Citizenship-based taxation. Should all UK citizens pay tax in the UK, even if they live abroad?

No. It’s a terrible idea. Here’s why.

How the UK system currently works

The UK taxes individuals based on their residence. If you live in the UK for 183 days in one tax year (or more than 90 days if you have a home here)1It’s a bit more complicated than that, but these days the rules are fairly clear and sensible then you are “resident” in the UK, and subject to UK tax on all of your income and gains for that year.2Unless you are a “non-dom”, which is a whole other story

The problem with this from some people’s perspective is that it becomes remarkably easy to stop being subject to UK tax. Simply quit the UK. Plenty of wealthy people skip the UK to move to tax havens, often just before making large capital gains.3It’s occasionally claimed that people don’t move in response to higher tax rates. Most of this is based on studies of people moving from relatively highly taxed US States to relatively lowly taxed states. It’s not applicable to the very wealthy moving to tax havens, which is hard to study statistically (too few people) but very easy to assess empirically (there’s no other reason a Brit would choose to live in Monaco You can be sure we’d see more of that if the UK was about to introduce a hefty wealth tax

Whether you call this “tax avoidance” and/or think it’s immoral is a personal question on which different people will have different views. But – as long as they are really spending 270 days abroad every year, and don’t come back within five, then leaving the UK is absolutely a proper, legal and 100% effective way to escape UK tax.

The US alternative

The US does things differently – it has “citizenship-based taxation”.

The way this works is that US citizens (and green card holders) are fully subject to US tax on their worldwide income and gains, no matter where they live. So you cannot escape US tax by moving to Panama. You can escape US tax by surrendering your citizenship – but that comes at the price of a hefty exit tax (which broadly eliminates all the immediate benefit of escaping US taxation).

Interestingly there is almost no other country that does this.4People sometimes cite Eritrea, but that looks more like gangsterism than tax.

But, on the face of it, if you want to stop billionaires from leaving the UK and escaping UK tax, this is the approach to adopt.

(You may, alternatively, regard such an approach as immoral, and think that no country has the right to tax people who want to leave – but I’m going to park such political questions and look at the practicalities)

Where citizenship-based taxation goes wrong

The problem is that you would be paying tax in two places. A Brit living in France would pay UK tax (because they are a British citizen) tax plus French tax (because they are resident in France).

On the face of it, this shouldn’t be a problem, because the UK has double tax treaties with France and most other countries which in principle stop you from being taxed twice on the same income. And certainty in a simple case where you have £100 of income then the US and UK won’t both apply their full rate of tax to that income. But the problems go beyond simple double taxation.

We can get a sense of the issues by looking at the difficulties currently faced by US citizens (subject to US worldwide taxation) resident in the UK (and subject to UK worldwide taxation).

Here’s how it goes:

