US Tax Rules for Expats Living in the UK: FATCA, FBAR & PFICs Explained (2025)

If you’re a US citizen or green card holder living in the UK, your tax obligations do not end at Heathrow. The United States operates a citizenship-based taxation system, which means you must report your worldwide income each year – even if you never step foot in the US again.

This guide outlines the key tax rules you need to know in 2025, from FATCA and FBAR to PFICs, ISAs, and UK pensions – and how to navigate them intelligently for both US compliance and UK tax efficiency.

US Tax Rules for Expats in the UK

📌 Do US Expats in the UK Need to File a US Tax Return?

Yes. Every US citizen and green card holder must file Form 1040 annually, reporting global income. This includes:

• UK salary

• Rental income from UK or other countries

• Dividends and interest from UK bank accounts or investments

• Capital gains from selling property or shares

• Pension growth and withdrawals

Even if you pay tax in the UK, you must still report it to the IRS. Double taxation is usually avoided through the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) – but only if you file correctly.

🧾 FATCA: What US Expats in the UK Must Report (Form 8938)

FATCA (Foreign Account Tax Compliance Act) requires US taxpayers to report foreign financial assets over certain thresholds using Form 8938. For expats living abroad, the threshold is:

• $200,000 at year-end

• $300,000 at any point during the year

This includes:

• UK bank and savings accounts

• Investment accounts

• Shares in foreign companies

• Non-US pensions

Penalty for non-filing: Up to $10,000, plus $50 per day if delinquent.

🌍 FBAR: Do You Have More Than $10,000 in Foreign Accounts?

If you hold more than $10,000 in total across all foreign financial accounts (even briefly), you must file a Foreign Bank Account Report (FBAR) via FinCEN Form 114.

This includes:

• Personal current and savings accounts

• Business accounts

• Joint accounts

• Investment platforms

• Even accounts you only have signing authority over

Penalty for non-filing: Up to $10,000 for non-willful violations – and far higher for willful ones.

📉 PFICs: Why Most UK Investment Funds Are a Tax Disaster for US Citizens

The term PFIC stands for Passive Foreign Investment Company – and many popular UK investments fall into this trap:

• Unit Trusts

• OEICs

• Investment platforms (even inside ISAs)

• Non-US ETFs and mutual funds

Why does this matter?

Because PFICs are taxed under a punitive regime by the IRS:

• Gains are taxed at the highest ordinary income rate (not capital gains)

• Interest is charged retroactively on each year of deferral

• Annual filing of Form 8621 is required for each fund

💥 Even if you never withdraw money, you may owe significant tax.

🇬🇧 ISAs: Not So “Tax-Free” After All

For UK residents, ISAs are marketed as tax-free. But the IRS does not recognise ISA status. That means:

• Income and gains must be reported annually

• They may be PFICs

• You get no tax protection at all under US law

Better alternatives: US-compliant portfolios held via specialist platforms or held inside treaty-recognised pensions.

✅ UK Pensions: Still a Great Tool – With a Catch

The good news? Most UK pensions (like SIPPs, workplace schemes, and defined benefit pensions) are respected by the US-UK tax treaty. That means:

• You don’t pay US tax while funds grow inside the pension

• You can delay taxation until withdrawal

• No PFIC problems

  
  

🚨 The catch: The IRS may consider some pensions (like SIPPs or employer schemes) to be foreign grantor trusts, requiring you to file:

• Form 3520

• Form 3520-A

Failing to do so can result in penalties – even if you don’t owe any tax.

📊 What Forms Must US Expats in the UK File?

Form	What It Does	When It's Required
1040	Standard US tax return	Always (if income exceeds thresholds)
FBAR (114)	Declares foreign bank and investment accounts	If foreign accounts > $10,000 in total
8938	Declares foreign financial assets	If assets exceed FATCA thresholds
8621	Declares and calculates PFIC income	If you hold non-US mutual funds
3520 / A	Reports UK pensions treated as foreign trusts	If IRS considers your pension reportable

🧠 Planning Tips: How to Stay Compliant AND Build Wealth

1. Avoid UK OEICs and Unit Trusts – Instead, use direct shares or US-compliant ETFs

2. Steer clear of ISAs – Not recognised by the IRS, and can trigger PFICs

3. Invest via pensions – SIPPs and workplace pensions offer tax deferral and are treaty-protected

4. Use the FEIE or FTC wisely – Work with a cross-border specialist to choose the right method

5. Keep records – Consolidate bank data to make FBAR and FATCA filings easier

6. File all required forms – Even if no tax is owed, penalties for missing reports are severe

   
   

📞 Next Steps: Book a Free Strategy Call

Tax compliance is critical – but so is making sure your wealth is growing tax-efficiently on both sides of the Atlantic.

In a free 15-minute strategy call, we can:

• Review your UK investment and pension setup

• Flag any PFIC or filing issues

• Help structure your portfolio for US and UK optimisation

• Show how to build long-term wealth without triggering IRS penalties

  
  

👉 Book a call today and take the guesswork out of US-UK expat finances.