This month (7 January 2023), the US government has announced plans to reduce its fee for the citizenship renunciation scheme from US$2,350 to just US$450. Rule-making will now begin to change the fee level.
The reduction in the much-criticised fee will be welcomed by many.
The decision comes just a few days before oral arguments in a court case were put to a US district court judge in Washington, DC.
The court case was brought by the Association of Accidental Americans who argued that “the right to renounce U.S. nationality is a fundamental, constitutional, natural and inherent right under the U.S. Constitution. The State Department’s fee is ‘essentially forcing U.S. citizens to remain U.S. citizens against their will’.”
Implications of renouncing citizenship
Perhaps one of the most common reasons to renounce citizenship is when people were born in the US but moved away as children and have little ongoing connection with the US – but are still subject to the US tax rules.
The US is one of only two countries to run a ‘citizenship-based taxation system’ as opposed to ‘residence-based’.
Boris Johnson made headlines back in 2009 as an “Accidental American” who had citizenship by dint of being born in the US. He sold his house in London and gained a tax bill from the US for doing so. He renounced his US citizenship in 2016 with the tax bill from his house sale likely being a contributing factor.
Further difficulties arise for US citizens seeking to open bank accounts or pensions in Europe.
The US$2,350 rate was introduced in 2015, an increase from the previous US$450, with the government stating that the costs were intended to cover processing fees. A US citizenship renunciation is irreversible.
Applicants must sign an oath of renunciation and appear in person before a US consular or diplomatic officer, typically at a US Embassy or Consulate. Those renouncing citizenship typically also draw on the services of a lawyer or account to help them with the process.
In addition to renouncing citizenship from a legal perspective, there is a parallel process which needs to be undertaken to expatriate for tax purposes. Without this, they would still be subject to the usual US filings, regardless of renouncing their passport. The process can be complicated and so it is essential to plan in order to ensure compliance with the legislation and make use of all of the appropriate reliefs.
Sestini & Co works with US citizens planning to renounce citizenship to advise the client which expatriation route they are subject to and what the potential tax and filing obligations would be for their particular set of circumstances, whether US citizen or long-term resident.
Giving up US citizenship should not be taken lightly. It can cause difficulties when seeking to visit the US as a ‘renounced citizen’, and can impact on your children’s future options.
As Boris Johnson discovered, part of the exit process involves proving that you have five years of complete and timely US tax compliance, and even after expatriation you may still be subject to an exit tax.
To renounce British citizenship, on the other hand, the process of renouncing citizenship is simply completed via an online or postal form with a fee of £372, and it can be possible to resume citizenship after the renunciation.
If you would like to discuss the tax implications of renouncing citizenship, get in touch with our US tax team at 01761 241 861
You can trust our team of experts in UK and US tax to work with you in non-standard situations. We understand your context, circumstances and opportunities, working or living across multiple territories; deal with family trusts, or tax implications of divorcing or separating.
Whether you’re seeking a tax review, want to check your tax efficiency, improved tax planning or find more efficient and stress-free ways to manage your tax, start a conversation with us today.