US Tax Preparation for American Expats With an HSA in the UK

A US Health Savings Account keeps its tax shelter on your IRS return after you move to London, but HMRC does not recognise it. Contributions get no UK relief, and the dividends, interest and gains inside the account go on your UK return each year as they arise. Most compliance problems come from preparing the two returns as if the other did not exist.

This guide is written for US citizen executives and founders who have moved to the UK with a substantial HSA, often six figures invested in US mutual funds or ETFs. It covers US tax preparation for American expats who hold an HSA while UK resident: what each return needs, which custodian documents a preparer has to collect, how HSA eligibility ends after the move, and how missed years are corrected on both sides. It covers compliance and return preparation only, not investment or retirement planning.

Why does an HSA become a two-return problem after a move to London?

Under Internal Revenue Code section 223, an HSA has three US tax benefits: contributions are deductible or excluded from wages, growth inside the account is not taxed, and distributions for qualified medical expenses are tax-free. None of this is written into UK law. The US-UK income tax treaty contains no article that extends UK relief to an HSA the way certain pension arrangements are protected, and HMRC has no HSA category. For a UK resident, the account is effectively an ordinary overseas investment account.

That produces a mismatch every year. On the US side the account is quiet: contributions and distributions go on Form 8889, and the dividends and gains inside it never reach Form 1040. On the UK side, those dividends and gains are the only thing that matters, and they are taxable in the year they arise, whether or not anything is withdrawn. A US-only preparer will usually leave the HSA off the UK return entirely. A UK-only accountant may not know the account exists. The client pays for the gap, sometimes years later.

How the HSA is treated on each return

Issue	US federal return (IRS)	UK Self Assessment (HMRC)
Contributions	Deductible on Form 8889 (or excluded from wages through a cafeteria plan), but only for months you are an eligible individual	No relief. Employer contributions for a UK-resident employee may be taxable employment income
Dividends and interest inside the account	Not taxed while held in the HSA	Taxable foreign income in the tax year received, even if reinvested
Gains on selling investments inside the account	Not taxed while held in the HSA	Capital gains (or offshore income gains for non-reporting funds), computed in sterling
Distribution for qualified medical expenses	Tax-free; reported on Form 8889	Taking cash out is generally not a taxable event in itself; the tax arose when the income and gains were earned
Distribution for non-medical use	Included in income, plus a 20% additional tax unless an exception applies (age 65, disability or death)	Generally no further UK tax on the withdrawal itself
Excess contributions	6% excise tax on Form 5329 each year until corrected	Not relevant; there was no UK relief to lose
Foreign account reporting	A US-custodied HSA is not a foreign account: no FBAR, no Form 8938	Reported as foreign income on the foreign pages of the return
Reporting period	Calendar year	6 April to 5 April

The US return: Form 8889 and what triggers it

An HSA held at a US custodian is a domestic account for US purposes. It does not go on the FBAR (FinCEN Form 114) or on Form 8938, which cover foreign accounts and specified foreign financial assets. Executives who have just started FBAR reporting for new UK bank accounts sometimes add the HSA to the list anyway. That is harmless but wrong, and it suggests the preparer has not thought about where the account sits.

The form that matters is Form 8889. It is required for any year in which you, your employer or anyone else contributes to your HSA, you take a distribution, or you have to include an amount in income because you failed the testing period (explained below). A year with no contributions and no distributions generally needs no Form 8889, even when the account is large and growing. For many expats the form becomes a distributions schedule after the move: Part II reconciles what came out of the account, as shown on Form 1099-SA, against qualified medical expenses.

Qualified medical expenses incurred in the UK

Where the expense happens does not matter. What matters is whether it meets the IRS definition of medical care in IRS Publication 969 and the Publication 502 categories. Consultant fees at a London private hospital, prescriptions and dental treatment can qualify. Health insurance premiums generally do not, apart from limited exceptions such as COBRA continuation coverage, coverage while receiving unemployment compensation, and certain Medicare and long-term care premiums. Most UK private medical insurance premiums will therefore not be qualified expenses. Keep the invoices: an HSA reimbursement with no receipts behind it is treated as a non-qualified distribution if the IRS asks.

When does HSA contribution eligibility end after the move?

You may contribute only for months in which you are an eligible individual: covered by a US-qualifying high-deductible health plan (HDHP) on the first day of the month, with no other disqualifying health coverage, not enrolled in Medicare, and not claimable as someone else's dependant. Holding an HSA does not make you eligible. Being covered by an HDHP does.

Executives transferred to London often leave the US HDHP when they join a UK payroll, and switch to the employer's UK private medical plan or rely on the NHS. From that month, contributions should stop. The annual limit is prorated by month: for 2026, the IRS limits are $4,400 for self-only coverage and $8,750 for family coverage, plus a $1,000 catch-up for account holders aged 55 or over. Someone who moves in May and leaves the HDHP at the end of April may be eligible for only four months of the year.

Whether UK coverage is "other health coverage" depends on its terms. A UK private medical policy with no qualifying high deductible will generally disqualify you. NHS entitlement is a less settled question and should be looked at case by case rather than assumed either way. Either way, the preparer's job is to identify, month by month, whether the client had HDHP coverage and whether anything else overlapped with it.