  • The US has the “foreign earned income exclusion” for the first $107,000 of income for citizens living abroad. But it doesn’t protect the self-employed, who still have to pay US self-employment tax on their income. If you’re a plumber or an IT contractor, you have to file two complete tax returns in two countries. Those tax returns have different rules for e.g. what is deductible and what isn’t. Nightmare.
  • To make life more fun, those tax returns will often cover a different period – for example the UK tax year runs from April 6th, but the US tax return runs from January 1st. Even if you’re employed, and all your income is exempt in the US under the foreign earned income exclusion, you still have to file.
  • Filing tax returns in two countries is complicated, because of the interactions between the two sets of returns. I know someone who had a $5k capital gain – filing US taxes for that year cost them $3k.
  • Capital gains are a problem, because the US taxes you on your US dollar gains. For example: say you buy a house in the UK for £300k and sell it a few years later for the same price. No UK capital gain. But if Sterling appreciated over that period, so that the dollar purchase price was $380k but the dollar sale price was $450k, then you have a $70k US capital gain, but no cash proceeds to fund it. And the UK will do the same to your US assets.
  • If you make a capital gain then the different filing and payment timetables mean that you’ll sometimes have to pay the full US tax, then the full UK tax, then claim a refund of the US tax.
  • It’s a nightmare for the spouse. If a couple have a joint account, and one is a US citizen and the other is not, then the joint account becomes subject to U.S. tax. Married couples can normally not worry about the tax treatments of their family finances – but where one of the couple is a US citizen then even simple arrangements like joint accounts become very complicated.
  • Many people in the UK have an ISA, where you can put cash or shares into an account and the return is exempt from tax. But it’s not exempt from U.S. tax. So a U.S. citizen living in the UK cannot use an ISA (or, to be more accurate, if they use an ISA they get no benefit from it). Some US advisers think it’s worse than that, and an ISA has a particularly awful US tax treatment: that’s a whole other class of problems that arises when one country’s tax system has to characterise the tax effect of another country’s legal and tax system.
  • You always get the worst of both worlds. For example, the US and UK take the opposite approach to the taxation of your house. The UK gives you no tax relief on your mortgage payments, but exempts you from capital gain on the value of the house. The US gives you tax relief on mortgage payments, but then taxes the capital gain. Both are somewhat balanced results. A U.S. citizen living in the UK gets the worst of both worlds. They get no tax relief on the mortgage for their UK tax, but have to pay US capital gains when they sell. That’s an unbalanced result.
  • It becomes impossible to buy investment funds. The UK has rules that in practice mean no UK residents can buy an investment fund unless it is either established in the UK, or foreign but an “approved offshore reporting fund”. The US has rules that in practise mean it is very disadvantageous for a US citizen to invest into a non-US fund (the PFIC rules). The poor U.S. citizen living in the UK is subject to both sets of rules, and therefore cannot realistically invest in any funds.
  • There’s an obvious incentive for US citizens abroad to simply not declare or pay their US taxes. That’s a criminal offence, but historically it was very hard for the IRS to spot. A whole international reporting regime – FATCA – was introduced to stop this. But that imposes a significant admin burden on non-US financial institutions with US citizen clients and, as a result, some banks don’t allow US citizens to open accounts.
  • I could go on. The impact on minors. “Accidental Americans”. Retirement account taxation. Inheritance/estate tax interaction. Complexity when couples divorce. Social security/national insurance interaction. You don’t need to be wealthy, or to have complex personal finances, to have a horrible time navigating the US and UK tax systems at the same time.

These are unfair outcomes for normal people, particularly people who can’t afford lots of tax advice. Billionaires can cope with it; doctors and IT workers, not so much.

So if the UK adopted citizenship-based taxation then you might regard that as a “win” for taxing the very wealthy. But it would hurt many ordinary people who choose to live abroad.

That’s why the US is the only developed country that taxes on the basis of citizenship. Why does it do that? Some combination of: changing the US tax system is very hard, US expats don’t have valuable votes and so the campaign to change the law gets nowhere, and the US is big enough and bad enough to get away with things that other countries can’t.

Surely there’s a way to do the good stuff and not the bad stuff?

One idea would be to keep citizenship-based taxation, but only for people who move to tax havens.

The problem with this is that there are many countries that behave exactly like tax havens for Brits who move there. Singapore, Israel, Portugal, even Italy, don’t tax, or barely tax, the income of a wealthy Brit who moves there. So our list of “tax havens” would have to either be very long, or full of holes.

And if the UK introduced a wealth tax, then almost every other country would be a “tax haven” from that wealth tax, because only a handful of countries these days impose a wealth tax.

So what’s the answer?

I think there are two.

One is to have no problem with people leaving the UK if they choose, and escaping UK tax. You can justify this on the principled grounds that everyone has a right to vote with their feet, or the pragmatic grounds that people may be less likely to come here, and entrepreneurs less likely to stay, if we hit them with a large tax bill when they leave.5The US doesn’t have an obvious problem with that, but this arguably goes back to the US being uniquely big and bad enough to have a citizenship-based taxation system.

The other is to say that in some cases, where a person has accrued lots of untaxed capital gain during their time in the UK, the UK should have a right to tax it if they leave. I think that’s worth more thought, and will be writing more about it soon.

But citizenship-based taxation is unfair and unjust.

