US Citizen in UK - Tax Treaty / Credits question

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boz
Posts: 7
Joined: Sat Jun 05, 2021 4:07 am

US Citizen in UK - Tax Treaty / Credits question

Post by boz »

Hi All,

I'm a US citizen living in the UK. I had a question about how the tax treaty / credits work for sale of individual stocks held in a US brokerage. I tried looking at the treaty but the wording is very confusing :?

So, my question is - If I sell some stock today for a gain (either long or short term), would I pay the tax in the UK or USA ? My understanding is pay UK and claim credits in the USA, but just wanted to confirm.

In this case, the UK tax would be due next year after the end of the tax year in April 5 2022, but USA tax is due April 15. Would I be able to apply the UK tax credits to the 2021 USA tax liability even though the UK tax would be paid in 2022. i.e - does the tax year difference have any issues with timing etc, or would I be good since the tax would accrue in both UK / US at the same time ? or do I always have to Pay the actual foreign tax before claiming tax credits ?

Does any of this change if I had a UK broker instead or does residency override this ?

Thanks.
tubaleiter
Posts: 246
Joined: Tue Mar 09, 2021 11:58 am

Re: US Citizen in UK - Tax Treaty / Credits question

Post by tubaleiter »

Disclaimer: not a professional in any on this one, just a regular person in the same situation as you - happy to be corrected!

My understanding is that capital gains are sourced, for US tax purposes, based on the location of the taxpayer. So in our case, as a US citizen living in the UK, they will be foreign (UK) income.

Therefore, you owe tax primarily to the UK, but if US tax is higher, you'll owe the difference to the US. That's actually a pretty feasible situation for capital gains, because the UK has the £12,300 capital gains allowance - you pay no UK tax on the first £12,300 of gains every year.

If it's more than that and you do pay UK tax, the tax credits get messy because of the different years. Would look something like this:

1. Realize gains in June 2021
2. File an extension to US taxes typically due in April 2022
3. Pay UK tax on the gains via self-assessment after April 5 2022
4. File US taxes including the UK taxes

It's cleaner if you can sell in the window between the years, i.e.:

1. Realize gains in January-March 2022
2. Pay UK tax on the gains via self-assessment after April 5 2022
3. Use the UK tax on your 2022 US tax return by 15April 2022.
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