Are You Claiming All Your Tax Reliefs as a Dual Resident? Common Mistakes US Expats Make

Living between two tax systems can be rewarding, but it can also be confusing. Many American expatriates in the United Kingdom unintentionally pay more tax than necessary because they overlook key reliefs available under both HMRC and IRS frameworks. While each country has its own set of exemptions, credits, and deductions, the most effective tax planning depends on knowing how to apply them correctly in both jurisdictions. At Xerxes Associates LLP, we help US expats identify missed opportunities, avoid double taxation, and stay compliant on both sides of the Atlantic.

The first and most common issue for dual residents is misunderstanding foreign tax credits. Both the US and UK allow taxpayers to offset taxes paid abroad, but the timing and calculation methods differ. Many expats incorrectly assume that filing a return in one country automatically satisfies obligations in the other. In reality, income must often be converted, matched by tax year, and adjusted for foreign exchange differences to ensure that credits apply accurately. When misapplied, these credits can either fail to reduce liability or trigger discrepancies that attract audits.

Another commonly missed opportunity is the Foreign Earned Income Exclusion (FEIE). US expats who qualify can exclude a portion of their foreign-earned income from US taxation, currently capped at over 120,000 USD per year. However, eligibility depends on meeting specific residence or physical presence tests. Those who move mid-year, travel frequently, or work remotely for US companies often miss out because they fail to meet the test or file the required Form 2555. Strategic planning and correct documentation can ensure this relief is applied without jeopardising compliance.

UK tax residents who are non-domiciled can also claim the remittance basis of taxation, which means they are taxed only on income brought into the UK rather than their global income. While this can be beneficial for those with overseas investments, it requires careful coordination with US tax filings to prevent double reporting. The IRS taxes worldwide income regardless of domicile, so any income excluded in the UK must still appear on US returns, often offset by foreign tax credits.

Dual residents frequently overlook pension and investment reliefs. Under the US-UK Double Taxation Treaty, contributions to certain UK pension schemes may be deductible for US tax purposes, and growth within the pension can often be deferred. Yet many Americans either fail to report these correctly or overpay by including UK pension income prematurely in their US returns. Conversely, HMRC may not tax US retirement income that remains in qualified plans such as 401(k)s or IRAs, depending on how the funds are accessed. Each case requires precise coordination of treaty provisions to ensure both tax authorities recognise the same treatment.

Another area where expats lose out is capital gains. While the UK taxes gains at different rates depending on the type of asset, the US may categorise the same transaction differently, particularly when currency fluctuations are involved. Without consistent record keeping in both pounds and dollars, taxpayers can inadvertently pay tax on gains that do not exist in real terms. Xerxes Associates LLP assists clients in maintaining dual-currency tracking systems that align HMRC and IRS calculations.

Perhaps the most critical relief often missed is the timely use of the Double Taxation Treaty itself. Many individuals fail to claim treaty protection because they are unaware of which articles apply to their circumstances. Article 24, for example, provides specific protection against double taxation for employment, investment, and pension income, yet it must be claimed explicitly through the appropriate forms. Without doing so, reliefs are lost, and taxpayers can end up paying full rates in both countries.

For dual residents, proper planning begins with complete transparency and accurate documentation. Keeping track of when income was earned, where it was received, and how it was taxed is vital for avoiding errors. Using the correct exchange rates and reporting thresholds also ensures that each filing is consistent and defensible.

At Xerxes Associates LLP, our advisers specialise in identifying reliefs that are often missed by generic accountants or software-based filing systems. We prepare both HMRC and IRS returns in tandem, ensuring every available treaty article and credit is applied efficiently. This integrated approach saves clients significant sums while providing peace of mind that their filings are fully compliant.

If you are a US citizen living in the UK, it is worth reviewing whether you are claiming all the reliefs you are entitled to. Even small adjustments can lead to substantial savings.

To schedule a consultation and receive a tailored cross-border tax review, visit www.xerxesassociatesllp.com and speak with the dual-qualified team at Xerxes Associates LLP.

If you are a US expat living in London or elsewhere in the UK, get in touch with us to take advantage of the comprehensive, expert tax advice service that Xerxes Associates LLP provides to all our clients.