The US UK Tax Treaty Explained in Plain English

US UK tax treaty: an introduction

The US UK tax treaty is the 2001 income tax convention that decides which country may tax each kind of income when you have links to both. It was signed on 24 July 2001 and amended by a protocol signed on 19 July 2002. It came into force on 31 March 2003. However, it does not stop the United States taxing its own citizens. For Americans, its real value lies in a short list of exceptions and in the credit rules.

This article explains how to read the treaty, how residence works and which articles of the US UK tax treaty matter most to individuals. Our full guide to the US-UK double taxation treaty goes deeper into each type of income and the credit calculations.

What the US UK tax treaty covers

The treaty covers taxes on income and capital gains. Article 2 lists US federal income taxes, excluding social security taxes. On the UK side, it lists income tax, capital gains tax, corporation tax and petroleum revenue tax. Therefore, US state taxes and National Insurance fall outside it. Inheritance tax is outside it too, because a separate estate and gift tax treaty deals with death and gifts. Our article on the US-UK estate tax treaty covers that agreement.

According to GOV.UK's USA tax treaties page, the treaty took effect in the US from 1 May 2003 for taxes withheld at source. For other US taxes, it took effect from 1 January 2004. In the UK, it took effect for income tax and capital gains tax from 6 April 2003. Consequently, every return you file today falls under this treaty.

The four documents to read

The convention is the main agreement, set out in numbered articles. A protocol is a later agreement that amends it. The IRS United Kingdom tax treaty documents page links the 2001 treaty, the protocol, an exchange of notes and the technical explanation. Helpfully, GOV.UK publishes the convention as amended by the 2002 protocol in one text. That version saves you reading two documents side by side.

The technical explanation is the US Treasury's article-by-article commentary. It is not part of the treaty, but it is widely used to interpret the text. The Treasury technical explanation is long, so read only the articles you need. By contrast, HMRC sets out its view in its manuals, such as the Double Taxation Relief Manual entry for the USA.

Reading an article

Each article deals with one type of income or one rule. Watch two phrases closely. "Shall be taxable only" in a country gives that country the sole right to tax. By contrast, "may be taxed" lets that country tax, while the other usually gives credit. Above all, check Article 1 before relying on any other article.

Which country are you resident in under the treaty?

You are resident in a country for treaty purposes if its law taxes you there because of residence, domicile, citizenship or a similar test. If both countries treat you as resident, the Article 4 tie-breaker picks one.

The special rule for US citizens

Article 4(2) adds a condition for US citizens and green card holders. You count as a US resident only if you have a substantial presence, permanent home or habitual abode in the United States. Therefore, an American who has lived only in London for years is usually a UK resident under the US UK tax treaty. However, as the next section shows, that does not end US tax.

The Article 4 tie-breaker

The tie-breaker in Article 4(4) runs in a fixed order. First, you are resident where you have a permanent home available to you. If you have one in both countries, you are resident where your personal and economic relations are closer. That is your centre of vital interests. Next comes habitual abode, meaning where you normally live. Then comes nationality. Finally, if none of these settles it, the two tax authorities decide by mutual agreement.

Claiming treaty residence

On the UK side, HMRC's dual residents helpsheet HS302 explains how to make the claim. In the US, a green card holder who is treaty resident in the UK may work out US tax as a nonresident. That position needs Form 8833. Notably, it can have wider consequences, so it deserves care before you take it.

Why does the saving clause matter so much for Americans?

The saving clause lets the US tax its citizens as if the treaty did not exist. As a result, most benefits of the US UK tax treaty do not help a US citizen, apart from those listed as exceptions.

What Article 1(4) says

The saving clause is the rule in Article 1(4). It lets each country tax its residents, and lets the US tax its citizens, "as if this Convention had not come into effect". For example, Article 13 says gains on shares are taxable only where the seller lives. Even so, the US still taxes an American in London on those gains.

The exceptions in Article 1(5)

Article 1(5)(a) lists the benefits that survive for everyone, citizens included. These include Article 17(1)(b) on exempt pension payments, Article 17(3) on social security and Article 17(5) on alimony and child support. They also include Articles 18(1) and 18(5) on pension schemes. In addition, Article 24 on double taxation relief, Article 25 on non-discrimination and Article 26 on the mutual agreement procedure survive. Article 9(2) is listed as well, though it concerns associated companies rather than individuals.

