If you ever feel like the UK tax system is complex, or HMRC are difficult to deal with, then use the US as a comparison and you’ll quickly see it could be worse.
The main thing that makes the US personal tax system unique is that it is citizenship-based rather than residency-based. In practice this means that US Citizens and US Greencard holders will always be subject to US tax on their worldwide income and gains. By comparison, if a UK national moves abroad, they would only be subject to UK tax on their UK sourced earnings (such as a UK rental property).
So here’s a couple of complex scenarios we see quite regularly:
- The US Citizen living in the UK: As a UK resident, they are subject to UK tax on their worldwide income. As a US Citizen, they are subject to US tax on their worldwide income. As UK tax rates are generally higher than in the US, this means it is likely the individual will ultimately pay UK tax rates, but this doesn’t remove the need to file a US tax return annually.
- The Accidental American: This is an individual who was born in the US but has potentially never identified as a US Citizen. Boris Johnson is a famous example, but in many cases people only realise late on in life they are in fact a US Citizen, and therefore should have been filing US tax returns and paying US tax their whole life. Often this realisation comes in the form of a scary letter from the IRS demanding 10 years’ worth of US tax filings and levying punitive interest and penalties.
- The high net worth US Citizen living in the UK: Similar to Scenario 1, but the individual has worldwide investments making it complex to ensure income has been taxed correctly in the right jurisdiction, and to determine the most beneficial method of taxation in the UK. Throw into the mix the need to file multiple annual informational forms in the US, and your tax compliance obligation can become quite burdensome.
However, in what has the potential to be one of the biggest tax overhauls this century, Republicans in the US are beginning to consider moving to a residency-based tax system, letting US expatriates off the hook. This is in the early stages at the moment, with a petition only submitted last week. But major tax reform was one of Donald Trump’s big campaign promises so this could potentially be something that Congress and the Administration could agree on. Things can only get better!
But in the meantime, the complexities continue.