FAQ: US & UK Tax Guide for British Non-Resident Aliens
Last Updated: Sept. 12, 2025
What defines a British national as a "Non-Resident Alien" (NRA) for U.S. tax purposes, and why is this classification critical?
For U.S. tax purposes, an "alien" is any individual who is not a U.S. citizen or national. An "Non-Resident Alien" (NRA) is an alien who does not meet either the "green card test" or the "substantial presence test" in a calendar year. This classification is crucial because U.S. resident aliens are taxed on their worldwide income, similar to U.S. citizens, whereas NRAs are generally only taxed on their U.S.-sourced income and specific income "effectively connected" with a U.S. trade or business.
The Green Card Test is met if an individual is a Lawful Permanent Resident of the U.S. at any time during the calendar year.
The Substantial Presence Test (SPT) is met if an individual is physically present in the U.S. for at least:
31 days in the current year, AND
183 days over a three-year period (current year + two preceding years), calculated by counting all days in the current year, one-third of days in the first preceding year, and one-sixth of days in the second preceding year.
Certain individuals, such as some foreign government-related individuals, teachers/trainees (for a limited period), students (for a limited period), and professional athletes, may be "exempt individuals" whose days of presence do not count towards the SPT. Additionally, a "Closer Connection Exception" may apply even if the SPT is met, provided the individual is present in the U.S. for fewer than 183 days in the current year, maintains a "tax home" in a foreign country, and has a "closer connection" to that foreign country than to the U.S.
What are the general U.S. tax rules for Non-Resident Aliens (NRAs) regarding U.S.-sourced investment income, specifically Fixed, Determinable, Annual, or Periodical (FDAP) income and capital gains?
For NRAs, U.S.-sourced investment income is typically categorized into Fixed, Determinable, Annual, or Periodical (FDAP) income and income Effectively Connected with a U.S. Trade or Business (ECI).
FDAP Income: This primarily covers passive investment income such as dividends, interest, rents, and royalties. Unless a tax treaty provides a lower rate, FDAP income is subject to a flat 30% withholding tax on the gross amount. No deductions are allowed against FDAP income when this flat rate applies, making treaty benefits particularly valuable.
Capital Gains: Generally, capital gains from U.S. sources (excluding those from U.S. real property) are not considered FDAP income. NRAs are typically subject to U.S. tax on such capital gains only if they are physically present in the U.S. for 183 days or more during the taxable year, or if the gains are effectively connected with a U.S. trade or business. For most British NRAs who are UK residents and do not meet the 183-day presence test, capital gains from U.S. stocks and bonds are usually exempt from U.S. tax.
How does the "US-UK Tax Treaty" reduce U.S. tax obligations for British NRAs on investment income, and what is Form W-8BEN's role?
The "US-UK Tax Treaty" aims to prevent double taxation, clarify taxing rights, and reduce U.S. tax rates for UK residents. To claim these benefits, a British NRA must provide a valid Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)," to the U.S. withholding agent (e.g., bank or broker).
Key treaty provisions for common investment income types include:
Dividends: The maximum U.S. withholding tax rate for most individual investors on portfolio dividends is reduced to 15%. Lower rates (5% or 0%) apply under specific corporate or pension scheme ownership conditions.
Interest: Interest arising in the U.S. and beneficially owned by a UK resident is generally exempt from U.S. withholding tax (0% rate).
Capital Gains: Gains from the sale of capital assets by a UK resident are generally taxable only in the UK, meaning they are exempt from U.S. tax, with a significant exception for gains from U.S. real property.
Form W-8BEN certifies foreign status, beneficial ownership, and eligibility for treaty benefits. Failure to provide it can result in the default 30% withholding tax, even if a lower treaty rate applies. The form is valid for the year signed and the following three calendar years, or until a change in circumstances.
What are the special U.S. tax rules under FIRPTA for British NRAs investing in U.S. real property, and what is FIRPTA withholding?
Investments in U.S. real property interests (USRPIs) by British NRAs are governed by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This law ensures foreign investors pay U.S. tax on gains from disposing of USRPIs, which include direct ownership of land/improvements or shares in a U.S. Real Property Holding Corporation (USRPHC).