Benefits only for non-citizens

Article 1(5)(b) covers a second group. It protects Article 18(2) and the articles on government service, students, teachers and diplomats. However, these benefits apply only to people who are neither citizens nor green card holders of the country taxing them. Consequently, a US citizen cannot use the students article to escape US tax.

Former citizens

Article 1(6) extends the saving clause to a former citizen or long-term resident who gave up that status mainly to avoid tax. It applies for 10 years after the loss of status, and only to income from sources in that country. Our article on taxes after renouncing US citizenship explains the wider picture.

How does the US UK tax treaty treat pensions and social security?

Pensions are generally taxed where you live, and social security is taxed only where you live. Unlike most of the treaty, several of these rules survive the saving clause.

Pensions under Articles 17 and 18

Article 17(1)(a) says pensions are taxable only where the recipient lives. Article 17(1)(b) adds that a payment exempt in the scheme's country stays exempt in the other, and this survives the saving clause. Meanwhile, Article 18(1) stops the other country taxing growth inside a pension scheme until benefits are paid. Article 18(5) gives a US citizen working for a UK employer US relief for UK scheme contributions, within US limits. It applies only if the US competent authority has agreed that the scheme generally corresponds to a US one.

Pension lump sums: a contested area

Article 17(2) says a lump sum from a pension scheme is taxable only in the country where the scheme is established. However, Article 17(2) is not on the list of saving clause exceptions. On the usual reading, therefore, the US can tax a citizen on a UK tax-free lump sum. Some argue that the exemption in Article 17(1)(b) should carry across. Because the point is contested, we take the cautious approach: we model it both ways and disclose any treaty position taken. Our pensions service covers this reporting.

Social security under Article 17(3)

Article 17(3) says social security payments are taxable only in the country where the recipient lives. Because it survives the saving clause, a US citizen living in the UK pays UK tax, not US tax, on US Social Security. Similarly, a UK State Pension paid to someone living in the US is taxed only there. Contributions are a different matter. The treaty excludes social security taxes, so a separate totalization agreement decides which system you pay into.

How does the US UK tax treaty treat work, investments and study?

Salary is usually taxed where you do the work, with a short-visit exemption. Investment income and gains follow separate articles, and students and visiting teachers have their own.

Employment income under Article 14

Article 14 lets the country where you work tax your salary. However, Article 14(2) gives a short-visit exemption with three tests. First, you are present for no more than 183 days in any twelve-month period starting or ending in the tax year. Second, your employer is not resident in the country you visit. Third, a permanent establishment there does not bear the cost. Directors' fees have their own rule in Article 15.

Dividends, interest and gains

Article 10 caps the source country's tax on dividends at 15% for individuals. A company owning at least 10% of the voting power gets 5%, and pension schemes can get 0%. Article 11 makes interest taxable only where the owner lives. Under Article 13, gains on land may be taxed where the property sits. Most other gains are taxable only where the seller lives. Moreover, Article 13(6) lets a country tax a former resident who left within the previous six years.

Students and teachers

Article 20 exempts payments a visiting student receives from outside the host country for maintenance, education or training. A business apprentice gets the exemption for one year only. Similarly, Article 20A exempts a visiting teacher's pay for teaching or research for up to two years. As noted, neither helps the host country's own citizens or green card holders.

Limitation on benefits under Article 23

Limitation on benefits is the anti-treaty-shopping test in Article 23. An individual resident in either country is automatically a qualified person. Instead, the test bites on companies, trusts and other entities, which must pass ownership, trading or business tests. Founders with holding companies will find more in our guide for founders and executives.

How does the US UK tax treaty stop double taxation?

Article 24 gives relief through tax credits. In addition, it re-sources some income so that a credit is actually available.

The basic credit rules

Article 24(1) requires the US to credit UK income tax paid by its citizens and residents, subject to US law. Article 24(4) requires the UK to credit US tax on US-source income. On the UK return, you claim Foreign Tax Credit Relief when you report the foreign income. On the US return, you claim the credit on Form 1116.

