Understanding double tax treaties as an expat (UK and US citizen guide)

As an expat, the chances are that you moved to a new country to improve your career prospects, start a business or save money - so the idea that you’d have to pay tax on your earnings both in your country of origin and country of residence will likely fill you with dread.

Whilst you’ll always be subject to the tax rules of your country of residence, a double tax treaty can mean you won’t have to pay tax on the same income in two different jurisdictions.

Below, we’ve put together everything you need to know, whether you’re an expat from the United Kingdom or the United States, and offer some money-saving advice to boot…

What are double tax treaties?

Before we get started, a quick explanation.

Double tax treaties, which are also known as double tax agreements, are designed to ensure individuals can claim tax relief rather than pay tax on the same income in two different countries. If you live in Spain but rent out a property in the United Kingdom, for example, then a double tax treaty can ensure you don’t have to pay tax on that rental income twice.

You’ll legally be required to declare your income in the United Kingdom and pay UK income tax, but won’t have to pay tax again when you bring that money into your new country of residence. However, this is a very simple explanation and it’s important to note that every double tax treaty is different - we recommend liaising with an accountant for personal advice.

UK expats

More than 100 countries have a double tax treaty with the UK. See the full list here.

If you’re a tax resident in the UK and a tax resident in another jurisdiction, then you’re what’s known as a dual tax resident. Typically, your country of origin will decide on the taxing rights over your income and your gains between the two countries, so you should determine your ‘treaty residence’ position as soon as possible to understand your rights and requirements.

Governments often apply a number of “tie-breaker” tests to determine where your treaty residence lies, so we recommend speaking with a UK-based accountant before generating any new income in the UK as an expat so you know whether you’d need to pay tax twice.

If you’re making investments in the UK or working for a UK employer, the following applies:

Working for a UK employer: If you work for a UK employer but are a dual resident and spend time outside of the UK, you might be considered a "treaty non-resident", where you’ll only be required to pay tax on income you earned on the days where you actually worked in the UK, and not the days you worked outside of the UK. For example, if you were employed in the UK but worked in France four days a week and one day per week in England, you’d only pay tax on a fifth of your overall UK income.

Investors: If you’re a dual resident but a treaty resident outside of the UK, then you’ll only pay tax in the UK on the income you earn from your activities in the UK. A good example of this would be property management; if you have a portfolio around the world, you’d only pay UK income tax on your UK properties; the rest of your income would be taxed in your country of residence or countries where income is generated.

Although double tax treaties are common, you must make a claim for treaty residence via a self-assessment tax return in the United Kingdom. Because of this, we recommend working with an accountant who has experience in claiming tax relief using double tax treaties.

Be sure of their fees before instructing an accountant to manage your finances, however, as the more complex your situation, the more you’ll likely be charged. If you would prefer to cut out the middle man and manage your claim yourself, you’ll find more information at GOV.UK.

Will Brexit have an impact on double tax treaties?

If you’re living in a country that’s part of the European Union, you’ll likely be wondering whether Brexit will have an effect on double tax treaties. The good news is that each double tax treaty is signed by individual countries rather than the European Union as a whole, so it’s unlikely that you’ll be affected in the short-term. However, it is possible that some countries will revisit their double tax treaties post-Brexit, so follow developments and be prepared before making any major investments or employment changes before Brexit happens.

US expats

If you’re an American citizen or green cardholder, you’ll be required to file a federal income tax return every year to declare your worldwide income, wherever in the world you are living.

Because of this, you may also be required to pay taxes in the US, though double tax treaties are in force to ensure you’re not taxed twice on the same income by two different countries.

To date, the United States has double tax treaties with more than 70 countries (see the full list on the IRS website) including the United Kingdom and Australia, with more in the works, but these typically protect foreign nationals moving to the US more than US citizens abroad.

That’s because US treaties include a Saving Clause which guarantees the US the right to tax citizens, no matter the provisions of the treaty, making it harder to avoid double taxation.

However, there are some circumstances when a double tax treaty can benefit expats who originate from the US. Indeed, many treaties prevent the US from taxing dividends, interest, and royalties from foreign-sourced income that has already been taxed abroad, which is great news for expats who receive such types of income and now live in a lower-tax country.

Students, teachers, trainees, and researchers are also exempt from having to pay tax in their host country, but only if they’re planning to return to the US within 2-5 years, depending on each tax treaty. It’s worth looking into individual treaties to understand what you are and are not eligible for, and remembering that some tax treaty benefits are not automatically applied - you may need to file a form 8833 when submitting your US tax return to receive any benefits.

There are other exceptions to the rule, too. For expats that earn up to $100,000, the Foreign Earned Income Exclusion scheme allows expats to exclude their income from US taxation, though that goes out of the window when you earn more than $100,000. Bear that in mind when scaling a business or making investments, and note that the limit rises every year.

Another way to take advantage of double tax treaties is to claim Foreign Tax Credit, which affords US citizens or green card holders $1 of Tax Credit for every dollar of tax they pay in another country. If you live in a country with higher tax rates than the US, that should mean you won’t have to pay any tax in the United States, and excess credits can be carried into future years. If you pay less tax in your new country of residence, however, that could mean you’d need to “top up your taxes” in the United States, though every situation is different.

As an expat with US citizenship, it’s important that you claim the right exemptions when submitting your income tax return, which is why we recommend working with an accountant to help you properly strategise. If you’re still confused, call the IRS on 1-800-829-1040.

Whilst you may need to jump through hoops to take advantage of double tax treaties in the UK and US, the benefits make it worthwhile. Found this guide useful? Be sure you subscribe to the Money Saving Expat blog to receive weekly updates from our expat money savers.

Tags: UK tax us tax tax treaty