Photo by James Giddins on Unsplash

  • 1
    It’s a bit more complicated than that, but these days the rules are fairly clear and sensible
  • 2
    Unless you are a “non-dom”, which is a whole other story
  • 3
    It’s occasionally claimed that people don’t move in response to higher tax rates. Most of this is based on studies of people moving from relatively highly taxed US States to relatively lowly taxed states. It’s not applicable to the very wealthy moving to tax havens, which is hard to study statistically (too few people) but very easy to assess empirically (there’s no other reason a Brit would choose to live in Monaco
  • 4
    People sometimes cite Eritrea, but that looks more like gangsterism than tax.
  • 5
    The US doesn’t have an obvious problem with that, but this arguably goes back to the US being uniquely big and bad enough to have a citizenship-based taxation system.

25 thoughts on “Citizenship-based taxation. Should all UK citizens pay tax in the UK, even if they live abroad?”

  1. John Buckeridge 6 July 2023

    Dan. I agree with your argument in its entirety (I think) but Capital Gains are a problem here. Perhaps the UK should charge CGT (or chargeable gain CT) on all UK fixed assets – particularly land and property irrespective of the residence of the vendor. The usual exemption for main residence and exemptions for certain types of investment funds could continue but with the proviso that you could not claim to have a main residence in the UK in any tax year in which you were non-resident. The tax system has already moved somewhat in this direction for corporates and going the whole hog would also simplify matters.

  2. BOB GOULDER 29 June 2023

    Dan. Thoughtful post. I happen to agree (strongly) that CBT is poor policy. Quick Question: Is the UK gov’t actually thinking about adopting it, to be more like the US? Is that what prompted your post? I hope not, but you never know. Separately, I’m curious if you’ve heard anything about France using a bifurcated approach, which applies CBT in one instance (only as to French citizens residing in Monaco) but applying RBT in every other instance? Thoughts on such a model? And would your answer change if it were the case that France and Monaco negotiated a formal treaty under which FRA assumed national defense obligations for the principality? (i.e., such that CBT then becomes a de facto means of making Monaco contribute to it’s own national defense costs). Regards, Bob

    • Hi Bob. No, it’s not seriously being proposed for the UK (or anywhere I’m aware of). Occasionally it’s suggested as an ad hoc response to criticisms of other proposed tax policies, ie as a way to stop the obvious consequence of people leaving.

      I’m very much not a French tax expert, but I believe the Monaco rule is a specific flex on residence, not CBT. A way to block an obvious game people played.

  3. Matthew 29 June 2023

    What is the _purpose_ of taxation? It’s to pay for all the services being used by people in certain jurisdictions. People who left that territory aren’t using most or any of the services.
    Sorry but the answer is not citizenship tax. Many people who left will just revoke citizenship as soon as they have an alternative.
    The world is becoming more nomadic. People want to live somewhere, work, spend, and own assets. Those are the main pillars of taxation. If a country can’t get that balance right, introducing another method is not the answer. Just get the existing ones right.
    I would suggest if the case of the UK the target should be wealth tax. If you own assets in a country, then you would need to contribute to paying for the services aligned with that. If people own homes, tax them based on the land. If they own a vehicle, tax them for using the infrastructure.
    It might be what you are suggesting, but instead of tied to bring British it’s tied to owning assets registered or kept in the UK.

    • Angus Bearn 10 September 2023

      Quite so, Matthew, and the sooner the better.

    • I think despite everything in the article I still disagree.
      If I was living abroad I would be getting almost the same benefit as I do now from UK spending in health, education, defence and welfare – if I needed these services I’d move back.
      I’ve already had the benefit of education, so should pay. If I got seriously ill I’d always have the NHS as a backup, the UK would be happy to supply, if I got caught in a conflict the armed forces would come to pick me up and if there was conflict I’d hide behind uk tanks. I really think I’d get over half the benefit of UK spending.
      I think these apply to most people and that unless someone renounces their citizenship so they’re not able to get these benefits they should pay some tax. It doesn’t have to be the same level and you can build in exceptions but it is fair, especially in the tax haven case.
      Punishing people for leaving is still a good idea. Just need someone smart to figure out a system that works.

  4. Alan Peery 28 June 2023

    Thanks Dan for documenting many of the citizen-based taxation issues that steal weekends from me every year as I prepare my US taxes. These issues present enough overhead that I find it easier to leave money on the table (skipping that better interest rate if I move my savings, etc) rather than doing the associated paper work.

