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Double Taxation Treaty Between the United Kingdom and the USA

by David Smith Personal finance consultant
double taxation

Double taxation is paying tax to two jurisdictions on the same declared income or the same item. For example, a UK citizen running a business in the US was earlier expected to pay tax to his domestic country, i.e., the UK and then pay tax to the state they are running the business, i.e., the USA. Double taxation was affecting a lot of trade between countries and so counties came together for the benefit of their citizens and signed treaties to avoid double taxation.

The UK and US signed a treaty in 2001 which came into effect in 2003 to avoid double taxation of either a resident or a citizen of one or both countries. The United Kingdom and the Us are among the few states who tax International income earned by their citizen or permanent residents residing in other countries. This can easily lead to double taxation and therefore, to protect from double taxation, a treaty was signed between the UK and the US.

The treaty allows reduced or full exemption of ax payment for residents (don't have to be citizens). The treaty also contains a clause that prevents a citizen or resident of either country from using the exclusions stated in the treaty to evade tax payments on the domestic or foreign country.

The treaty signed applies to the following:

  1. Foreign Earned Income Exclusion: In 2018 taxes, this law allowed citizens to exclude $103,900 in any income earned from foreign sources (either in the US or UK)
  2. Tax credit: If you pay taxes to the foreign government, a tax credit is given on any tax owed to your domestic country.
  3. Exclusion on foreign housing: If one is living abroad, some amount of tax is excluded by the domestic state to cover any household expenditures.
  4. Business Profits: Profits from any business shall be taxable only in the state where the business is being run unless the business is also being run in the other contracting state through a permanent establishment.
  5. Dividends: Any dividends paid by a resident company to an individual of the other state may be taxable in that state.
  6. Pensions, alimony, child support, and social security are only taxable by the domestic state.
  7. Capital gains: Both the US and the UK tax capital gains, though on a reduced rate, such as gains from government bonds, sale of your home in the foreign land and, life insurance policy.
  8. Estate taxes: for those domiciles in the UK, you will have to pay worldwide inheritance taxes. For those domiciles in the US, you will only pay inheritance taxes on properties located in the UK.

One can apply for a treaty resident as a citizen or resident of either state to avoid double taxation by simply through a well-assessed tax return and certain tax relief claims as per the treaty. The best way to ensure maximum benefit from the tax treaty between the US and UK (US UK tax treaty) is by visiting an expert account qualified in tax relief claims based on the agreement. Through this treaty, the residents or citizens of both countries save a lot of money.


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About David Smith Junior   Personal finance consultant

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Joined APSense since, November 23rd, 2018, From Los Angeles, United States.

Created on Feb 15th 2019 15:35. Viewed 313 times.

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