US UK Tax Returns Preparation for London Relocation Packages

For a US executive moving to London, US UK tax returns preparation must reconcile two opposing rules: the UK exempts qualifying removal expenses up to a statutory limit (commonly cited as £8,000 per move), while the US taxes almost every employer-paid moving cost as wages. The same package is reported differently on each return, and the gap rarely nets out.

Relocation packages for senior transferees are rarely modest. Removal of household goods, several months of serviced accommodation, a school search for children, assistance selling a US home, destination services, home-leave flights and a tax gross-up on top can easily run to six figures. At Jungle Tax we prepare returns for executives in exactly this position, and the recurring problem is not a lack of rules but a lack of alignment between them: the UK payroll, the US payroll, the relocation vendor and the tax equalisation provider each see only part of the picture. This guide explains how each element of a typical London relocation package is reported on the UK Self Assessment return and on the US Form 1040, where the foreign tax credit mismatch comes from, and exactly what to request from the employer before either return is filed. It is written from a preparation and compliance perspective, not as planning advice.

Why does the same relocation package produce two different answers?

The two systems start from opposite premises. The UK treats removal costs as a legitimate cost of taking up a job in a new location and relieves a defined slice of them from tax and National Insurance. The US, since the 2017 reforms took effect for tax years beginning in 2018, has suspended the exclusion for qualified moving expense reimbursements and the moving expense deduction for everyone except active-duty members of the Armed Forces moving under military orders (and, more recently, certain intelligence community employees). The suspension was originally set to expire after 2025, but subsequent legislation made it permanent, so there is no prospect of the old US exclusion returning for the 2026 tax year.

The practical result is that a single removal invoice paid by the employer can be tax-free in the UK and fully taxable in the US. Because the UK levied no tax on that slice, there is no UK tax to credit against the US liability on it. Whether the executive actually pays additional US tax then depends on how much excess UK tax is sitting elsewhere in the same foreign tax credit category, and on whether the foreign earned income exclusion has been elected. That is the core cross-border issue, and it is where generalist guidance on relocation taxes stops short.

How the UK treats a relocation package

The statutory exemption for qualifying removal expenses

The UK exemption sits in Chapter 7 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003, beginning at section 271. HMRC's guidance is set out in the Employment Income Manual on removal and transfer costs. In outline, qualifying removal expenses and benefits are exempt up to a statutory limit per move (the limit most commonly cited is £8,000, which should be confirmed for the year in question), provided the conditions summarised in HMRC's main conditions for exemption are met:

• A change of residence resulting from starting a new employment, a change in duties, or a change in the normal place of work.
• A reasonable daily travelling distance test: the old residence must not be within reasonable daily travelling distance of the new workplace, and the new residence must be. A move from New York or Chicago to London clearly satisfies the first limb; the second requires the London home (or temporary accommodation) to be commutable.
• A time limit: the expenses must be incurred, or the benefits provided, by the end of the UK tax year following the tax year in which the new job or new duties began. HMRC can extend this in limited circumstances.

The limit applies per relocation, not per tax year, so expenses spread across two UK tax years share a single allowance. Rented property qualifies as a residence; the home need not be owned.

What counts as qualifying, and what does not

Qualifying categories broadly cover disposing of the old residence (legal fees, agents' fees, early redemption costs), acquiring the new one (legal and survey fees, stamp duty land tax where a property is bought), transporting belongings (removals, packing, storage and insurance), travel and subsistence for the employee and family during the move, temporary living accommodation, bridging loan interest, and certain replacement domestic goods. Items that commonly fall outside the exemption and are therefore taxable in the UK from the first pound include:

• Tax gross-ups and any tax paid by the employer on the executive's behalf, which are earnings in their own right.
• Compensation for a loss on the sale of the old home, and general “disturbance” or cash lump-sum allowances that are not tied to specific qualifying costs.
• School search fees and school fees, which HMRC does not generally treat as removal expenses (the fees for a destination consultant who arranges only the family's move may need separate analysis).
• Ongoing housing beyond the temporary accommodation reasonably connected with the move, and cost-of-living or housing differentials.
• Home-leave flights after arrival, which fall under different rules altogether.

