US Tax Preparation for American Expats on London Secondment
US tax preparation for American expats on a London secondment: detached duty relief, the 24-month rule, FTC vs FEIE, tax equalisation and FBAR. Book a review.
A London secondment changes both the UK and US returns from the first day of arrival.
For a US executive seconded to London, US tax preparation for American expats means filing on both sides of the Atlantic from the first day of arrival. The UK taxes the salary through shadow payroll and Self Assessment. The US still taxes worldwide income, so the foreign tax credit, FBAR, Form 8938 and a clean exit from your state all have to be handled on the US return.
Secondments are among the most complicated profiles we prepare at Jungle Tax. The compensation package is built for a mobility policy, not for either tax code. You will usually have employer-paid housing, home-leave flights, school fees, a tax equalisation calculation, deferred equity vesting over several jurisdictions and two tax years that never line up. This guide explains, in preparation terms, how each element is reported, where returns usually go wrong, and what to collect before the first filing season.
Who this guide is for
This guide is for senior employees of a US employer seconded to a UK affiliate or branch for roughly 12 to 36 months, who keep their US employment contract and plan to go home. Typical readers are managing directors, partners-track bankers, general counsel and C-suite executives earning well above the US exclusion limits, often with restricted stock units, carried interest or deferred bonuses vesting during the assignment. If you have moved to London permanently, or are working for a UK employer on a local contract, some of the reliefs below will not apply. Your underlying filing obligations are the same.
What is detached duty relief and does it apply to a London secondment?
"Detached duty relief" is the informal name for the UK's temporary workplace rules for travel and subsistence. The legislation is in the Income Tax (Earnings and Pensions) Act 2003. If a secondee attends a UK office that counts as a temporary workplace, the cost of travelling to it, and the reasonable cost of living near it, is treated as a deductible business expense rather than private commuting. When the employer pays or reimburses those costs, they can be exempt from UK income tax and National Insurance, and no taxable benefit arises.
For a seconded executive the relief can cover the London flat, utilities and council tax, a daily subsistence allowance and travel between the flat and the office. For someone in prime central London, that can easily be worth six figures of taxable income a year.
The 24-month rule and the 40% test
HMRC's guidance at EIM32080 explains the key limit. A workplace cannot be temporary if the employee attends it during a period of continuous work that lasts, or is likely to last, more than 24 months. A period of continuous work is one in which the employee spends 40% or more of their working time at that place. Put simply, if you are expected to spend at least 40% of your working time in the London office for more than 24 months, it is a permanent workplace from day one and the relief never starts.
The test looks forward and depends on expectation, not hindsight:
- A secondment letter for 18 months qualifies from arrival, provided that expectation is realistic.
- If, at month 14, the assignment is formally extended to 30 months, the relief stops from the date the expectation changed. It does not stop retrospectively from arrival, and it does not continue to month 24.
- A 36-month assignment letter means no relief at all, even if you later go home at month 20.
- Splitting one assignment into back-to-back "new" secondments to the same office does not reset the clock. HMRC looks at the substance of continuous work.
- Occasional weeks in New York or Frankfurt usually do not break continuity if London remains at or above the 40% threshold.
What breaks the relief in practice
When we prepare catch-up UK returns, these are the failures we see most often. The assignment letter says "up to three years". A board minute or HR system records a longer expected term than the offer letter. An extension is agreed by email but payroll keeps treating housing as exempt. The employee moves from a US contract onto a UK local contract part way through. Family members' costs are included when the relief covers the employee's own reasonable subsistence. A separate, related point: the relief must be evidenced. HMRC expects receipts, leases and payment proof, or an approved bespoke scale-rate agreement for subsistence. A flat allowance paid with no link to actual costs is normally taxable earnings.
