# Can USA Investor in UK use Form 1116?



## csrote (Mar 8, 2013)

Hello all. I am a US citizen living in Cardiff, UK. I trade the US financial markets and earn capital gains, interest and dividends ("passive income"). I have no US earned (wage) income. I am not employed or even self-employed. Since I am not wealthy I need to bring my trading income into the UK to meet living expenses.

I have no UK income of any kind. I do not trade any markets outside the USA (yet).

Since I am physically located and (recently) tax-resident in the UK, I expect to pay UK income tax in addition to US income tax. The UK regards income produced FROM (controlled or managed from) the UK as UK taxable income.

My question is about IRS Form 1116, Foreign Tax Credit: can I benefit from this form? All of my trading (passive) income originates in the USA (and will be taxed by the USA), but is then brought over to the UK and spent. I will pay UK tax on the income brought into the UK from the USA. 

Will the UK tax qualify for offset on form 1116? Do the funds brought into the UK magically become UK "foreign source taxable income" (FSTI) since they are taxed by the UK?

Thank you for any help with this difficult question.


----------



## Bevdeforges (Nov 16, 2007)

In no case should you be paying US tax in addition to UK taxes. There are tax treaties between the two countries that are supposed to avoid double taxation.

Generally, you can offset your US tax liability with tax credits (via form 1116) for taxes paid to the UK (or other foreign) government. However, as a cash basis taxpayer, you deduct the taxes paid to the UK in 2012 against your tax liability for 2012 (determined when you file in early 2012). So if you haven't paid any taxes on your investment gains during 2012, you have no foreign taxes to credit against your 2012 declared income from investments.

I'm not sure how the UK taxes foreign investments, so I'll have to defer to someone more familiar with that tax system.

Oh, and by the way, I'm going to move this over to the Expat Tax section, since it will no doubt be of interest to other folks.
Cheers,
Bev


----------

