US Citizenship

US Citizenship as a British Expat

Many British expats who move to America end up staying and seeking US citizenship. This makes sense from a peace of mind perspective and for other benefits including eligibility to vote, and more options for estate planning (or at least reduced complexity – see earlier blog).

For anyone who leaves the US, either planned or unplanned (in my experience, as an expat, we can “never say never”, because things change – we change!) US citizenship is uniquely complicated. It comes with significant ongoing responsibilities that, in our experience, most people are totally unprepared for.

This is no joke. We have heard one international tax attorney describe US citizenship for someone living outside the USA like having a disability!

We aren’t saying don’t do it – for reasons we will explain you may essentially have to do it – and, of course, the right to live, work and vote in the US is a great privilege, but forewarned is forearmed. Be prepared and it won’t hurt nearly half as much.

As we have mentioned before America is one of only two countries in the world to have citizen-based taxation, as opposed to residence-based taxation.

In other words, US citizens and Lawful Permanent Residents living outside the US are subject to US tax irrespective of where their income was earned or gains arose. That means that the only way out of filing annual US tax returns—even if you live elsewhere and make money solely outside of the US—is to renounce your citizenship or green card, which is no small decision or small task.

As a fun fact, this unique system was introduced during the Civil War in an effort to have Americans living outside the US contribute to the cost of war. For more on this: check out this resource.

Living outside America, US citizens may still be required to submit annual informational returns in addition to their regular tax returns. This is true even if you don’t owe any US taxes, which have hopefully been eliminated/avoided through exclusions (such as the Foreign Earned Income Exclusion) and credits applied due to the application of a Double Taxation Treaty (DTA).

And don’t get too complacent if there is a DTA. These can do a great job at reducing double taxation, but often do not eliminate it entirely. Double taxation can feel particularly unfair and comes as a nasty surprise, but it is something the US citizen abroad will have to come to terms with.

US Citizen Considerations and Challenges

Here are some considerations and/or challenges that you will face as a US citizen in another country:

Annual Return Obligation

Regardless of whether you have any US tax to pay, you will have to submit US tax returns. The due date is slightly different than for US residents – 15 June.

Different Tax Year Periods

The US tax year is the same as the calendar year, i.e. 1 January to 31 December, but not all countries run like this. Most relevantly for our clients, the UK tax year runs from 6 April to 5 April the following year. At best this can produce logistical challenges (information gathering) and at worst it can lead to serious complications.

Information Gathering (no 1099s)

Adding to the logistical challenges of differing tax years is the challenge of gathering all the information needed to file your return. In the US, these are usually supplied to you on helpful 1099s. You won’t get a W2, and you probably won’t get 1099s from non-US accounts. You have to gather and collate all that information yourself.

Offshore Account Reporting (and Penalties)

As a non-US resident you are likely to have non-US assets and accounts. These may need to be reported on a dizzying array of US informational returns (FBAR, 8938, 3520, 3520A, 5471 etc.), even if there is no income to declare. This alone can get costly. But the real danger lies in the potential penalties associated with failing to file certain offshore forms, or even just getting the information wrong. Even innocent non-compliance can attract significant penalties.

Difficulty Opening Accounts

As a US citizen, you will find it much more difficult to open financial accounts (including bank accounts) in foreign countries. Many institutions will outright reject you as soon as they discover your US citizenship. This is due to FATCA, as we discussed in another blog, and the onerous requirements it places on foreign financial institutions that have US clients. It’s not impossible, just harder.

Investment Restrictions – PFICs

US citizenship can make even relatively vanilla investing very challenging. Many – most even – popular collective investments in your country of residence are likely to be classed as passive foreign investment companies, or PFICS, and are probably inadvisable for you. This can make investing in your domestic currency very challenging. Furthermore, your country of residence may impose restrictions on investing in US funds (e.g the UK and their Reporting Vs Non-Reporting Fund regime.

Furthermore, common investment wrappers may lose their benefits. For example, ISAs are a very common tax-advantaged investment wrapper for UK taxpayers. But for US citizens in the UK there is no benefit and even substantial danger (this also applies to US residents with ISAs). The US: UK DTA does not recognise the ISA wrapper, so the US looks straight through to the underlying investments, which are likely to be PFICs and, in the US, punitively taxed.

You gotta be careful!

Double Tax

Even the most robust Double Tax Agreement is unlikely to save you from double tax in all situations.

Possibly the most famous example of this is Boris Johnson (who, having been born in the US, was a dual US/UK citizen, until he gave it up following this debacle) having to pay US capital gains tax on the sale of his UK main residence.

Rental properties are treated differently (depreciation can be claimed in the US, but it can’t in the UK), which can result in a surprise tax bill.

The NIIT (net investment income tax) will still apply to higher earners on their capital gains. If you’re a US citizen in the UK with substantial income (>$250k) and you recognise a capital gain, you will likely be subject to UK CGT at 28% (2022). This will more than offset your US CGT exposure, but you’ll still be hit with the US NIIT at 3.8%. That’s double tax!

No Double Taxation Agreement (DTA) / Tax Treaty

Worse still would be living in a country that taxes its residents, without a US tax treaty. If you live in the UAE, which has no treaty but is personal tax-free, it will be frustrating to have to pay US income tax when everyone around you is living tax-free (assuming you make more that the Foreign Earned Income Exclusion). But to live somewhere and be taxed in that country and then taxed again in the US on the same income/gains – that would hurt.

Estate Planning Challenges

As a US citizen, you may be liable for US estate tax upon your death. If you are domiciled in another country, you may be liable for estate or inheritance tax in that country. The solutions available in each jurisdiction are likely not compatible with the other. In fact, they can create significant issues. Great care must be exercised. Many people react to this by doing nothing, which carries significant risks of a different sort.

Give up – EXIT PROCESS & TAX

If you are certain you will never return to the US, giving up your US citizenship is an option, but this should not be undertaken lightly. US citizenship is a powerful asset, despite everything you have just read.

Furthermore, the act of giving up citizenship is not easy and involves certifying that you are fully tax compliant and, quite possibly, settling an Exit Tax and being subject to something known as the Transfer Tax forever (or rather, your US citizen recipients would be).

This is not an exhaustive list. I am sure there is much more to consider, but hopefully this gives you some insight into the difficulties that you may face, so you can at least be prepared to meet them.

Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.