The last-month rule and the testing period trap

If you are eligible on 1 December, the last-month rule lets you contribute the full annual amount for that year. In return, you must stay eligible through a testing period running to the end of the following year. A relocating executive who used the rule in the year of the move and then lost HDHP coverage in the UK has failed that test. The contributions that exceeded the prorated limit are added back to income on Form 8889 Part III, with a 10% additional tax. Preparers who pick up a file after the move often miss this, because the failure happens a year after the contribution.

Excess contributions: the 6% excise tax and Form 5329

Excess contributions are the most common error we see on inherited expat files. They usually arrive in one of three ways:

• US payroll kept making pre-tax HSA contributions after the executive moved to the UK entity, often because the US employee record stayed open for equity vesting or a split payroll.
• The client made a personal contribution in the year of the move, in the belief that holding the account was enough to qualify.
• The prorated limit was not applied, or the last-month rule was used and then failed.

An excess contribution that is not withdrawn, together with the net income it earned, by the due date of the return (including extensions) is subject to a 6% excise tax for that year. The tax is reported on Part VII of Form 5329. It applies again every year the excess stays in the account, so an error made in the year of arrival and never corrected is charged in each later year. It can be ended by withdrawing the excess or by absorbing it as a deemed contribution in a later year when you are eligible again. For an executive who remains in London without an HDHP, withdrawal is usually the only route.

Two points often surprise clients. First, the 6% excise is a tax, not a penalty, so it is not waived by a penalty-relief programme. Second, excess employer contributions made through payroll also have to be added back to wages on the US return, because the W-2 exclusion assumed you were eligible.

The UK return: reporting income and gains as they arise

Once you are UK resident and taxed on the arising basis, HMRC taxes your worldwide income and gains, and the HSA gets no special treatment. In practice that means:

• Dividends and fund distributions go on the foreign pages as overseas dividends in the UK tax year received, even if they are automatically reinvested inside the HSA.
• Interest on cash held in the account is foreign savings income.
• Sales of investments are disposals for UK tax purposes. Each is computed in sterling, using exchange rates at acquisition and at disposal, and following UK share-matching rules rather than the custodian's US cost basis.
• Offshore funds. Most US mutual funds and ETFs do not have UK reporting fund status. A gain on disposing of a non-reporting fund is generally an offshore income gain, taxed at income tax rates of up to 45% rather than at capital gains rates. A US-focused HSA portfolio can therefore create a UK income tax bill on a sale the IRS never sees.
• Accumulating funds in reporting status can create excess reportable income that is taxable in the UK even though no cash is paid out.

HMRC's general guidance on tax on foreign income sets out the basic principle. The detailed calculations, especially the reporting-fund analysis, need the fund-level data covered below.

The foreign income and gains regime for new arrivals

Since the remittance basis was abolished from 6 April 2025, a new arrival who has not been UK resident in any of the previous 10 tax years can claim the four-year foreign income and gains (FIG) regime. For a qualifying executive, a valid claim can take HSA income and gains out of UK tax for up to the first four years of residence. The claim is made on the Self Assessment return and costs the personal allowance and the capital gains annual exempt amount. It has to be claimed and quantified; it is not automatic. Once the FIG years end, full arising-basis reporting starts, and the investments inside the account keep the acquisition dates and costs they have always had.

Why the foreign tax credit rarely helps here

US citizens in the UK usually rely on the foreign tax credit to prevent double taxation. The HSA reverses the normal pattern. UK tax paid on HSA dividends and gains relates to income the US does not tax, so there is no US tax for that credit to offset, and the UK tax is simply an additional cost. When a non-qualified distribution is taxed in the US, the UK has usually taxed nothing at that point, so there is no UK tax to credit either. The two systems tax the account at different times and never line up. This is why the account must be modelled separately on each return rather than netted off.

Non-medical distributions on both returns

If a London-based executive draws on the HSA for a non-medical reason, such as funding a property deposit, the US treatment is straightforward and expensive. The distribution is included in gross income, and under age 65 a 20% additional tax applies on top. Both are calculated on Form 8889. Because the account holds pre-tax contributions and untaxed growth, the whole taxable amount is exposed. There is no basis to recover for contributions that were deducted.

On the UK side, withdrawing cash from an investment account is generally not a taxable event in itself. Any UK tax was due when the income and gains were earned. If investments were sold inside the HSA to raise the cash, those sales are UK disposals in the tax year they occurred. A distribution that looks simple to a US-only preparer can therefore sit next to a UK capital gains or offshore income gains computation in a different UK tax year.