How the UK taxes employer-paid housing and allowances
If detached duty relief does not apply, or has stopped, the UK tax treatment of each benefit follows its normal rules. That usually means a larger UK tax bill, and so larger foreign tax credits on the US side.
| Benefit | UK treatment (relief available) | UK treatment (no relief) | US treatment |
|---|---|---|---|
| London accommodation paid by employer | Exempt as reasonable subsistence if within the 24-month rule | Taxable living accommodation benefit, reported via payroll or P11D | Taxable wages at fair value; may support the foreign housing exclusion or deduction if FEIE is claimed |
| Cost-of-living or hardship allowance (cash) | Generally taxable earnings | Taxable earnings, PAYE and NIC | Taxable foreign earned income |
| Home-leave flights | Can be exempt under specific rules for non-domiciled or seconded employees (conditions apply) | Taxable benefit | Generally taxable wages |
| School fees for children | Taxable benefit | Taxable benefit | Taxable wages |
| Relocation package | Qualifying costs exempt up to a statutory cap (figure to confirm, historically £8,000) | Excess over the cap taxable | Generally taxable wages; moving expense deduction largely unavailable for non-military taxpayers |
| UK tax paid by employer under equalisation | Taxable earnings, grossed up | Taxable earnings, grossed up | Taxable wages in the year paid |
The detail matters because the two systems do not match. A London flat that is fully exempt in the UK under detached duty relief is still taxable compensation in the US. But because no UK tax was paid on it, it creates no foreign tax credit. That gap is where unexpected US liabilities often come from.
Shadow payroll: the UK withholding you may never see
Most seconded executives are paid through US payroll. The UK still requires PAYE to be operated on the portion of remuneration that is taxable in the UK. Employers meet this with a shadow payroll, a UK PAYE calculation run alongside the US one. It reports UK-taxable pay and benefits to HMRC under Real Time Information and pays the UK tax, but it does not deliver cash to the employee. HMRC also offers modified PAYE arrangements for internationally mobile employees. These can allow tax to be settled on estimated figures during the year and trued up afterwards.
For return preparation, shadow payroll creates three practical issues:
- Your UK P60 will not match your US Form W-2. The UK tax year runs from 6 April to 5 April, benefits are valued differently, and equity income is sourced by workdays. Reconciling the two is the first step of any proper preparation.
- UK tax is often paid late. True-ups and gross-ups settled after the UK tax year change the year in which foreign tax is "paid" or "accrued" for the US foreign tax credit.
- A UK Self Assessment return is usually still needed. Most high earners, anyone with non-PAYE income and anyone claiming split-year treatment or overseas workday relief will need to file one, even if PAYE was run correctly. The online deadline is 31 January after the tax year ends.
UK residence, split years and overseas workday relief
Under the Statutory Residence Test, an executive who arrives mid-year and works full time in London will usually become UK resident, often with split-year treatment for the arrival year. Since 6 April 2025 the UK has replaced the remittance basis with a four-year foreign income and gains regime for new arrivals who were not UK resident in the previous ten tax years. Overseas workday relief has been redesigned alongside it. Under the new rules, earnings for days worked outside the UK in the first three UK tax years can be relieved from UK tax without having to be kept offshore, subject to an annual cap (reported as the lower of £300,000 and 30% of qualifying employment income; figures to confirm each year).
For a banker who travels extensively, the cross-border consequence is significant. Earnings relieved by overseas workday relief carry no UK tax, so they cannot generate a UK foreign tax credit on the US return. Unless they are foreign-source and sheltered some other way, they may be fully taxed in the US.
The US side: FEIE and housing exclusion or foreign tax credit?
US citizens and green card holders are taxed on worldwide income wherever they live. Two main tools prevent double taxation: the foreign earned income exclusion (FEIE) with its housing exclusion on Form 2555, and the foreign tax credit on Form 1116.
Qualifying for the FEIE: tax home, bona fide residence and physical presence
To claim the FEIE you need a foreign tax home and must pass one of two tests, as the IRS explains in its guidance on figuring the foreign earned income exclusion:
- Bona fide residence test: residence in the UK for an uninterrupted period that includes a full US tax year (1 January to 31 December). It depends on facts and circumstances, and a secondment with a fixed end date and a retained US home can weaken the claim.
- Physical presence test: 330 full days in a foreign country or countries during any 12 consecutive months. Business trips to New York count against you, so frequent-flyer executives often fail.