How the UK side is reported

Qualifying expenses within the limit do not appear on the executive's return at all. Qualifying expenses above the limit, and non-qualifying benefits in kind, are reported by the employer on form P11D (or processed through payroll where the employer payrolls benefits), with employer Class 1A National Insurance due on the taxable amount. Non-qualifying items paid as cash, such as a lump-sum allowance or a gross-up, generally run through PAYE as ordinary earnings. On the executive's Self Assessment return, the P60 figure goes in the employment pages as pay, and the P11D figures go in the benefits boxes. Where a US executive remains in the US social security system under a certificate of coverage issued under the US-UK totalization agreement, employee National Insurance should not be deducted, and the payroll should reflect that.

One UK-specific trap: in the year of arrival, the executive's UK residence position is determined under the statutory residence test, and split-year treatment may apply. Relocation payments made before UK duties begin are not automatically outside UK tax; what matters is whether they are earnings for the UK employment. Getting the residence and split-year analysis right is a precondition for reporting the package correctly, and it is covered in more depth for senior transferees on our US-UK tax accountants for executives page.

How the US treats the same package

Everything is wages unless an exception applies

For a US citizen or green card holder, employer payments of moving costs, whether reimbursed, paid directly to a vendor, or provided in kind, are compensation. They belong in Box 1 wages on the Form W-2 issued by the US payroll and are subject to federal income tax withholding. Social security and Medicare tax generally apply as well, unless the executive is covered by a certificate of coverage that keeps them in the US system (in which case US FICA continues and UK National Insurance is displaced) or they have moved to a local UK contract. Form 3903, which once carried the moving expense deduction, is now available only to qualifying members of the Armed Forces.

This applies regardless of whether the payments were made by the US employer, a UK affiliate, or a relocation management company. A common filing error is to include only the US W-2 figures and overlook benefits paid through the UK payroll or directly by the UK entity, which never appear on a W-2 but are still US-taxable compensation.

Sourcing: moving compensation follows the new job

For the foreign tax credit and the foreign earned income exclusion, what matters is the source of the income. The Treasury regulations under section 911 treat reimbursement of moving expenses as compensation for services to be performed at the new work location. A move from the US to London therefore generally produces foreign-source earned income, even if paid by a US payroll while the executive was still in New York. The regulations also attribute that income to the year of the move if the executive is a qualified individual (under the bona fide residence or physical presence test) for a period that includes at least 120 days of that year; otherwise it is allocated between the year of the move and the following year. The IRS summarises these rules in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Sourcing is often wrong in practice. Payroll systems do not source income; they simply report it. If the preparer does not reclassify the relocation compensation as foreign source on Form 1116 or Form 2555, the foreign tax credit limitation is understated and the executive may pay US tax that the rules would otherwise have relieved.

Foreign earned income exclusion or foreign tax credit?

Executives with London-level pay almost always claim the foreign tax credit rather than the foreign earned income exclusion, because UK marginal rates exceed US rates at the top of the scale and the exclusion (reported for 2026 as $132,900, to be confirmed against the IRS inflation adjustment) covers only a fraction of the salary. Where the exclusion is claimed on Form 2555, moving reimbursements are included in the foreign earned income figure. Where the credit is claimed on Form 1116, the relocation compensation sits in the general category basket alongside salary and bonus. The choice has multi-year consequences: revoking the exclusion generally bars a new election for five years without IRS consent, so it should not be made casually in a relocation year.

Line by line: how each package item is reported

The table below summarises the typical treatment of the most common components. It is a starting point for preparation, not a substitute for reviewing the actual policy and payroll records, because the exact wording of a relocation policy can change the result.

