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New Tax Credits for US Taxpayers Resident in the United Kingdom

September 2nd

A recent decision passed by the Internal Revenue Service has created a new potential tax credit for US taxpayers who reside in the United Kingdom. According to this recent policy change, US taxpayers resident in the UK can now offset the UK non-domiciled (non-dom) levy as a deduction against their tax bill.

What is the UK Non-Dom Levy?

UK non-doms are able to elect each year to be taxed on an alternative basis. This is known as taxation on a “remittance basis.” By electing to be taxed on a remittance basis, non-doms with a non-UK source of income or capital gains may be taxed only when the income is forwarded to the UK

However, for long-term non-doms – those who have qualified for remittance basis tax for at least seven of the previous nine years – there is a special tax levy that must be paid.

The non-dom levy, known as the Remittance Basis Charge (RBC), typically amounts to around £30,000 (approximately $48,900) in addition to the standard remittance basis tax.

This amount is due to increase even further in 2011. The United Kingdom’s national budget for 2011 has raised the Remittance Basis Charge to a staggering £50,000 for those with twelve years residence. It will remain at £30,000 for those who have only resided in the UK for between seven and twelve years.

How Will This Decision Affect American Taxpayers?

US law typically gives a credit for all income earned in a foreign country during the course of the tax year. The recent decision made by the IRS classifies the UK non-dom levy as income, thereby allowing it to qualify for a deduction on US federal tax returns.

This news comes as a great relief to many expatriot Americans in the UK. Since the United States practices worldwide taxation, many American taxpayers resident in the UK were effectively being taxed twice on their income. Under the new ruling, this problem should be eliminated, saving taxpayers significant sums of money.


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