Three UK taxes fit the US foreign tax credit: income tax, capital gains tax and, for the right taxpayer, corporation tax. National Insurance, council tax, stamp duty land tax, VAT, inheritance tax and student loan repayments do not go on Form 1116 (opens the official IRS page in a new tab). The High Income Child Benefit Charge is the awkward one, and no IRS publication we have read settles it.
This post is for US citizens and green card holders in Britain who are looking at a payslip and a pile of household bills and wondering what to carry onto the US return. Our guide to avoiding US-UK double taxation gives the short list. Here each of ten UK charges gets a verdict and a reason, followed by a worked household and a sorting checklist.
What makes a UK charge a creditable foreign tax
A UK charge qualifies only if it passes four tests in Publication 514. It must be imposed on you, you must have paid or accrued it, it must be your legal and actual liability, and it must be an income tax or a tax in lieu of one. The name on the bill decides nothing.
Publication 514 (opens the official IRS page in a new tab) says a credit is available only for tax imposed on you, and that the right to claim cannot be moved by contract. A spouse's UK tax is the spouse's, unless a joint return brings both spouses' foreign income taxes together. The Form 1116 instructions (opens the official IRS page in a new tab) add that interest and penalties are not creditable, and neither is an amount you did not legally owe, including one that can be refunded.
The income tax test is mostly about the base. Publication 514 describes a net income tax as one imposed on realised gross receipts less costs and expenses. Taxes based on assets, such as property taxes, fail, and so do taxes based on gross receipts or units of production unless they stand in lieu of an income tax. Neither Publication 514 nor the Form 1116 instructions name any UK charge in this post, so most verdicts below are reasoned from those general rules rather than read off an IRS list.
The treaty supplies the UK-specific layer. Article 2 of the income tax convention (opens the official GOV.UK page in a new tab) lists income tax, capital gains tax, corporation tax and petroleum revenue tax as the UK taxes covered, along with later taxes that are identical or substantially similar. Article 24 then says those listed taxes are considered income taxes for the US credit, and Article 1(5) keeps Article 24 outside the saving clause.
Which UK taxes on a return are creditable
UK income tax and capital gains tax are creditable because Article 24 of the treaty treats both as income taxes for the US credit, and each is charged on income or gain. Corporation tax is also on that list, but it is creditable only by a taxpayer treated as paying it.
Being creditable does not mean fully used. The credit stops at the US tax on that category of foreign income, and any excess is carried back one year and forward ten within the same category, as our post on carrying excess UK tax credits explains. The capital gains tax rates of 18% and 24% therefore say little about how much credit will be usable.
Corporation tax at 25% is the entry people most often misread. A shareholder taking a dividend pays income tax on the dividend, and the company's tax is not imposed on that shareholder. Publication 514 allows an individual to credit certain taxes of a controlled foreign corporation only through a section 962 election, which is an option to review and not a default. The treaty's own credit for underlying tax is confined to US companies holding at least a tenth of the voting stock. An owner of a company that has elected to be disregarded is in a different position, as our post on Form 8858 sets out.
- Income tax: creditable, including PAYE that is a final liability, less anything refundable
- Capital gains tax: creditable, subject to the category limit and year matching
- Corporation tax: creditable only where the tax is treated as the claimant's, or through a section 962 election
Why is National Insurance not creditable when income tax is
National Insurance fails on an express rule, not on its base. Publication 514 says no credit or deduction is allowed for social security taxes paid to a country that has a social security agreement with the United States, and the UK has one.
The treaty points the same way. Its list of covered UK taxes does not include National Insurance, and the agreement dealing with social security sits outside the income tax treaty. HMRC's certificate of coverage guidance (opens the official HMRC page in a new tab) lists the USA among the countries with an agreement, and the IRS page on totalization agreements (opens the official IRS page in a new tab) explains that such agreements exist to prevent double social security tax.
The agreement generally gives relief at the other end, by leaving the worker covered in one system. Our post on being self-employed in the UK as a US citizen covers how that plays out for self-employment tax.
Are council tax, stamp duty, VAT and inheritance tax creditable
No. None of the four is charged on your income or gain, and none is named in Article 2 of the treaty. IRS guidance does not name any of them, so these verdicts rest on the general rules in Publication 514 and on how each charge works.