Re-sourcing and the three steps

Re-sourcing is a treaty rule that treats income as arising in the other country so a credit can be given. It matters because a US credit normally covers only foreign-source income. For an American living in the UK, Article 24(6) works in three steps on US-source income. First, the UK credits only the US tax the treaty allows on a non-citizen, such as 15% on dividends. Second, the US credits the UK tax left after that credit. Third, the income is treated as UK-source to the extent needed. IRS Publication 514 names the United Kingdom among treaties with these rules. The Form 1116 instructions describe a category for income re-sourced by treaty.

An example: retired in Bristol

Consider a typical case, which is an illustration rather than a real client. Sarah is a US citizen who has lived in Bristol for twenty years. She receives US Social Security, a UK workplace pension and dividends from a US brokerage account. Each item follows a different article.

First, her Social Security is taxable only in the UK under Article 17(3), so her US return leaves it out. Next, the UK taxes her UK pension first. The US taxes it too, because of the saving clause, but credits the UK tax. Finally, the UK credits US tax on her dividends only at the 15% treaty rate. The US then credits the remaining UK tax on that re-sourced income.

When the answer changes

Suppose Sarah also took a lump sum from her UK pension. That item falls into the contested area above. Therefore, we would show her the result both ways before she decides how to file. Our treaty relief service prepares these calculations on both returns.

How do you claim the US UK tax treaty on your returns?

In the US, you disclose many treaty positions on Form 8833. In the UK, you claim relief on your Self Assessment return or on an HMRC claim form, depending on where you live.

Form 8833 and when it is needed

Form 8833 is the IRS treaty-based return position disclosure. Under 26 USC 6114, you disclose a treaty position that overrides or modifies the Internal Revenue Code. The IRS Form 8833 page says dual-resident taxpayers use it too. Furthermore, the regulations in 26 CFR 301.6114-1 specifically require disclosure when a treaty decides an individual's residence.

When Form 8833 is waived

The same regulations waive disclosure in several common cases. They cover treaty changes to the tax on pensions, annuities, social security, employment income and students' income. Re-sourcing for the foreign tax credit limit is waived too, as are reduced withholding rates on an individual's dividends and interest. There is also a $10,000 threshold for an individual's reportable items, or $100,000 where residence is the only item. Under 26 USC 6712, the penalty for an individual's failure to disclose is $1,000 per failure. Accordingly, we disclose a contested position, such as a lump sum, even where a waiver might apply.

UK claims if you live in the UK

If you live in the UK, you claim relief on your Self Assessment return. Foreign income and the credit go on the SA106 foreign pages. If you are dual resident, HS302 explains the treaty claim. To get a reduced US withholding rate, a UK resident who is not a US person normally gives the payer Form W-8BEN.

UK claims if you live in the US

You might expect to use HMRC's general DT-Individual form. However, US residents with a UK pension, purchased annuity, interest or royalties use form US-Individual 2002 instead. It claims relief at source or a repayment of UK income tax. The IRS certifies US residence, and Form 8802 is the application for that certification. In the other direction, HMRC issues a UK certificate of residence.

How US UK Tax Experts can help

We prepare your US and UK returns from one file, so the US UK tax treaty positions on each agree. First, we work out your residence under both countries' rules and the tie-breaker. Next, we apply the right article to each item of income, including the re-sourcing credit. Then we prepare Form 8833 where it is needed, and the UK claims that go with it.

Where a point is contested, we model it both ways and explain the difference in plain English. We prepare returns and claims; we do not give investment or financial advice.

Conclusion

In summary, the US UK tax treaty decides which country taxes each type of income, but the saving clause keeps US citizens inside the US system. The exceptions that matter most cover pensions, social security and double taxation relief. Article 4 settles residence, and Article 24 turns double tax into a credit. Finally, Form 8833 and the UK claim forms make each position count on your returns.

Contact us

Do you need the US UK tax treaty applied to your next returns? Email us at hello@usuktaxexperts.com, or tell us about your situation through our contact page. We reply within one working day with what we would need from you.