    One particular area that bit was an ESOP where my employer changed scheme managers (so the paperwork didn’t line up), made two rights issues while I was participating growing my shares by non-integer multiples, and then restating the share numbers when calculation errors were discovered. Dividends were paid as a mixture of cash and shares. And the exchange rates changed every month, of course…

  5. Patrick Dougherty 28 June 2023

    I am in of citizenship based taxation. The reason is philosophical and economic. If one is a citizen one has rights but also obligations – that should not change depending on where live. Secondly, in a capitalist society there is always a pyramid structure where relatively few individuals make a huge amount of earnings or capital gains – as a society we have accepted this on basis that we can tax and take a proportionate share to pay for services to benefit everyone. This has given legitimacy to the capitalist system. If on other hand you allow those who have made or earn vast sums to legally not pay tax you drive a stake through the heart of that legitimacy. Couple in businesses that have legally been doing the same thing and you have the situation where the elite are richer than ever , GDP higher than ever but our libraries are closing. That’s just wrong and needs to be changed.

    For those planning to escape UK taxation – I would be more open to them renouncing their citizenship to forego tax obligations in UK – once their tax to that date has been paid

    • Philosophically I don’t think that makes sense. Someone can come to the UK and live here for years without becoming a citizen. They’re fully subject to UK tax in that time. We tax on the basis of residence, not citizenship.

      If you think there are loopholes that stop the wealthy from being fairly taxed then the answer is to close those loopholes. Citizenship taxation is neither necessary nor sufficient to fairly tax the wealthy. There are many countries with more progressive tax systems than the US – arguably all other OECD countries fall in this category…

      • Patrick 28 June 2023

        A non citizen should pay tax if resident but can stop doing so upon leaving. The difference with Being a citizen comes is that it comes with ongoing responsibilities to that country. If you no longer want to play ball then that should be through loss of citizenship. The idea that people who game the system to pay less tax legally and discredit the capitalist system in a society are allowed to keep citizenship makes a mockery of the structures put in place to give public legitimacy to capitalism.

  6. Olivier Roland 27 June 2023

    Great article ! I just published another one on the disastrous effects of taxation on US citizenship, and FATCA:

    I appreciate the concrete examples you give of bad interactions between two different tax systems.

    • Olivier Roland 29 June 2023

      Dan, I would like to quote some examples you gave in my article and in my upcoming book… but can’t find your last name 🙂

  7. Keith Collyer 27 June 2023

    If people choose not to live in the UK and that is an argument for them not paying tax here, it must surely also be an argument for them not getting a vote here.

    • the history of linking tax and voting is not a happy one.

      • John Buckeridge 6 July 2023

        I agree that linking tax with voting would be very dangerous but that does not mean that voting should not also be linked with residence – if only on the basis that if you do not live in the UK you do not suffer the consequences of a bad UK government.

  8. Richard Weber 27 June 2023

    Dan mentions “the worst of both worlds”. This is accentuated by the US requirement that different types of income be reported within different “silos” of Form 1116 (tax credits). So if one has a US tax credit because UK dividend taxes paid exceed the US taxes that would have been due on the same dividends, that credit cannot be used to offset some US tax liability that is not a dividend tax. No tax treaty can adequately create a fair outcome, because taxes really have to be viewed “in the round”. UK collects tax via a landscape of income tax, VAT, stamp duty, council tax, capital gains tax, and numerous others. Some of these, such as council tax and VAT are not allowed as credits against one’s US tax bill.

    • Yes – tax treaties are fine to prevent double taxation of companies or people from country A doing business in country B, but they’re just not designed to deal with the complete overlap of *everything* you get for US citizens.

  9. Barry Crisp 27 June 2023

    Thanks Dan for an interesting read. Clearly taxation of citizens makes little sense despite superficially addressing some issues. Just one question for you as someone who suffers from it – why can’t the UK change its tax year to January 1st. Surely it would be easier for everyone. Is there any other country that doesn’t do this?