There is also a threshold point specific to secondments. If an assignment is realistically expected to last, and does last, one year or less, the IRS treats it as temporary and your tax home stays in the US. In that case the FEIE is not available at all.
Why the foreign tax credit usually wins for high earners
The FEIE is capped (reported at $130,000 for 2025 and $132,900 for 2026, per person; figures to confirm). The housing exclusion adds relief for qualifying housing costs above a base amount. London has a higher location-specific limit, published annually by IRS notice. For an executive on $750,000 plus equity, excluding the first $132,900 barely helps. The "stacking rule" also taxes the remaining income at the higher marginal rates that would have applied without the exclusion.
UK income tax on earnings reaches 45% above the additional-rate threshold, plus employee National Insurance where no certificate of coverage applies. Because that is generally higher than the effective US federal rate, the foreign tax credit usually offsets US federal tax on UK-taxed salary in full. Excess credits can be carried back one year and forward ten years in the same category, which can then shelter UK-sourced income in later years. Revoking an FEIE election also prevents re-electing it for five years without IRS consent. For most senior secondees, the FTC is therefore the correct default, and it should be modelled before the first return is filed.
Where the foreign tax credit falls short
The credit fails in predictable places for secondees:
- US-workday income. Salary for days worked in the US is US-source income. It carries no foreign tax credit capacity even if the UK taxes it.
- Exempt London housing. As explained above, housing that is UK-exempt under detached duty relief creates US income with no matching UK tax.
- Equity vesting across both periods. Restricted stock units granted before arrival and vesting in London are sourced by workdays differently in each country. Foreign tax credit sourcing has to follow the US rules, not the UK apportionment.
- Timing mismatches. UK tax covering April to April must be allocated to calendar years. Late equalisation payments must be matched to the right year, and an accrual-basis election for foreign taxes may be advisable.
- Net Investment Income Tax. The 3.8% surtax generally cannot be reduced by foreign tax credits under the IRS position, so UK investment income can still produce US tax.
Tax equalisation settlements are taxable income
Most US mobility policies equalise the secondee so they pay no more, and no less, tax than if they had stayed at home. During the year, the employer withholds a hypothetical US tax (plus hypothetical state tax) from pay and pays the actual UK and US taxes. After year-end, an equalisation settlement compares hypothetical tax with the employee's actual stay-at-home liability, and one side pays the other.
From a preparation standpoint the key rules are:
- Employer-paid tax is income. UK tax paid on your behalf is additional remuneration in both countries, which is why the UK grosses it up on shadow payroll. In the US it is wages in the year paid, and it usually appears on a later Form W-2.
- The cycle continues after you go home. The UK tax for your final London year may be paid by the employer in the year after you return. That creates foreign-source income and foreign tax in a year when you live in, say, Connecticut again. The foreign tax credit and carryovers need to be tracked for several years.
- Settlements can go either way. A payment from you to the employer, or from the employer to you, must be reflected consistently on both returns and on the employer's gross-up calculations.
- Your own return still has to be right. The employer's provider prepares its equalisation calculation for the employer. You remain personally responsible to the IRS and HMRC for the accuracy of your returns.
Social security: the US-UK certificate of coverage
Without planning, a secondee could pay both US FICA and UK Class 1 National Insurance on the same salary. The US-UK totalisation agreement stops this. An employee temporarily sent by a US employer to work in the UK, for an assignment expected to last up to five years, can remain in US Social Security only. The US employer applies to the Social Security Administration for a certificate of coverage, which is then provided to the UK payroll as evidence that no UK National Insurance is due.
For return preparation, check that the certificate exists and covers the whole assignment period. If it was never obtained, UK NIC may have been due from the start. Missing it also affects the Medicare and Social Security figures shown on US returns. UK NIC is also generally not creditable against US income tax under the agreement. Treating it as a foreign tax credit is a common error on self-prepared returns.
FBAR and Form 8938 on new UK accounts
The first month in London usually brings a UK current account, a savings account, sometimes a UK brokerage or ISA. Each is a foreign financial account for US reporting:
- FBAR (FinCEN 114): required if the aggregate maximum value of all foreign accounts exceeds $10,000 at any time in the calendar year. It is filed electronically, due 15 April with an automatic extension to 15 October. See the IRS guidance on reporting foreign bank and financial accounts.
