What is a tax invader?

I heard from someone last night make the following interesting calculation. I thought it would be worth sharing. It will answer my question about "what is a tax invader?".

From 6 April this year the UK will be allowing £1,000 interest and £5,000 dividends tax free to each tax payer. If there are 200,000 Americans in the UK, that is a potential for the US to tax interest and dividends of £1.2 billion, where no offsetting UK tax credit is available. This means that the yield on about £40 billion of UK assets are now placed in the way of US tax. We could add to  this assets in ISAs.

Of course this is an exaggeration, since most UK people, even Americans, do not have so much investment income. But even a small fraction of this amount is looks pretty outrageous. I think I will use this example when I next write to my MP. This is a point that MPs can be made to understand.

I heard from someone last night make the following interesting calculation. I thought it would be worth sharing. It will answer my question about "what is a tax invader?".

From 6 April this year the UK will be allowing £1,000 interest and £5,000 dividends tax free to each tax payer. If there are 200,000 Americans in the UK, that is a potential for the US to tax interest and dividends of £1.2 billion, where no offsetting UK tax credit is available. This means that the yield on perhaps £40 billion of UK assets are now placed in the way of US tax. We could add to  this assets in ISAs.

Of course this is an exaggeration, since most UK people, even Americans, do not have so much investment income. But even a small fraction of this amount is looks pretty outrageous. I think I will use this example when I next write to my MP. This is a point that MPs can be made to understand.

The UK has had tax free capital gains and dividend allowances for a long time......but they were tax bracket based. The US also has similar tax free allowances for people in the 15% tax bracket. The trick is to arrange things so you tax advantage of both allowances and pay no dividend or capital gains in either country by using local regulations.

Two small modifications would avoid this problem:

1) Turn the foreign earned income exclusion into the foreign *any* income exclusion. This would also avoid the problem of the US ripping off the disability and pension income of low income US expats.

2) Just one "any income" basket for foreign tax credits. This probably would have saved Boris Johnson from paying the US tribute on the sale of his UK home.

These changes would entirely reasonable and simplify US tax preparation. But the US seems entirely unwilling to be reasonable.

Just tried a quick calculation.

Case 1. A UK resident filing single has £30,000 wages, no ISA investments, £1,000 interest, £5,000 qualified dividends, £11,000 capital gains. A 2555 exclusion is taken on the wages. Exchange rate 1.40. US tax is $1,568.

Case 2. A UK resident has £30,000 wages. US tax is $0.

UK tax is the same in both cases. It certainly looks as if the US has managed to charge $1,568 tax on the passive income. I can't think what use of US allowances would avoid this.

Two small modifications would avoid this problem:

1) Turn the foreign earned income exclusion into the foreign *any* income exclusion. This would also avoid the problem of the US ripping off the disability and pension income of low income US expats.

It might be a good idea, but only for bona fide foreign residents and it would also help in the whole PFIC mess as well.



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Just tried a quick calculation.

Case 1. A UK resident filing single has £30,000 wages, no ISA investments, £1,000 interest, £5,000 qualified dividends, £11,000 capital gains. A 2555 exclusion is taken on the wages. Exchange rate 1.40. US tax is $1,568.

Case 2. A UK resident has £30,000 wages. US tax is $0.

UK tax is the same in both cases. It certainly looks as if the US has managed to charge $1,568 tax on the passive income. I can't think what use of US allowances would avoid this.

Well the income is too much. If the taxable income can be kept within the US 15% tax bracket there would be no tax on the UK dividends or long term capital gains as long as PFIC wasn't an issue.

Anyway why is it an issue to have to pay US tax. Just because something is tax free in the US or UK doesn't mean it's tax free in the other country.


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There's something any US Person in the UK should be keeping an eye on: The rumoured 'pension ISA' or 'ISA pension', or whatever it might be called if it were ever to materialise. The media have concentrated on the eradication of the 25% lump sum aspect, but have any of you looked at the implications for US taxpayers and the loss of any foreign tax credits on a UK pension? Pension contributions would be taxed pre-contributing (and the Chancellor receives the tax inflow now) with the pension, on maturity, being tax free (which also does away with the 'take the money and run' substitute for annuities).

