What types of US sourced income are NRAs subject to US tax on?
As a NRA, you are potentially subject to US tax on certain US sourced income that is either:
- “Fixed or determinable annual or periodical income” (FDAP); or
- Certain US-source capital gains; or
- “Effectively connected income” (ECI) from the conduct of a “trade or business” within the US.
Generally, ECI is taxed on a net basis at graduated rates, while FDAP income is taxed only on a gross basis at a flat rate of 30%.
US tax is often withheld from US sourced income and if you invest only in FDAP income producing assets, then you’re normally not required to file a US income tax return because tax has been fully withheld at source. US sourced dividends will be subject to 30% withholding tax or 15% if claiming the US/UK treaty rate and a Form W-8BEN has been completed.
FDAP income includes passive investment income, such as US sourced dividends or interest, however there is an exemption for US sourced interest income received from bank deposits, financial institutions, and insurance companies.
As a NRA, if you have capital gains from selling personal property this is generally not subject to US tax but you should be aware if you’re a NRA student present in the US for greater than 183 days in a year, you would be subject to a flat tax of 30% on US sourced capital gains. Please note that gain or loss from the sale or exchange of personal property generally has its source in the US if the NRA has a tax home in the US.
Capital gains from the sale of US real property is always ECI so you’d need to file a tax return in this situation. Withholding tax of 15% on the sales proceeds should apply when you sell US real estate and there is potential for withholding tax to be reduced.
If you were to sell US real estate, the gain would also be reportable on your UK income tax return. However, the US would have the primary taxing rights on a capital gain on US sourced real estate, so double tax relief would need to be claimed on the UK tax return.
Rental income from US real estate can potentially be FDAP or ECI, depending on the situation, however, it is often favourable to elect to treat the rental income as ECI so that deductions can be claimed against the rental income.
When are NRAs subject to US gift and estate tax?
As a NRA, you are subject to gift and estate tax only on US situs assets, which for estate tax purposes includes US real estate, tangible property located in the US, and stock in a US corporation. Cash in a US bank deposit/savings account does not count as a US situs asset, however, cash within an investment portfolio would count as a US situs asset. For gift tax purposes, US situs assets include only US real estate and tangible personal property and cash located in the US is considered tangible personal property.
NRAs only have a $60,000 p/a lifetime exclusion amount but are entitled up to $16,000 p/a gift tax allowances. The US/UK estate tax treaty is quite favourable to British nationals resident in the UK as effectively only US real estate or business assets from a US trade or business would fall into the scope of US estate tax, on the assumption that you’re domiciled in the UK and not in the US.
It’s possible that owning the US real estate through an entity could have some tax advantages in terms of removing the property from the US estate tax regime. It’s also possible that either a trust or (even better) a foreign corporation should be considered in any planning if removing a future estate tax exposure is desirable.
My expertise lies in international taxation and its implications for non-resident aliens (NRAs) in the United States. I've had extensive experience navigating the intricate tax landscape for non-residents earning income or holding assets within the US.
In the context of your inquiry, NRAs in the US can be subject to taxation on various types of income:
Fixed or Determinable Annual or Periodical Income (FDAP)
- Taxation: FDAP income, such as passive investment income (dividends, interest), is subject to a flat 30% withholding tax.
- Exemptions: Certain US-sourced interest income from specific entities like bank deposits, financial institutions, and insurance companies might be exempted.
US-Source Capital Gains
- Taxation: Generally, capital gains from the sale of personal property aren't subject to US tax for NRAs, but there are exceptions.
- 183-Day Rule: NRAs present in the US for more than 183 days might face a flat 30% tax on US-sourced capital gains.
Effectively Connected Income (ECI)
- Taxation: ECI from conducting a trade or business within the US is taxed at graduated rates on a net basis.
- US Real Property Sales: Capital gains from the sale of US real property are always treated as ECI and require filing a tax return.
Gift and Estate Tax for NRAs
- Taxation: NRAs are subject to gift and estate tax on US situs assets, including US real estate, tangible property in the US, and stock in a US corporation.
- Exclusions and Allowances: NRAs have a limited $60,000 lifetime exclusion amount for estate tax and up to $16,000 annual gift tax allowances.
- US/UK Estate Tax Treaty: The treaty favors UK residents, exempting most assets from US estate tax if they're domiciled in the UK and not in the US.
Estate Tax Planning for US Real Estate
- Strategies: Ownership through entities, trusts, or foreign corporations might mitigate estate tax exposure for US real estate holdings.
Understanding the nuances of these taxation aspects is crucial for NRAs to manage their US-sourced income and assets efficiently while ensuring compliance with tax regulations.
FAQs
UK residents aren't subject to paying tax on US shares from the UK, but they do have to pay a tax on any dividends or income received from those US stocks. This tax is called a withholding tax (WHT) and it's 15%. Any dividends or income received from US stocks must receive this WHT 15% tax.
