Incredibly confused on how and where I should be paying tax!

I've been reading all these threads about remittance and arising and non-doms and I am incredibly confused now! Here is my situation, can someone please tell me if I've been doing something wrong and if so how I can fix it?

I've been in the UK for 5 years. Most of that time was spent as a student on a tax-free stipend. As I didn't pay tax on that here, I declared it on my US income tax return and paid tax on it. Now I am working in the UK making way less than the foreign income threshold and paying UK tax, so my understanding is that I still have to file, but I don't have to pay tax on my UK income. Here is where it gets more complicated. I have a mutual fund in the US, and the dividends are re-invested automatically, and I also have a joint checking account with my mum which pays a very very tiny amount of interest. That all goes into my US tax file, but I usually don't have to pay tax on it because it is so little. In the UK I have two savings accounts, a cash mini-ISA (tax-free, pretty small balance) and a direct saver for which I pay UK tax on the interest. Should I be declaring the latter two items on my US tax return? Should I be paying UK tax on my US investments? And what on earth is non-dom and how do I know what I am? Help!

Should I be paying UK tax on my US investments?

As regards the unremitted US income the technical question to ask is .... are you within the terms of Section 809D ....... Application of remittance basis without claim where unremitted foreign income and gains under £2,000? Section 809D was inserted into UK tax law by the Finance Act 2008.

That is, the amount of the dividends from the US mutual fund, plus your share of the interest on the US bank account .... is the amount of income less than £2000 per year? If the answer to that is "yes" then effectively the remittance basis still continues for you .... the income is not taxable in the UK unless you remit that income to the UK.

And what on earth is non-dom and how do I know what I am?

There are three characteristics in UK tax law, that assist in determining tax liability on income or gains ..... Resident .... Ordinarily Resident .... and Domicile.

Based upon what you have posted it looks likely that the UK tax authorities would treat you as .... Resident .... Ordinarily Resident ... but Non-Domiciled! Accordingly, if you are within the terms of Section 809D mentioned above, specifically the £2000 limit, you are not liable to UK tax on overseas investment income not remitted to the UK.

Compare that to me ... Resident ... Ordinarily Resident .... Domiciled in the UK ..... if I happened to have your US income, I would be liable to UK tax on the income even if the income is not remitted to the UK.

Does that help?

In addition to the 2000 pound threshold you have to be resident for 7 years to be taxed by the UK on your foreign gains, (unless it is remitted to the UK). Once you reach the 7 years you will be taxed on an arising basis, but you'll get a UK credit for tax you pay in the US.  Alternatively you can opt to pay 30k pounds to be taxed on a remitted basis. FYI any capital gains from those US mutual funds will be taxed in the UK as income, but that's been fully covered in another thread.

As a US citizen you must include all your income, so yes the mini cash ISA and savings accounts. You have to pay tax on the mini cash ISA interest as the IRS does not recognize it's UK tax free status, but you'll get credit for the tax you pay on your regular UK bank interest. Word to the wise don't buy UK based investment products like Unit Trusts as the IRS has complex rules and expensive taxes on these to discourage US citizens from investing offshore.

I'm surprised that you had to pay US tax on a tax free UK stipend. I don't know anything about this, it just seems strange. There is a section in the tax treaty that deasl with such stipends, but I'm not sure it applied you your situation. Maybe Guya can offer an insight

My recollection is that the student article in the treaty only "works" for periods of less than 2 years - so the income may have been taxable in the US.  There are lifetime learning & hope credits you could still have claimed that might have helped a little.

OK, that is slightly clearer. My mutual funds dividends and interest have always been well less than £2000 a year, and this tax year it has lost a substantial amount!

Once you reach the 7 years you will be taxed on an arising basis, but you'll get a UK credit for tax you pay in the US.  Alternatively you can opt to pay 30k pounds to be taxed on a remitted basis.

30K! I'm not remotely near having that sort of money. If I cash out my investment and move it to a UK account, do I have to pay capital gains in the US and in the UK? If I get a credit in the UK, do I have to file something?

How do I actually declare ISA interest on a US tax return?

Since you won't claim the remittance basis all you need to do on your UK return is claim non-dom status.

The ISA interest is reported on Schedule B as interest & on the passive basket Form 1116.

You'd also mention it on the Form TD F 90-22.1.

If you sell the fund you report this as a gain on your US return.  If you elect the treaty you could resource it as foreign on the passive Form 1116 & claim credit for UK tax in the US.

The UK would have you report an offshore income gain on the foreign pages of your UK return. If you are remitting from a mixed fund (eg an account containing accumulated dividends) you would owe UK tax on the income remitted.

> FYI any capital gains from those US mutual funds will be taxed in the UK as income, but that's been fully covered in another thread.

> Word to the wise don't buy UK based investment products like Unit Trusts as the IRS has complex rules and expensive taxes on these to discourage US citizens from investing offshore.

