bobbyleo

What do we need to do when we get back to the UK and start earning an income. Part of our income will include a rental income from our home in the US that we will declare (to who?).

I know there is a tax treaty but what hoops do we need to jump through, what forms?. Last thing we want is to be double taxed or pay any penalties.

We have the FBAR/8938 reporting under control. What else do we need to do?

Thanks

nun

When asking tax questions your citizenship and residence status are important. But if the rental is in the US you must pay US state and federal tax on your net rental income. Whether you pay UK tax on that income will depend on how you are taxed in the UK ie are you taxed on an arising or remittance basis. You will be able to use tax paid in one country as a tax credit in the other to avoid double taxation.

bobbyleo

Thanks. I am dual UK/US citizenship and my wife is US. Our residence status will be UK.

What does 'arising or remittance' basis mean and what documentation do we need to claim tax credits?

There must be a host of expats living in the UK with the same issues.

Pulaski

Some taxes are paid on income no matter where in the world it arises, other taxes are only paid when you remit the money to your country of residence. .... The arising basis is by far the most common for individuals.

Bear in mind that you will have different tax calculations for your US rental property because there are different deductions, and more of them (mortgage interest, mandatory depreciation, property taxes, insurance, etc.), allowed in the US than in the UK. You will need to do separate calculations for each country, though you will get a tax credit in the UK for your tax paid in the US, it is almost certain that the taxes on your rental income will be much higher in the UK.

bobbyleo

Is there a particular form we need to complete for the tax treaty to take effect?

Thanks.

Pulaski

The tax treaty exists, and nothing you can do alters that, one way or the other.

bobbyleo

I don't want to alter the tax treaty, I just want to know what do we need to do to comply so we are all on the same page. Is there a particular IRS form that needs completing?
How does the US know about us paying UK tax and visa versa.

nun

There is no need for you to worry about the tax treaty. Your situation does not require you to actively claim any tax treaty article.

As a UK citizen, if you move back to the UK and intend to stay for the foreseeable future then you you will probably be taxed on an arising basis so that the UK will tax your worldwide income when and where it arises. As a US citizen the US always taxes on your worldwide income.

So you do your US taxes just as usual for the rental and all the rest of your income and file your 1040. You will get foreign tax credit for UK tax you paid on UK source income and you might be able to exclude UK earned income from your US taxes as well. In the UK you will need to do a Self Assessment to pay tax on any foreign income. So you work out the UK tax due and then you subtract any US tax you have paid. You do that by claiming a foreign tax credit.

The only relevance of the treaty is that it gives primary tax authority on real estate to the country where the house is located. For the vast majority of other income and gains you pay your residence country first

bobbyleo

Ok. Thanks.
That makes sense.

theOAP

NOTE: I see nun's already answered, but since I already have this typed up,...


Not to confuse matters, but put simply, they don't, until you tell them.

I'll start with an assumption: you will be living fully in the UK for at least several years ("Our residence status will be UK"). Under the new HMRC residence test (SRT), it's most likely you will be paying tax on the arising basis and not on the remittance basis. Paying tax on the arising basis requires you to declare all income, worldwide, to HMRC. Since some of this income will come from the US, and therefore not have UK tax withheld, you will need to complete a self assessment form with HMRC. It's here where you tell HMRC about the US income.

With both you and your wife being US citizens, you must also declare all of your worldwide income to the IRS. As a USC, the IRS automatically pretends you are resident in the US, which means you file a standard Form 1040 and associated other forms. This is where you tell the IRS about your UK income.

Generally, it is simpler to have declared worldwide income to HMRC; be taxed by HMRC at HMRC rates on that income; and then claim a FTC (foreign tax credit) for the tax paid to HMRC on the IRS form (Form 1116). Usually, but not always, the tax paid to HMRC will offset any tax due the IRS.

There will be a period in which all these interactions don't quite match up, so for the first year or two, you may feel your being double taxed (in spite of the treaty). Eventually, it all begins to function as it should, and all comes right.

The US state in which the property is located may come with its own problems.

Pulaski

Some states don't recognize the US-UK tax treaty!

nun

This won't be a big issue in this case as the OP will probably have to pay the full state tax even if they are themselves non-resident and HMRC will give a credit for both the federal and state tax on the rental income. Here is an excellent analysis by a well trusted US/UK tax expert. It covers rental and investment income.....so just concentrate of the rental bit.

NY state of mind | Taxation

Bermudashorts

I would not worry about arising or remittance basis. Firstly it only applies to non domiciles? Are you non domiciled? Where have you lived most of your life? Where were you born? Where was your father born? Anyway it is almost certainly not relevant, it is complicated to claim and has downsides like losing personal allowances and incurring a very large annual charge for using it if you do so for a number of years.

I have not read the US-UK tax treaty specifically. But I would also expect that it works as explained above by Pulaski. You pay your tax in US, then you would need to register for self assessment in UK, fill in the UK tax return, indicate what tax you already paid in US and that is allowed for in the UK tax computation.

You do not need to do anything special to claim double taxation relief. Other than fill in the right box on the self assessment form of course.

nun

+1

The only relevance of the treaty is that it defines the country with primary taxation authority in various circumstances. The OP having a US rental property is a situation that goes against the usual convention of the residence country having the "first bite at the cherry". For income from real property the treaty gives first bite to the country where the real property is located. The OP should not neglect state tax.