For the US Person, it would require a total declaration of the individuals contributions, the employers contributions, plus the yearly growth to achieve a full basis in the pension. In reality, using the present as an example, most won't do that and would end up paying US tax instead of paying UK tax as they do now. For the individual, it might be a gain if tax rates stay relative one country to the other as they are now. Would the UK care, since the contributions have already been taxed? Nonetheless, it's the complications of living in one country which has definite ideas as to how to structure retirement versus also having to pay tax to a second country which defeats the intended result (tax free retirement). The downside is what would the UK view as reasonable to charge pensioners for (eldercare) if they are having a tax free retirement? Oops, possibly not everyone would have a tax free retirement.

Anyway why is it an issue to have to pay US tax. Just because something is tax free in the US or UK doesn't mean it's tax free in the other country.

My sentiment entirely. They are two different systems which produce different answers in different situations.

Anyway why is it an issue to have to pay US tax. Just because something is tax free in the US or UK doesn't mean it's tax free in the other country.

I have heard one interesting solution. The UK should write into its tax code that if ever a foreign country imposes a tax upon a UK resident for which there is no compensating credit for UK tax paid, then the UK automatically imposes an equal tax to create a tax credit. This would make no difference to tax paid by the tax payer, but it would ensure that the money is not syphoned off to a foreign land for the frivolous reason of the tax payer's citizenship.

But I do also see that provided all relevant UK taxes are paid a tax payer should be free to do what he wishes with what remains, including throwing it in the gutter, renting a villa in Spain, or paying some foreign tax.

There's something any US Person in the UK should be keeping an eye on: The rumoured 'pension ISA' or 'ISA pension', or whatever it might be called if it were ever to materialise. The media have concentrated on the eradication of the 25% lump sum aspect, but have any of you looked at the implications for US taxpayers and the loss of any foreign tax credits on a UK pension? Pension contributions would be taxed pre-contributing (and the Chancellor receives the tax inflow now) with the pension, on maturity, being tax free (which also does away with the 'take the money and run' substitute for annuities).

This is the same as a US ROTH IRA. If it's classed as a pension for treaty purposes then everything is fine, tax is paid going in, gains are protected from taxation and income would be tax free in both the US and the UK. If it's not classed as a pension for treaty purposes it would be nasty.

This is the same as a US ROTH IRA. If it's classed as a pension for treaty purposes then everything is fine, tax is paid going in, gains are protected from taxation and income would be tax free in both the US and the UK. If it's not classed as a pension for treaty purposes it would be nasty.

I would certainly be hit hard if Roth IRA withdrawals were to be taxed in the UK.  I've made a lot of IRA to Roth conversions while in the USA (paying US taxes on the conversions) to avoid paying 40% UK tax when IRA mandatory withdrawals start to happen at age 70.5. (We'll be moving to the UK in a couple of months)

This is the same as a US ROTH IRA. If it's classed as a pension for treaty purposes then everything is fine, tax is paid going in, gains are protected from taxation and income would be tax free in both the US and the UK. If it's not classed as a pension for treaty purposes it would be nasty.

If classed as a pension (and not a form of an ISA), would the US require ROTH IRA rules to be applied? For example, contribution limits for married filing separate, which is the way most expats file, and the 59.5 age limit before withdrawing. Anyway, the proposal for the ISA pension has not been favourably received so far in the UK, but, it's still worth keeping an eye on.

If classed as a pension (and not a form of an ISA), would the US require ROTH IRA rules to be applied? For example, contribution limits for married filing separate, which is the way most expats file, and the 59.5 age limit before withdrawing. Anyway, the proposal for the ISA pension has not been favourably received so far in the UK, but, it's still worth keeping an eye on.

Well you are usually only allowed to contribute up to the limits on similar US schemes, but the withdrawal rules are left to residence state.

Well you are usually only allowed to contribute up to the limits on similar US schemes.

You do know what the limits are for married filing separate in a ROTH?   

You do know what the limits are for married filing separate in a ROTH?   

Yes.....so don't marry an NRA