Rising Trend: Americans in the UK Opting to Renounce US Citizenship

Because it makes things easier for them. Renouncing their US citizenship means they’ll be avoiding most future US taxes living in the UK. 

Are former American citizens better off financially after renouncing their US citizenship?

It depends. 

Renouncing your US citizenship in UK can reduce financial burdens related to US tax obligations and reporting requirements. However, former American citizens might still have to pay an exit tax and lose access to US financial services.

On the upside, there are favorable US social security rules for non-resident aliens. In general, if you have paid into social security for a full 40 quarters (10 years of work), you will be eligible to collect benefits when you retire.

Even as an NRA, you can still continue to collect US social security like you would have if you remained a US citizen. 

Note that there are still defining factors depending on your circumstance.

I’m just planning to renounce my US citizenship.

If you’re just planning, then you’ll still need to continue with your US tax obligations. Thankfully, there is tax software for Americans that’ll help you with the process, allowing you to make sure you’re complying with most of your tax requirements.

The keyword here is “most”; tax software usually can’t cover all of your tax obligations. 

Hiring an experienced tax professional is usually the best way to avoid having any missed payments, or having to pay penalties because a tax software was unable to tell you that you needed to file a certain form.

Steps on how to renounce US citizenship (UK Edition)

• Secure another citizenship

• Before you are able to renounce your US citizenship, it’s required to already have citizenship in another country to avoid becoming stateless.

• Schedule an appointment

• To begin the renunciation process, you’ll need to schedule an appointment. You can do this by visiting their website or calling their office.
  
  Depending on where you are, there are different locations for embassies you can contact.

• Prepare documentation

• Form DS-4079: “Request for Determination of Possible Loss of United States Nationality”
• Form DS-4080: “Oath of Renunciation of the Nationality of the United States”
• Form DS-4081: “Statement of Understanding” (if applicable)
• Form 8854: “Initial and Annual Expatriation Statement” for reporting exit tax
• Proof of US citizenship (e.g., passport, birth certificate)
• Proof of foreign citizenship (e.g., passport)
• Passport-size photographs

• Attend the renunciation appointment

• At your scheduled appointment at the US embassy, you will make a formal declaration of renunciation and take an oath.

• Pay the renunciation fee

• The fee for renouncing your US citizenship in 2024 is currently US$2,350. You can verify the current fee on the US Embassy’s website.

• Submit forms and documentation

• Provide all completed forms and required documentation during your appointment.

• Receive confirmation

• After processing, you will receive the Certificate of Loss of Nationality (CLN as proof of your renunciation.

• Final tax obligations

• After you renounce, you will need to file your final US tax form (Form 1040) on the year you expatriate. The tax return is due on April 15 of the year after the expatriation.
  
  Additionally, you still have to pay taxes on unrealized gains, which will be calculated on Form 8854. This is your Exit Tax.

What should I know about Exit Tax?

When US citizens and residents choose to sever their ties with the United States, they are expected to resolve any potential outstanding tax obligations. In some cases, that means paying an exit tax. The exit tax is not a penalty for leaving the US. Instead, it’s a final bill for your unpaid tax debts. This could include:

• Unfiled tax returns
• Assets that haven’t been taxed yet but would be in the future, such as capital gains on stocks or funds in retirement accounts

What are covered and non-covered expats?

US expatriates fall into two categories when it comes to the exit tax: covered and non-covered expats. 

Covered expats are required to settle their tax liabilities by paying an exit tax, which functions like a capital gains tax. 

The US government treats their global assets as if they were sold the day before expatriation, and the exit tax is applied to any unrealized gains above a set exclusion amount, which for 2024 is approximately US$866,000 (adjusted annually for inflation).

• For 2024, these thresholds include:
  • A net worth exceeding USS$2 million at the time of expatriation.
  • Average annual net income tax liability for the previous five years exceeding US$201,000 (adjusted yearly, this figure is based on the 2024 threshold).
  • Failure to comply with US tax filing obligations for the previous five years.

On the other hand, individuals who do not meet the thresholds for “covered” status are considered non-covered expats. 

These individuals can expatriate without being subject to the exit tax. However, they must still ensure all prior US tax obligations are settled before renouncing their citizenship or ending their long-term residency.