A British founder or executive who moves from London to the United States becomes a US tax resident under one of two tests: the green card test (opens the official IRS page in a new tab) or the substantial presence test. From the residency starting date the US taxes income from all sources, and a UK company, UK funds, a UK pension and unvested equity each acquire a US treatment. Most of the planning that changes the result has to be reviewed before that date.
This post is for founders, fund managers and senior executives who are not yet US citizens or green card holders and are relocating from the UK. It goes further than the section on moving country in our guide to US-UK tax for founders, fund managers and executives. It covers when residence starts, the dual-status first year, what becomes a US issue on arrival, what to review beforehand and the UK rules on leaving.
When does US tax residence start for someone moving from the UK
Under the green card test, residence starts on the first day in the year you are present in the US as a lawful permanent resident. Under the substantial presence test (opens the official IRS page in a new tab), it generally starts on the first day you are present in the US in the year you meet the test, which can be before the move.
The substantial presence test counts every day of presence in the current year, one third of the days in the prior year and one sixth of the days in the year before that. A person meets it with at least 31 days in the current year and a weighted total of 183 days. Some days are left out: days in transit between two places outside the US for less than 24 hours, days someone could not leave because of a medical condition that arose in the US, and days as an exempt individual, such as certain students, teachers and diplomats. Our substantial presence test page sets out the count.
Where both tests are met in the same year, Publication 519 (opens the official IRS page in a new tab) takes the earlier of the two starting dates. The treaty tie-breaker, for someone resident in both countries under each country's own law, is a separate mechanism. A claim under it, on Form 1040-NR with Form 8833, changes how the tax is figured, but the person is still treated as a US resident for other purposes.
Why business trips before the move can bring the start date forward
Because the starting date under the substantial presence test is the first day of presence in the year the test is met, short visits earlier in that year can become the first day of US residence. A founder who flew in for board meetings in February and moved in July may be a US resident from February.
Publication 519 allows up to ten days of presence to be disregarded in fixing the starting date, but only if the person shows that on those days their tax home was in a foreign country and they had a closer connection to it. The days still count towards meeting the test. A run of consecutive days cannot be split: if one day in it cannot be excluded, none of it can. The exclusion is claimed in a signed statement with the return.
The closer connection exception is a different rule: it can treat someone who meets the test as a nonresident for the whole year, using Form 8840. It is not available to anyone who took steps towards a green card, or had an application to adjust status pending, during the year. Records worth keeping before the move include these.
- Board meetings and investor or customer trips in the year of the move
- US days in the two previous calendar years, which count at one third and one sixth
- Transit days of less than 24 hours between two places outside the US
- Days on a visa before a green card is first used, which can still count
What a dual-status first year means in practice
In the year of arrival a new resident is usually a dual-status alien: a nonresident before the residency starting date and a resident after it. Before that date, only US-source income and income connected with a US business is taxed. After it, income from all sources is.
Publication 519 says foreign income received while resident is taxable even if it was earned before arrival, and foreign income received while nonresident is not taxable even if it was earned later in the year. A UK bonus paid the week after arrival is therefore within the US charge, and relief for the UK tax on it is worked through on Form 1116.
A dual-status filer cannot take the standard deduction, use head of household rates or file jointly, and files a Form 1040 marked as a dual-status return with a Form 1040-NR statement for the nonresident part. Two elections change this. The first-year choice can treat someone who arrives late in the year, and meets the substantial presence test the next year, as resident from an earlier date if they were present for an unbroken month and on at least three quarters of the days from then to the year end. A person married at the year end to a citizen or resident can instead choose, with the spouse, to be treated as resident for the whole year, filing jointly on worldwide income.
Which UK holdings become a US issue on arrival
On the residency starting date the founder becomes a US person for the information return rules. A UK company they control can become a controlled foreign corporation, UK funds are commonly passive foreign investment companies, and a UK pension and unvested equity acquire a US treatment, each with its own reporting.
