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As a NRA, you are potentially subject to US tax on certain US sourced income that is either:
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 investing in the US it’s worthwhile looking at the potential US and UK tax income implications. The following table explores the US tax consequences of certain US investments, based on a British national who is resident and domiciled in the UK.
|
US situs asset |
US sourced income/gain |
US tax consequences |
US tax return |
Notes |
|
US bank/savings account |
Interest income |
Exempt |
N/A |
Taxable in the UK |
|
US brokerage account |
Interest income |
Exempt |
N/A |
Taxable in the UK |
|
US dividends |
15% withholding tax on US dividends (provided W-8(BEN) completed |
N/A |
Taxable in the UK and credit given for US tax withheld |
|
|
Capital gains |
Exempt |
N/A |
Taxable in the UK |
|
|
US real estate |
Rental income |
Generally taxed as ECI so expenses can reduce taxable income |
US tax return required |
The US get the primary taxing rights so credit is given for US tax on a UK tax return |
|
Capital gains |
15% withholding tax on the proceeds. |
US tax return required and potential to reduce withholding tax |
The US get the primary taxing rights so credit is given for US tax on a UK tax return |
|
|
US Limited Liability Company (LLC) |
Various income |
ECI taxable and FDAP potentially taxable |
Needs to be reviewed based on the facts |
US LLCs are problematic for UK tax purposes |
|
US Limited Partnership (LP) |
Various income |
ECI taxable and FDAP potentially taxable |
Needs to be reviewed based on the facts |
|
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.
For professional advice tailored to your unique circumstances, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided.
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