    • It would absolutely be easier for everyone – HMRC and taxpayers. However, the transition would be a right pain, with everyone having to file for one 9 month tax year, and a bunch of systems and technical complications. Possibly it will become easier once tax is truly entirely digital?

      But I’d place a small wager that we could be writing in 2123 and the UK would still have its crazy 5 April year end.

      There’ s a definitive OTS report on the subject here:

      • Andrew 27 June 2023

        The tax year in many countries is a calendar year ending 31 December, but as the OTS notes, some countries make other choices. In Australia, the tax year ends on 30 June, in India on 31 March, in South Africa on 28 (or 29) February. The UK’s tax year ending 5 April is unusual, but several Commonwealth counties still use 30 March.

        The UK could make the change to a calendar year, like Ireland did with a 9 month / 39 week tax year from 6 April to 31 December 2001. As I understand it, Ireland also took the opportunity to introduce new online electronic services – not having to change existing software was seen as an advantage.

  10. Peter Ferrigno 27 June 2023

    An exit tax by marking assets to market when people leave the country has been tried by a few more countries and does have some advantages. There are obvious issues around liquidity if your main asset is e.g. a private company or real estate in another country, but those can be mitigated by allowing deferral (with interest!) until the asset is disposed of.

    The biggest gains may be on those just passing through for a few years, and then it’s a question of whether it’s fair to treat the market value at time of arrival as the base cost rather than the purchase price. It’s complex area even for those of us that do this all the time for a living, so I am looking forward to seeing your take on it, Dan!


  11. Iain Campbell 27 June 2023

    “The other is to say that in some cases, where a person has accrued lots of untaxed capital gain during their time in the UK, the UK should have a right to tax it if they leave.”

    Interesting to think about the ways in which this could work. I imagine you would need to tax the gains before the person became non-resident, so does that require some sort of clearance procedure for those with large potential gains? A procedure like trustees becoming non resident?,trustees%20cease%20to%20be%20resident.
    What would happen if the realised gain was then less than assessed on exit – a refund? And so on.

  12. Mike Breen 27 June 2023

    Citizenship based taxation sounds patriotic and fair but it’s actually a form of tributary slavery, a tax department ball and chain attached to your ankle at birth. It is easy, TOO EASY for government to use such a system to try and keep people and capital in the nation in the face of basic human rights and freedoms.

    Make no mistake, the US system is punitive and it is meant to be. The idea that renunciation makes this ok is a nonsense, citizenship brings human rights. The idea that you must give up one set of human rights in order to exercise the human right of a family life abroad without being persecuted by the nation you left is absurd and yet this is now the reality for the USA.

    It’s not a road to go down, don’t.

  13. John Richardson 27 June 2023

    Thanks for this article supported by all the examples experienced by individuals who are tax residents of both the US and UK. Middle class Americans abroad are being crushed by US citizenship taxation enforced by FATCA.

    The US actually imposes a more punitive tax regime on US citizens who live outside the USA (including many people who never lived in the USA).

    The only practical meaning of the US citizenship tax regime is that it imposes US taxation on the non-US source income of people who live in other countries. The governments of those other countries should be concerned by this gross violation of their tax sovereignty.

  14. Ted Keen 27 June 2023

    Thanks Dan for raising awareness of the unfairness, unreasonableness and compliance nightmare of citizenship-based taxation. As a US citizen living in the UK, in addition to having to establish investment and pension arrangements that satisfy both governments, what happens every year is that my wife (who owns her UK Ltd Co) and I (and now our adult children) pay thousands to file our US returns (including FBAR forms), but only have to pay hundreds -maybe -because of some disparity in the capital gains tax rules, etc. I would willingly pay $2,000 every year to file a form in which I verify that “I am tax resident in the UK, where 100% of our income is taxed, here’s a copy of my latest return, now please leave me alone for another year.” A win for the US Treasury, a win for us, a loss for our US tax advisors, yes, but they can surely find alternative applications of their skills. Surely there is lower hanging fruit for the IRS than expats living in high tax countries.

Add a Comment

Your email address will not be published.

We use cookies to store and use information whilst you are visiting our website, and to help it work smoothly, but will never serve any advertising to you.  Our privacy policy is here