The Instructions for Form 5471 (opens the official IRS page in a new tab) place in Category 3 a person who becomes a US person while owning at least ten per cent of a foreign corporation, and Category 4 covers a US person, including a resident of the United States, who controls one. Where US shareholders own more than half, it is a controlled foreign corporation. The initial penalty for a missing Form 5471 is $10,000 per form per year, and our post on Form 5471 for a one-person UK limited company walks through the schedules.
A US person who owns shares in a passive foreign investment company generally files under the Instructions for Form 8621 (opens the official IRS page in a new tab). UK unit trusts, OEICs and ETFs, including those held in an ISA, are commonly PFICs, and without an election gains and certain distributions fall under the excess distribution rules. Our post on QEF and mark-to-market elections for UK funds compares the options.
Article 18 of the US-UK treaty (opens the official GOV.UK page in a new tab) provides that income earned inside a UK pension scheme is taxed in the US only when paid out, and the saving clause does not override that paragraph. Relief for contributions made while working in the US is narrower, has conditions of its own and is not protected from the saving clause for a green card holder. RSUs and options that vest after arrival are within the US charge while the UK still taxes its workday share, as our post on RSUs when you move between the US and the UK explains.
What to review before the residency starting date
The useful work happens before the starting date, because elections, sales and restructurings made while still a nonresident can produce a different US result from the same steps taken afterwards. Each is an option to review under both countries' rules.
For the company, the questions are its US classification, whether a check-the-box election is worth considering, and what its earnings and asset records show on the starting date. For investments, they are which funds are PFICs and whether to hold, sell or make an election. For equity, they are grant and vesting dates and the workday record. The US computes gains in dollars under its own rules, so the US cost of each asset is a question to review before anything is sold. Our tax planning and international tax teams work through these with the client's UK advisers.
- Recording every US day in the year of the move and the two years before
- Listing the UK company's shareholders and whether US persons will own more than half
- Identifying UK funds, including ISA holdings, that are likely to be PFICs
- Gathering cost and acquisition dates for shares, funds and property
- Mapping unvested awards by grant date, vest date and workdays in each country
- Checking whether a green card application rules out the closer connection exception
A worked example of a mid-year move to New York
A British founder owns all the shares in her London software company, holds UK funds in an ISA and has unvested RSUs from a former US-listed employer. She makes two short trips to New York in February, moves there on an employment visa in July and stays for the rest of the year.
She meets the substantial presence test for the year, so her residency starting date is her first February trip unless she can exclude those days under the ten-day rule. Her year is dual-status. From the starting date her company is a controlled foreign corporation and she is a Category 3 Form 5471 filer, her ISA funds are likely PFICs, and RSUs vesting after that date are within US tax, with UK PAYE on the UK workday portion.
In the UK, she may qualify for split year treatment under the full-time work case or the home case, depending on the facts. If she sells the company while living in the US and returns to London within five years, temporary non-residence can bring the gain back into UK charge in the year she returns. Her first Form 1040 is due on 15 April, and the planning points were best settled before February.
How the UK treats a founder who leaves for the US
The UK decides residence for each tax year under the Statutory Residence Test (opens the official HMRC page in a new tab), not by a simple day count. A founder leaving part-way through a tax year is usually UK resident for that year, but the year can be split into a UK part and an overseas part if one of the departure cases applies.
HMRC's guidance lists three departure cases: starting full-time work overseas, being the partner of someone who does, and ceasing to have a home in the UK. Each has conditions that must all be met, and priority rules apply where more than one fits. The year of departure is reported on the SA109 residence pages of the Self Assessment return.
The rule founders most often miss is temporary non-residence. A person who had sole UK residence in at least four of the seven tax years before leaving, and who returns after five years or less, can be taxed in the year of return on certain income and gains received while away. HMRC's list includes capital gains and distributions from closely controlled companies. Our guide for founders, fund managers and executives covers the company and equity rules that sit alongside it.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
