves. Giving up the citizenship is a consular act before a US embassy officer, and it carries a substantial State Department fee; tax compliance is not a precondition the embassy checks. What five years of compliant filing decides is whether you leave as a covered expatriate. Failing to certify that compliance on Form 8854 makes you covered on its own — independently of the net worth and average tax liability thresholds, so being comfortably under both does not make the certification irrelevant. Covered status triggers the exit tax: a deemed disposal of worldwide assets, and a later charge on gifts and bequests to US persons. Renunciation solves the problem permanently for those who genuinely have no US connection left, but doing it before the filings are in order is how people acquire an exit tax they did not owe.
The coordination problem
The practical difficulty is rarely either return in isolation — it is that the two must be planned together. The UK tax year ends 5 April and the US year ends 31 December, so credits have to be matched across mismatched periods. A UK adviser optimising for UK tax will recommend ISAs, unit trusts and a personal company; each of those is a US problem. A US preparer working alone will not know what the UK treatment was.
Acumon works with dual filers through expatriate tax and double taxation advice, coordinating the UK side — self assessment, investment structuring and pensions — with US preparers so the two returns agree. If you hold a US passport and a stocks and shares ISA, that combination alone is worth a conversation this year.