Do UK citizens pay tax in US? ›
1. Yes, U.S./U.K. dual citizens have to file U.S. taxes. The most common question we hear is, “do dual citizens in the U.K. have to file U.S. taxes?” The U.S. is one of two countries in the world that taxes based on citizenship, not place of residency.
What is the UK US tax treaty for British citizens? ›
This is because the US taxes its citizens on their worldwide income, regardless of where they live, and the UK taxes individuals on the income they earn while residing in the UK. The treaty provides relief from this double taxation by allowing individuals to claim a credit for taxes paid in the other country.
How are foreign investors taxed in the US? ›
U.S. Tax for Foreign Investors
As a general rule, foreign investors (i.e. non-U.S. citizens and residents) with no U.S. business are typically not obligated to file a U.S. tax return, including on income generated from U.S. capital gains on U.S. securities trades.
Can a UK citizen invest in US stock market? ›
There is no citizenship requirement for owning stocks of American companies. While U.S. investment securities are regulated by U.S. law, there are no specific provisions that forbid individuals who are not citizens of the U.S. from participating in the U.S. stock market.
Can I invest in the US stock market from the UK? ›
No individual can buy US shares without a W-8BEN form – it is a requirement of the American Internal Revenue Service (IRS). Therefore, the second step to buying US shares in the UK is to fill out this form. You don't have to download anything; it can be completed on our online platform.
Is there double taxation between US and UK? ›
So Americans who are also tax residents in another country may need to pay taxes on the same income twice: once to the US and once to their country of residence. Fortunately, there are ways to avoid double taxation — one of which is the US-UK tax treaty.
What taxes do British citizens pay? ›
Personal income tax rates
| Tax rate band | Income threshold 2023/24 (GBP) | Income tax rate (excluding dividends) |
|---|
| Starting rate for savings | 12,571 to 17,570 | 0%* |
| Basic rate | 12,571 to 50,270 | 20% |
| Higher rate | 50,271 to 125,140 | 40% |
| Additional rate | Over 125,140 | 45% |
1 more rowFeb 12, 2024
How Can Dual Citizens Avoid Double Taxation?
- Tax Treaties. The US has signed tax treaties with more than 60 countries around the world. ...
- Foreign Earned Income Exclusion. ...
- Foreign Tax Credit. ...
- Foreign Housing Exclusion.
Parliament passed the Stamp Act on March 22, 1765, to pay down a national debt approaching £140,000,000 after defeating France in the Seven Years War (1763). A year earlier, Parliament passed the Sugar Act, their first revenue-raising measure. Both taxes promised dire consequences in a post-war economy.
Hi, Article 17(3) of the UK/USA Double Taxation Treaty stipulates that payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State will be taxable only in the other Contracting State.
Why did Britain tax America so much? ›
England's Seven Years' War (1756–1763) and its counterpart waged in America, the French and Indian War (1754–1763), doubled Britain's national debt. In order to recoup some of the losses Britain incurred defending its American colonies, Parliament decided for the first time to tax the colonists directly.
What are the rules for foreign investments in the US? ›
Foreign investment is prohibited in the following areas: a) defense, internal public order and State security; b) banking activities involving central bank and issuing bank function; c) other areas which are considered by law to be absolutely reserved for the State or the Sovereign Prince.
Do foreign nationals pay US taxes? ›
A nonresident alien (for tax purposes) must pay taxes on any income earned in the U.S. to the Internal Revenue Service, unless the person can claim a tax treaty benefit. This applies to students as well.
What is the tax of investing in USA? ›
Capital gains
They're usually taxed at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, 35%, or 37%). Long-term capital gains are profits from selling assets you own for more than a year. They're usually taxed at lower long-term capital gains tax rates (0%, 15%, or 20%).
Do UK investors pay tax on US dividends? ›
This will indicate what you should receive in your account in GBP. If very different, then the custodian of the shares deducted US foreign withholding tax at source from the dividend. The dividend tax treaty between the US and UK is 15%. Some countries e.g Israel, Greece are a lot more.
How do I avoid tax on US dividends in the UK? ›
If your total UK and foreign dividends amount to less than the £2000 threshold, then there is no UK tax to pay on the dividends. No relief would be due for the USA tax paid, as there is no tax to pay in the UK, because there is no double taxation in place.
Is there a double taxation agreement between UK and USA? ›
The U.S./U.K. tax treaty—formally known as the “Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains” ...
Do I have to pay tax on US shares? ›
If you want to buy US shares the US government will charge you a tax on any income you earn from those shares as you are not a US resident or citizen. Chances are you'd prefer to pay less of this tax (known as withholding tax) on your shares, which is where a W-8BEN form comes in.