Package item	UK treatment	UK reporting	US treatment	US reporting
Shipping household goods, packing, storage	Qualifying; exempt within the statutory limit	Nothing if within limit; excess on P11D	Taxable wages; foreign source	W-2 Box 1 (or added from UK records); Form 1116 general category
Temporary serviced accommodation in London	Qualifying if temporary and connected with the move; shares the limit	Excess over limit on P11D	Taxable wages; foreign source	As above
Family flights to London on relocation	Qualifying travel	Within limit, not reported	Taxable wages	As above
US home sale costs (agent and legal fees)	Qualifying disposal costs	Within limit, not reported	Taxable wages if reimbursed; the sale itself is a separate capital transaction	W-2 wages; home sale on Schedule D/Form 8949 if reportable
Loss-on-sale compensation	Not qualifying; taxable	PAYE or P11D	Taxable wages	W-2 wages
School search / education consultant	Generally not qualifying; taxable	P11D or payroll	Taxable wages	W-2 wages
Lump-sum relocation allowance	Not qualifying unless spent on qualifying items and so structured	PAYE	Taxable wages	W-2 wages
Tax gross-up	Taxable earnings	PAYE or P11D	Taxable wages, often in a later year	W-2 wages in year paid

The foreign tax credit mismatch explained

Consider an executive on a London assignment whose employer pays £30,000 of qualifying removal costs and a further £20,000 of non-qualifying items (a school search, a loss-on-sale payment and a cash allowance). In the UK, the qualifying costs up to the limit are exempt, the qualifying excess and the non-qualifying items are taxable, and income tax is charged at the executive's marginal rate on the taxable portion. In the US, the entire £50,000 (translated into dollars) is wages.

For the exempt slice, the US taxes income that the UK did not tax, so no UK tax attaches to it. But the foreign tax credit limitation is calculated for the whole general category basket, not item by item. Because UK tax on the executive's salary and bonus is usually higher than the US tax on the same income, most London-based executives generate excess foreign tax credits. Those excess credits can absorb the US tax on the exempt slice, provided the relocation income is correctly sourced as foreign. In many cases the net extra US tax is therefore nil, but only if:

• the relocation compensation is classified as foreign source rather than left as US source by default;
• UK tax is properly converted into dollars and matched to the correct US tax year, which requires splitting the UK tax years that run from 6 April to 5 April;
• the preparer has not elected the foreign earned income exclusion in a way that disallows credits on excluded income; and
• any unused credits are carried back one year or forward ten years and tracked on Schedule B of Form 1116.

Where the executive moved part-way through the year, a large part of the year's salary may be US-source income earned before departure. The foreign tax available to absorb US tax on the relocation compensation is then smaller, and the mismatch can produce real additional US tax in the arrival year. This is also the year in which state tax becomes relevant: the departing state may still claim the right to tax relocation payments made before the move date, and some states do not allow a credit for UK tax at all.

Tax gross-ups and tax equalisation: income that creates more income

Most senior relocation policies include a gross-up so the executive is not out of pocket for the tax on the package. A gross-up is itself taxable, which is why it is usually computed on a grossed-up formula rather than a flat percentage. In a cross-border move there are often two gross-ups: one covering US tax (and any FICA) on the relocation payments, and one covering UK tax on the non-exempt items. Each creates additional income in both countries.

Timing is the complication. A US gross-up is frequently calculated after year-end, once the relocation vendor has closed its books, and paid in the following calendar year. On the US return it is wages in the year paid. In the UK, the equivalent payment will fall into whichever UK tax year it is made, which may not match. If the executive is on tax equalisation, there is also a hypothetical tax deduction from pay and a year-end settlement calculation that can generate either a further payment to the employee (taxable in both countries) or a repayment by the employee. We regularly see relocation gross-ups from year one flowing through the year-two and year-three returns, and each one needs to be sourced and matched to the correct foreign taxes again.

Home sale assistance: the separate capital transaction

Home sale assistance has two distinct layers. The first is the employer's help, whether paying agent fees, covering carrying costs or compensating for a loss. That help is compensation in the US and is treated in the UK as set out above. The second is the sale of the home itself, which is a capital transaction for the executive regardless of who paid the costs.

On the US side, a gain on the sale of a principal residence may be partly or wholly excluded under section 121 if the ownership and use tests are met, with any taxable gain reported on Form 8949 and Schedule D. If the sale completes after the executive has become UK resident, the UK may also tax the gain, because a UK resident is generally taxable on worldwide gains. Private residence relief may apply, but its periods of occupation are calculated on UK rules, and the new foreign income and gains regime for recent arrivals from 6 April 2025 changes how foreign gains are treated for those who qualify. Whether the sale closes before or after the UK arrival date is therefore a critical fact that the returns must reflect accurately. Buyer value option arrangements, in which a relocation company buys the property, change the US wage reporting but not the underlying capital analysis.