What a preparer needs from the HSA custodian

US custodians produce paperwork designed for the IRS. The UK return needs more detail. For every year under review, collect:

1. Form 5498-SA: contributions for the year, including those made by the following April for the prior year, and the year-end fair market value. It usually arrives after the US filing deadline, so check the prior year's form too.
2. Form 1099-SA: gross distributions and the distribution code (normal, excess contribution removal, death).
3. W-2 box 12 code W amounts from every US employer, to reconcile employer and payroll contributions against the prorated limit.
4. Monthly or quarterly statements for the whole period, not only year-end, because UK tax years run from April to April and income has to be split across them.
5. Transaction-level history: every dividend, interest credit, reinvestment, purchase and sale, with dates, quantities and prices, for sterling conversion and UK share matching.
6. Fund identifiers, such as ticker and ISIN, so reporting-fund status can be checked and any excess reportable income collected.
7. Medical receipts supporting every distribution treated as qualified.
8. Health coverage records: HDHP start and end dates, and the terms of any UK medical cover, to determine month-by-month eligibility.

Most custodians can export a full transaction history. Request it early. Rebuilding several years of UK calculations from PDF statements is where catch-up engagements lose the most time.

How missed years are put right

On the US side

If the only US errors are HSA-related, such as excess contributions never removed, the testing period missed, or non-qualified distributions reported as qualified, the usual fix is amended returns on Form 1040-X with corrected Forms 8889 and 5329, and then removal of any remaining excess. The SECURE 2.0 Act introduced a limitations period for the excise tax on excess contributions that generally begins when the income tax return for the year is filed, which limits how far back the exposure runs. The exact look-back should still be confirmed for each file.

Often the HSA is only one of several gaps. An executive who missed the HSA points has usually also missed FBARs for new UK accounts, Form 8938, UK pension reporting or ISA income. If the failures were non-wilful and the client meets the non-residency test, the IRS Streamlined Filing Compliance Procedures (the Streamlined Foreign Offshore Procedures for non-residents) let the client file three years of amended or delinquent returns and six years of FBARs with no miscellaneous offshore penalty. The HSA corrections, including any 6% excise, go into those three returns in full. Our streamlined filing specialists prepare these submissions regularly, and the FBAR penalty calculator gives a first estimate of the exposure being resolved.

On the UK side

Unreported HSA income and gains are undeclared foreign income, and HMRC treats them seriously. Where the errors cover several years, the usual route is a voluntary disclosure through the Worldwide Disclosure Facility. The period HMRC can assess depends on behaviour: generally 4 years for innocent errors, 6 years for careless ones and up to 20 years where the behaviour was deliberate. Penalties for offshore non-compliance are generally higher than for domestic errors and are reduced substantially for unprompted disclosures. Where only one or two recent years are affected and the amendment window is still open, amending the Self Assessment returns directly may be enough.

Sequencing the two corrections

The order matters. The UK computation depends on the full transaction history and on whether the FIG regime applied in the early years. The US correction depends on month-by-month eligibility and the custodian's 5498-SA and 1099-SA records. Both use the same underlying data, so we build one reconciled HSA ledger (contributions, distributions, income, disposals and eligibility months) and prepare both returns from it. That keeps the IRS and HMRC filings consistent with each other, which matters if either authority later compares them.

A worked example

A US citizen CFO transfers from New York to London in June 2023 with an HSA of about $180,000, invested in US-domiciled index funds. US payroll carries on making HSA deductions until December 2023 because a residual US employment contract is kept for equity vesting. She joins her UK employer's private medical plan in June 2023. Nobody reports the HSA to HMRC.

• US: she was eligible for five months of 2023. Contributions above the prorated limit are excess. They must be added back to wages, removed with their earnings, and charged 6% for every year they stayed in the account, on Form 5329 Part VII.
• UK: having lived in the US for more than ten years, she may have been able to claim FIG treatment from 2025/26. For 2023/24 and 2024/25, which predate the new regime, the arising or remittance basis rules of the time apply, and fund distributions and disposals inside the HSA may need to be disclosed. The US-domiciled funds are probably non-reporting, so any disposal is an offshore income gain.
• Resolution: one reconciled ledger, amended US returns (or a streamlined submission if other foreign-account failures are found), and a UK disclosure or amendment covering the same period.

Common preparation errors we correct

• Listing the HSA on the FBAR or Form 8938, while leaving it off the UK return.
• Continuing HSA contributions after the client's HDHP coverage ended.
• Missing the testing-period income inclusion in the year after a mid-year move.
• Using the custodian's US cost basis for UK computations instead of sterling-converted, UK-matched figures.
• Taxing US fund disposals at UK capital gains rates when offshore income gain treatment applies.
• Treating UK private medical insurance premiums as qualified HSA expenses.
• Claiming a foreign tax credit that does not exist for UK tax on HSA income.

Working with a single cross-border preparer

An HSA is small next to most of the reporting a relocating executive faces, but it is where US-only and UK-only preparers are most likely to miss something, because each system ignores what the other taxes. At Jungle Tax we prepare both returns from one set of reconciled figures. Our US-UK tax accountants handle the IRS side, and our UK tax services team handles HMRC reporting and disclosure. We regularly act for clients on our high-net-worth service whose HSA is one of many US accounts that have to be brought up to date.

If you have moved to London with a US Health Savings Account and are not sure whether it has been reported correctly on either return, contact our cross-border team for a confidential consultation. We will review your custodian records, identify any exposure on both sides of the Atlantic, and prepare the filings needed to bring you fully compliant.