Gains from the disposition of a USRPI are treated as Effectively Connected with a U.S. trade or business (ECI), meaning they are taxed on a net basis (after deductions) at graduated U.S. income tax rates, similar to U.S. citizens.
FIRPTA withholding is a mechanism where the buyer of a USRPI from a foreign person is obligated to withhold a portion of the gross sales price as an advance payment of the seller's potential U.S. tax liability. The standard withholding rate is 15% of the gross sales price. This can lead to over-withholding if the actual gain is much smaller. Reduced rates (e.g., 0% or 10% for personal residences under certain price thresholds) or exemptions may apply. Foreign sellers can apply for a withholding certificate (Form 8288-B) from the IRS to authorize reduced or zero withholding if the standard rate would exceed their actual tax liability.
When is a British NRA required to file a U.S. Nonresident Alien Income Tax Return (Form 1040-NR), and why is an ITIN sometimes necessary?
A British NRA must file Form 1040-NR, "U.S. Nonresident Alien Income Tax Return," if they:
Are engaged in a U.S. trade or business during the year (including gains from USRPIs).
Have U.S. income on which the U.S. tax liability was not fully satisfied by withholding.
Are seeking a refund of overwithheld or overpaid U.S. tax (e.g., if the 30% default rate was withheld on dividends but they qualify for the 15% treaty rate).
Are claiming deductions or credits against ECI.
The filing deadline is generally June 15 for most passive investors (or April 15 if wages subject to U.S. withholding were received). Timely filing is crucial, as the IRS can deny deductions or credits if a return is not filed within 16 months of the original due date.
A U.S. Individual Taxpayer Identification Number (ITIN) is issued by the IRS to individuals who need a U.S. taxpayer identification number but are not eligible for a Social Security Number (SSN). A British NRA may need an ITIN if they are required to file Form 1040-NR, particularly to claim treaty benefits or refunds through a tax return, or as a foreign seller of a USRPI. The application for an ITIN (Form W-7) is often submitted with the tax return, and the process can take several weeks or months.
How are British NRAs (who are UK residents) taxed in the UK on their U.S. investment income, and what mechanisms prevent double taxation?
UK residents are generally subject to UK tax on their worldwide income and gains. This means U.S.-sourced investment income (dividends, interest, capital gains) that may have already been taxed in the U.S. is also reportable and potentially taxable in the UK.
To prevent double taxation, the UK provides Foreign Tax Credit Relief (FTCR). This allows a UK resident to claim a credit for U.S. taxes paid against their UK tax liability on the same income or gain. The amount of FTCR claimable is the lower of:
The actual foreign tax paid (or the amount allowable under the US-UK Tax Treaty, if less).
The amount of UK tax liability attributable to that specific item of foreign income or gain.
This "lower of" rule means full relief may not always be available if the U.S. tax rate (even treaty-reduced) exceeds the UK tax rate for that individual. FTCR is typically claimed on the foreign supplementary pages (SA106) of the UK Self Assessment tax return, requiring evidence of U.S. tax paid (e.g., Form 1042-S). As an alternative, foreign tax paid can sometimes be claimed as a deduction against the foreign income in the UK.
What is the "Saving Clause" in the US-UK Tax Treaty, and why is it generally not a concern for British NRAs?
Most U.S. income tax treaties, including the US-UK Tax Treaty, contain a "saving clause" (Article 1(4)). This clause generally allows each country to tax its own residents and citizens as if the treaty had not come into effect.
For a British national who is genuinely a Non-Resident Alien (NRA) for U.S. tax purposes and not a former U.S. citizen or long-term resident, the U.S. saving clause generally does not override the treaty benefits they claim. This is because they are claiming benefits as a resident of the other contracting state (the UK), not as a U.S. person. The saving clause's primary purpose is to preserve the U.S.'s ability to tax its own citizens and residents on their worldwide income, regardless of treaty provisions that might otherwise limit that right for residents of the other country. Therefore, for typical British NRAs, the saving clause does not negate the treaty benefits they claim on their U.S. investment income.
Given the complexities, especially for significant portfolios or real property, seeking professional tax advice from advisors familiar with both U.S. international tax rules and UK tax law is highly recommended to ensure compliance and optimize tax outcomes.