What to collect from the employer's payroll before filing

The quality of the returns depends almost entirely on the completeness of the payroll data. Before we begin preparing either return, we ask the executive to request the following from the employer or its mobility provider:

• US Form W-2 for each year of the move, plus any corrected W-2c, together with a breakdown of the relocation amounts included in Box 1 and Box 14.
• UK P60 and P11D (or the payrolled-benefits statement) for each UK tax year, plus the P45 if a UK employment ended.
• A relocation expense statement from the relocation management company itemising every payment, the vendor, the date and whether it was treated as qualifying for UK purposes.
• The gross-up calculations for both countries, including the tax rates assumed and the payment dates.
• The tax equalisation policy and year-end settlement, if applicable, including hypothetical tax withheld.
• The certificate of coverage, if the executive remains in the US social security system.
• Assignment letters showing the start date of UK duties, the expected duration and the entity that employs the executive.
• A shadow payroll reconciliation, if the US employer ran a UK shadow payroll, to ensure income paid from the US has been reported to HMRC and vice versa.

The single most useful document is a reconciliation that maps each relocation payment to its US wage reporting and its UK reporting. Where the employer cannot provide one, we build it from the underlying statements. Discrepancies at this stage are common; it is far cheaper to resolve them before filing than to amend returns in both countries later.

When relocation reporting went wrong in a prior year

Executives sometimes come to us after the first year has been filed, often by a preparer familiar with only one system. Typical problems include UK-paid relocation benefits omitted from the US return, relocation compensation left as US source so foreign tax credits were lost, a foreign earned income exclusion elected in error, or UK Self Assessment not filed at all because the executive assumed PAYE covered everything. A relocation year also tends to be the year in which new UK bank accounts, a UK pension and sometimes ISAs are opened, all of which carry separate US reporting on FinCEN Form 114 (FBAR) and Form 8938.

These problems are correctable. An amended Form 1040-X can recover lost credits, and where information returns were missed and the failure was non-wilful, the IRS streamlined procedures may be appropriate. Our IRS streamlined filing team handles such catch-up filings for executives, and our US tax services cover the ongoing Form 1040, Form 1116 and FBAR compliance that follows. Missed UK returns can likewise be brought up to date with HMRC, generally with lower penalties when the disclosure is unprompted.

A preparation checklist for the relocation year

1. Establish the dates: the last US workday, the UK start date, the arrival date and the date the family moved.
2. Determine UK residence under the statutory residence test and whether split-year treatment applies.
3. Determine US qualification under the physical presence or bona fide residence test, and whether the 120-day attribution rule is met in the year of the move.
4. Classify every relocation item as UK qualifying, UK non-qualifying, and US wages, and confirm the total used against the UK statutory limit.
5. Reconcile US W-2 wages with UK P60 and P11D figures and add any income paid from the UK that is missing from the W-2.
6. Source relocation compensation to the UK for the US foreign tax credit calculation.
7. Match UK tax to US tax years, convert currency at appropriate rates and compute the Form 1116 limitation, including carryovers.
8. Track gross-ups and equalisation settlements into later years.
9. Review the home sale on both systems, dated to the UK arrival.
10. Complete the FBAR and Form 8938 for new UK accounts.

Why coordinated preparation matters

A relocation package is designed by the employer to make the move financially neutral. The tax returns are where that neutrality is either achieved or quietly lost. When the UK and US returns are prepared separately, each can be technically defensible while the combined outcome is not: foreign tax credits are left unused, gross-ups are double-counted or missed, and the executive or the employer ends up bearing tax that was never intended. Preparing both returns together, from a single reconciliation of the package, is the most reliable way to get it right the first time.

If you have relocated to London with an employer-funded package, or you are reviewing a relocation year that may have been reported incorrectly, our specialists prepare the US and UK returns in tandem and work directly from your employer's payroll data. Please contact our cross-border team to arrange a confidential consultation.