- Form 8938: for taxpayers living abroad, reported thresholds are $200,000 at year-end or $300,000 at any time (single), and $400,000 or $600,000 (married filing jointly). The form is attached to Form 1040.
- ISAs and UK funds: ISAs are tax-free in the UK but not in the US. Many UK funds held inside them are PFICs, requiring Form 8621 and punitive default treatment. Senior secondees should generally not open investment ISAs without advice.
Penalties for non-wilful FBAR failures can be significant even where no tax is owed. You can estimate your exposure using our FBAR penalty calculator. If earlier years were missed, the IRS Streamlined Filing Compliance Procedures may offer a structured route back into compliance.
State tax residency: leaving and returning
State tax is the most frequently overlooked US cost of a secondment. The FEIE and treaty do not apply to state income tax in the same way, and many states do not allow a credit for UK tax. If you remain a resident of your state while in London, UK-taxed salary may be fully taxed by the state as well.
- Domicile states (for example New York) generally treat you as a resident until you abandon your domicile. Keeping a US home, voter registration, driving licence and children in local schools undermines a change. New York has a special "548-day" safe harbour for people working abroad, with day-count conditions; figures to confirm.
- California has a safe harbour for individuals abroad under an employment contract for an uninterrupted period of at least 546 consecutive days, subject to conditions on days in California and intangible income; figures to confirm.
- Returning mid-year usually means a part-year resident return in the year you leave and again in the year you come back. Income is allocated between the resident and non-resident periods.
- Equalisation usually builds in hypothetical state tax, so an unplanned state liability affects both your return and the employer's settlement.
Filing calendar for a seconded executive
| Obligation | United States | United Kingdom |
|---|---|---|
| Tax year | 1 January to 31 December | 6 April to 5 April |
| Main return | Form 1040 due 15 April; automatic 2-month extension to 15 June if abroad; Form 4868 to 15 October | Self Assessment, paper by 31 October, online by 31 January |
| Extension for FEIE qualification | Form 2350 where you are waiting to meet bona fide residence or physical presence | Not applicable |
| Foreign accounts | FBAR by 15 April (auto-extended to 15 October); Form 8938 with Form 1040 | Not applicable for UK accounts |
| Payroll reporting | Form W-2 including equalisation and benefits | Shadow payroll via RTI; P11D or payrolled benefits; P60 |
| Social security | FICA continues with certificate of coverage | No Class 1 NIC where certificate held |
| Double tax relief | Form 1116 foreign tax credit, or Form 2555 | Treaty relief where US tax has priority on specific income |
A worked preparation sequence
For a typical 24-month banker assignment starting in September, we build the returns in this order:
- Collect the documents: the assignment letter and any extensions, the equalisation policy, the certificate of coverage, travel calendars showing US and non-US workdays, UK P60 and P11D (or payrolled benefit statements), US Forms W-2, equity vesting statements and all UK account statements.
- Test detached duty relief against the expectation at each date, and identify any point where the expectation changed.
- Prepare the UK return first, including residence status, split-year treatment, overseas workday relief and treaty positions on US-source income, because UK tax drives the US credit.
- Convert and allocate UK tax to US calendar years, including taxes paid in later settlement rounds.
- Model the FTC against the FEIE, source income by workday, and document the choice for future years.
- Complete the FBAR, Form 8938 and any PFIC reporting, then state part-year returns.
- Reconcile to the equalisation settlement so that the employer's calculation reflects the filed position.
Where to go next
If you are preparing for a move, or already partway through an assignment, it helps to see how the elements fit together. Our overview of US-UK tax accountants explains how dual-jurisdiction preparation works, and our high-net-worth practice covers executives with complex compensation. Further guides are available in our guides library.
A London secondment is short, but the returns it creates can run for several years after you have gone home, through late equalisation settlements, credit carryovers and a final UK year. If you would like both returns prepared together so that every figure reconciles, contact our cross-border team for a confidential consultation. We will review your assignment letter, equalisation policy and account positions and set out a clear preparation plan for each year of the secondment.
