US Tax Guide for UK Investors & Expats: Understanding W-8BEN Forms, ISAs, and Tax Rules
By Boring Money
19 May, 2025
Most tax systems are fiendishly complicated, but the US tax regime is particularly knotty. Unlike the majority of countries, the US imposes taxes on its citizens' worldwide income - regardless of where they live. This creates onerous reporting requirements for all US citizens, but it doesn't just stop there. UK citizens may be caught too if they have business interests or investments in the US. Let's explain in more detail.
When do US tax rules apply?
The tentacles of the US tax authority are long. Most countries tax you based on where you live, but the US also taxes based on citizenship. That means all US citizens and green card holders must file a US tax return and pay tax on their worldwide income, no matter where they live.
If you're not a US citizen or green card holder - what the IRS (Internal Revenue Service) calls a "non-resident alien" - you're only taxed on income that comes from the US. This includes things like dividends or returns from US shares, interest from US banks, or earnings from a US business.
One important exception: if you invest in US stocks through a UK-listed fund or ETF, that income is not treated as US-sourced - so it generally avoids US tax altogether. Direct ownership of US shares, however, will expose you to withholding tax and potentially other US tax rules... let's peel back the layers.
Rules for UK investors investing in US assets
Do you pay tax on US shares in the UK?
Yes - but it’s a two-part story, because you’re dealing with two tax systems.
UK residents trading individual US stocks and shares are subject to US withholding tax. The withholding tax is 15% of the dividends or income earned from US stocks. It is worth noting that you will still pay all the usual UK taxes if you are holding those investments outside an ISA, include dividend tax or capital gains tax.
However, there are ways to reduce your US tax. By completing the W-8BEN form, you can mitigate the amount you pay on any dividends or income received from US stocks.
What is a W8BEN form?
If you receive interest, dividends
, royalties or any other income from a US source, you need to fill in a W-8BEN form. If you don't, the US tax authorities will assume you are a US taxpayer and apply a withholding tax.The form is used as evidence that you are not a US person. It requires an individual's foreign Tax Identification Number (TIN), which for UK nationals is usually your National Insurance number.
The form requests that a lower rate of US federal withholding tax be applied and includes details of the relevant tax treaty and how the individual qualifies. For UK residents, Article 10 of the US/UK tax treaty will see the rate of withholding tax on trading income reduced to 15% or 0%, depending on the circumstances (e.g. where the income is tax-exempt in the UK via a pension fund).
It’s a fairly straightforward to complete a W-8BEN form and most investment platforms will prompt you to do it when you open an account or buy your first US asset. If you haven't been prompted and you're looking to invest in the US, make sure you contact your chosen platform so you don't unwittingly avoid it.
The form is valid for three years, after which you’ll need to renew.
Rules for US citizens living in the UK
Do you have to pay US tax if you're living in the UK?
If you’re a US citizen living in the UK, you’re still required to file a US tax return every single year - no exceptions, even if you haven’t set foot in the States for decades!
The US is one of the only countries in the world that taxes based on citizenship, not residency, which means your global income is always fair game for the IRS. That includes salary from your UK job, investment income, pensions, rental income... the whole lot.
But don’t panic: the US tax system includes provisions to stop you from being taxed twice on the same income. The two main tools you’ll be using are:
Foreign Earned Income Exclusion (FEIE)
Foreign Tax Credit (FTC)
The Foreign Earned Income Exclusion (FEIE)
This allows you to exclude up to around $120,000 of foreign-earned income (the exact amount adjusts annually) from your US taxable income, provided you meet certain criteria - namely, that you:
Live outside the US for at least 330 full days in a 12-month period, or
Pass the bona fide residence test (i.e. you're a proper long-term UK resident)
This can work well if you’re employed in the UK and your salary is below the threshold. However, it doesn’t apply to investment income, rental profits, or capital gains
- it’s for earned income only (think: salaries, not dividends).You claim the FEIE using Form 2555 with your usual US tax return. It can be a bit fiddly, especially when you’re trying to coordinate US and UK tax years (which don’t align), but for many expats on modest to mid-level salaries, it can wipe out your US tax bill entirely.
The Foreign Tax Credit (FTC)
If you’re a US citizen paying UK tax on your income, you can often claim a credit on your US tax return for those UK taxes you've already paid. This is where the Foreign Tax Credit (FTC) comes in.
Instead of excluding income like the FEIE does, the FTC lets you reduce your US tax bill by the amount of tax you’ve already paid to the UK. So, if the UK taxed you on your salary, dividends, or capital gains, you can usually offset that against your US tax due on the same income.
The FTC usually works better than the FEIE if you have unearned income - like dividends, interest, capital gains, or rental income.
You claim the FTC by filing Form 1116 with your usual US tax return. It’s not the most user-friendly form (this is the IRS we’re talking about), but it’s crucial if you want to avoid paying twice.
Do you pay US tax in an ISA?
ISAs work well for most UK taxpayers but for US citizens the IRS classifies them as Passive Foreign Investment Companies (PFICs). These come with punitive US taxation rules that render them obsolete as a tax savings vehicle. Investors will be subject to US income and capital gains tax on all activity within the ISA.
So while your UK friends may be loving their ISAs, you’re better off avoiding them entirely and investing through a US-based brokerage account or a Roth IRA for longer-term goals (more on this below).
What's the best way to invest in US stocks?
If you're a UK citizen
1) Fill out the W-8BEN form
For UK citizens, investing in US stocks is totally doable - but you’ll want to keep a close eye on that withholding tax. Remember, this hefty 30% can usually be reduced to 15% or even 0% as long as you file a W-8BEN form properly. You'll typically be prompted by your investment platform (but it's wise to contact them directly if you're not to make sure you don't miss anything).
2) Avoid US-domiciled funds
It's also wise to steer clear of US-domiciled funds and ETFs; They’re a tax and admin headache. Most aren’t eligible for ISAs or SIPPs, and if they don’t qualify as “reporting funds” under HMRC rules (many don’t), any gains you make will be taxed as income, not capital gains - meaning your tax bill will match your marginal rate of Income Tax (potentially up to 45% for additional rate taxpayers). Instead, go for UK or Ireland-domiciled funds that invest in US stocks - they’re ISA/SIPP-friendly, tax-efficient, and let you tap into US markets without the grief.
You can usually tell if a fund is UK-domiciled by checking its Key Investor Information Document (KIID)
or factsheet - it will state the fund’s domicile or country of registration. If it says "United Kingdom" or "UK", you’re good. You can also look at the fund’s ISIN code: UK-domiciled funds typically start with GB. Just don’t confuse your investment platform’s location with the fund’s domicile - a US fund listed on a UK platform is still a US fund (and still a problem)!If you're a US citizen in the UK
The one option for US citizens resident in the UK is a Roth IRA. This has similar benefits to an ISA, but doesn't attract the same punitive tax treatment from the US authorities.
All investment growth is free from Income and Capital Gains Tax and, in addition, there are no taxes or penalties if you want to withdraw your initial capital (but not the income or capital growth). Once you reach age 59½, you can take out as much as you like including the income and gains without incurring penalties.
The UK also recognises Roth IRAs, so doesn’t levy tax from its side.[1]
Do you need professional tax advice?
If you are a non-US resident and non-US citizen who is simply investing in a few US shares, you can probably get away with working it out yourself. If not, you’re almost certainly going to need the services of an expert. The US tax system is a minefield and the tax authorities are not known to be sympathetic. Ignorance of the law – “but I didn’t know I had to pay tax” - is no defence. While some wealth managers have given up advising US citizens because of the complexity, there are a range of specialist US advisory groups in the UK.
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