Council Tax (opens the official GOV.UK page in a new tab) is a local charge set by the valuation band of the home, which is close to the asset-based tax Publication 514 rules out. Stamp Duty Land Tax (opens the official GOV.UK page in a new tab) applies when land or property is bought above a certain price, so its base is a purchase price with no account of cost or profit. VAT (opens the official GOV.UK page in a new tab) is charged by businesses on the goods and services they sell. It is imposed on sales, not income.
Inheritance Tax (opens the official GOV.UK page in a new tab) at 40% is a tax on the estate of someone who has died. It is not an income tax, and it is not imposed on an heir's income. Any relief belongs to a different system: the separate 1978 convention and the US estate tax return, as our post on the US-UK estate tax treaty describes.
- Council tax: not creditable, based on the property's valuation band
- Stamp duty land tax: not creditable, based on the price paid
- VAT: not creditable, charged on sales of goods and services
- Inheritance tax: not creditable on Form 1116, with estate treaty relief handled separately
Does the child benefit charge or a student loan count
Student loan repayments do not count, because they repay a debt. The High Income Child Benefit Charge is unresolved. It is legally an income tax charge in the UK, yet it is measured by child benefit received, and we have found no IRS statement either way. Whoever claims it is taking a position.
GOV.UK says student loan repayments (opens the official GOV.UK page in a new tab) are taken from salary at the same time as tax and National Insurance, and that payslips show them. The money reduces a loan balance, so there is no tax liability to credit. The sources above do not discuss UK student loans, so this rests on the nature of the payment.
The child benefit charge (opens the official GOV.UK page in a new tab) has arguments both ways. In favour, section 681B (opens the official GOV.UK page in a new tab) of the Income Tax (Earnings and Pensions) Act 2003 makes the higher earner liable to income tax, income tax is listed in Article 2, and Article 2 covers taxes however they are levied. Against, Publication 514 looks at the net income character of a levy, and this charge works by recovering a benefit, with income acting as a trigger more than a base. Official guidance is silent, so the answer depends on the facts and on how much risk the filer accepts.
Through the PAYE route (opens the official GOV.UK page in a new tab), HMRC issues a new tax code, so the charge can be collected inside the income tax deducted instead of on its own line. Anyone treating it as not creditable may need to strip it from the P60 tax figure, and GOV.UK does not explain how the amount appears.
How does the sort work for a Manchester household
Take a US citizen employed in Manchester, married to a British spouse with lower earnings, with two children and a child benefit claim in the spouse's name. They file separately. Over the year there are eight charges to sort. Two land on the citizen's Form 1116 and one needs a decision.
The payslip shows income tax, National Insurance and a student loan repayment. The citizen is the higher earner, so the charge falls on the citizen even though the benefit is paid to the spouse, and it runs through the tax code. In June the citizen also sold a holding of shares at a gain, and paid capital gains tax after filing a Self Assessment return. The spouse's own PAYE tax is not imposed on the citizen and stays out on a separate return.
That leaves a short result. PAYE income tax goes in, once any charge inside it has been dealt with. Capital gains tax goes in, in the passive category. National Insurance, the loan repayment, council tax on the home, the stamp duty on last year's purchase and VAT all stay out. A late payment interest charge from HMRC also stays out. Change one fact, so that the spouse earns more, and the charge moves to the spouse and the question disappears from the citizen's return altogether. The credit then reaches Form 1040, and our individual tax returns service works from the same list.
What can you do with a UK charge that is not creditable
Usually very little as a personal deduction, although a few items have another home. National Insurance gets no deduction under the same rule that denies the credit. Foreign real property taxes cannot be deducted on Schedule A. Stamp duty land tax may instead form part of the cost of the property.
The Schedule A instructions (opens the official IRS page in a new tab) list foreign personal or real property taxes among those you cannot deduct, which closes that door for council tax on a home. Publication 514 notes that foreign property taxes may still be deductible as business or income-producing expenses, which can matter for a let flat, as our post on letting out your UK flat describes. Publication 551 (opens the official IRS page in a new tab) includes transfer taxes among the settlement costs added to basis. It does not name stamp duty land tax, but keep the record for the eventual sale.
Bring the sorted list to our treaty relief or cross-border tax team, and read it against the wider reliefs in the double taxation guide.
- Pull the P60 and any HMRC tax calculation for the UK tax year
- Remove National Insurance, student loan and pension lines from the figure
- Identify any child benefit charge inside the tax code and apply your recorded position
- Remove interest, penalties and anything HMRC has refunded or will refund
- Remove tax on income excluded on Form 2555
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