And then these governments and leaders keep doing their lip service to 'free trade' and 'free markets' and how we should "bring down the barriers" and "tear the walls down" and create a new global unified world, yada yada yada.

As for the big global multi national corporations, they will have some special loopholes that their ivy league educated lawyers can take advantage of.

As for the govt leaders, they dont have to worry about investing for retirement with their sumptuous golden pensions so they are sorted.

Tax law should be very simple : You live in a country for more than X months a year, you a pay a flat Y% of your earnings above a basic free allowance, whether you earn 50K a year or 50 gazillion a year. Takes 5 minutes to complete a friggin return. Ah, but that would throw the tax lawyers and govt beureucrats out of business. 

There is no need to create so much complication. It is not as if they are finding the cure for cancer or launching a space shuttle. Keep government small and raise the basic revenue in a simple effective way. And once you raise the revenue, spend it judiciously, like you run a small startup company.

30K! I'm not remotely near having that sort of money.

Don't worry about the 30k, it's a way for rich folks to pay a fee to HMRC so that they can
avoid paying UK tax on their offshore investments that they don't remit to the UK. Once you meet the residency period rules the UK will tax your offshore funds on an arising basis. This only becomes a serious issue for people in the 40% tax bracket, but it's an area that I've held forth on too much recently.

You mention moving money to the UK, please be aware that non-US pooled investments like unit trusts, stocks and shares ISAs, ie the UK equivalent of mutual funds, come under IRS PFIC rules and they will become the bane of your life, just don't even think of buying them. Buying the shares of individual companies in either the UK or US puts you in a better tax position that the pooled investment vehicles of either country, but it's a more risky and time consuming way to invest IMO. If you need the money more for spending or as an emergency fund by all means put it in a UK savings account, but remember all foreign accounts over $10k need to be declared to the US Treasury.

Here is a link to some useful articles, although no mention

http://www.britishamericantax.com/Articles.html

And then these governments and leaders keep doing their lip service to 'free trade' and 'free markets' and how we should "bring down the barriers" and "tear the walls down" and create a new global unified world, yada yada yada.

I can see how all this is frustrating you, I sometimes feel that way, but life's too short for that. I've never really understood why capital gains should be taxed differently from income anyway, that's a "gift" to those with money to invest. When I get annoyed at the possibility of having to pay tax or navigate complicated cross border taxation I remind myself that I'm lucky to have lived in both the UK and the US and to have enough money to have the potential to pay a lot of tax. There are far worse problems to have.

You bemoan the complications of the tax code, well I look at it like the Windows Operating System, something built up over the years and added to adhoc to fix bugs and problems. The result is highly complex and prone to problems, but it serves it's purpose and works most of the time.

Since you won't claim the remittance basis all you need to do on your UK return is claim non-dom status.

The ISA interest is reported on Schedule B as interest & on the passive basket Form 1116.

You'd also mention it on the Form TD F 90-22.1.

I've never filed a UK return. Would I need to do that this year, or only after 7 years if I still have the investment? As for the US one, I've always filed a 1040A. Is that still what I would use? I've never heard of a Form TD F 90-22.1 except on this forum, is that something separate from the normal form? Also, do I need to back-report my ISA and savings account, or should I be ok if I just report it in my next return?

Better still, where can I find a UK-US accountant?

UK law has always required you to file a UK return to claim the remittance basis although this may have made no practical difference.  You should ask HMRC to issue one for 2008/09.

The Form TD F 90-22.1 is required by the Bank Secrecy Act - it is not part of your US tax retun expect that you mention it also on Schedule B.

Found this on the HMRC IR20 document:
If you have less than £2,000 unremitted overseas income and gains in a tax year,
this change may not affect you. You will continue to have access to the
remittance basis by default, that is, without making any claim.

So does this mean that if I made less than £2000 in income per year from my investment and did not bring any of it to the UK, I would not need to file anything?

As for Form TD F 90-22.1, am I going to get in major trouble for never having filled this out? When I submit the one for 2008, should I also submit for the past two years (the only time my accounts have had a value over $10,000)?

Argh! I've also just remembered that on my new contract that started this month, I have signed up to the university pension scheme. Do I have US tax liability on that as well?

Argh! I've also just remembered that on my new contract that started this month, I have signed up to the university pension scheme. Do I have US tax liability on that as well?

Yes, it is a non-US employer sponsored qualified pension plan.

Argh! I've also just remembered that on my new contract that started this month, I have signed up to the university pension scheme. Do I have US tax liability on that as well?

Hi There,
I'm in a similar situation to you, US working in UK university system and part of the pension scheme. Guya and Lizzit answered some questions I had that sound the same a yours. Hope it helps.

http://talk.uk-yankee.com/index.php?topic=38158.0
http://talk.uk-yankee.com/index.php?topic=39133.0