British expats in the US may face unexpected UK tax bills. Learn how HMRC's five-year rule, new dividend rules, and state taxes can impact your wealth.

The UK's Five-Year Tax Rule: What British Expats in the US Need to Know Before Moving Home

Leaving the UK can be easy. Leaving the UK tax system is often not. I've seen this play out firsthand, in my own life as a dual UK and US citizen and in years of working with clients on both sides of the Atlantic. Most British expats in the US assume that once they file as non-resident, HMRC is done with them unless they move back someday. That assumption is wrong, and it's one of the most expensive ones I have come across.

I’ve watched the same pattern play out again and again. A business owner moves to California or New York for a few years, keeps drawing dividends from the UK company, sells some shares along the way, then heads home. Two bills follow. One from a state that credits nothing. One from HMRC, for income and gains they thought were long behind them.

And as of this April, a rule change made the UK side of that bill meaningfully bigger.

So, here’s what this blog will cover:

• The five-year rule
• The new close company dividend rule that took effect on April 6, 2026
• Why a high-tax state could make both worse
• Where your ISA sits in all of it

To keep it concrete, I’ll run one example through the whole piece. Call him James.

How HMRC's Five-Year Rule Can Affect British Expats

As an example, a hypothetical client named James did what most Brits I work with do. Moved to the South Bay in 2024 for his wife’s job, kept his UK company running with a manager in place, and paid himself dividends from it like he always had. The plan was four years here, then home.

What nobody told him at the departure gate is that the UK has a rule for people exactly like him. Officially it’s called the temporary non-residence rules. I call it “the five-year trap.”

It can work like this. If you were UK tax resident for at least four of the seven tax years before you left, and you come back within five years, HMRC treats certain income and gains you realized while abroad as if they happened in the year you return. Then it taxes them. All of it, piled into one tax year, no spreading.

Capital gains on assets you owned when you left. Dividends from your own company. Certain pension withdrawals. None of it gets taxed while you’re away. It just sits in a drawer at HMRC, waiting to see if you come home.

Two things genuinely escape: gains on assets you bought after leaving, and ordinary salary you earned abroad. Almost everything else a business owner or investor cares about is in the drawer.

And the five years is not what you may think it is. It runs on UK tax years and split-year dates, not calendar years, not the date on your shipping container. James left in October 2024. If he lands back at Heathrow in November 2029, that’s five calendar years gone and he is still inside the window. People miss this line by a few months, and in some cases, it can result in a significant additional tax liability. 

The New 2026 UK Dividend Tax Rules for Returning Expats

Here’s the part even James’s accountant was still catching up on.

For years, owners like him had an out. If the company earned its profits after you left the UK, dividends paid from those profits escaped the clawback. Leave, let profits build, extract them abroad, come home clean. It wasn’t a trick. It was how the legislation was written.

The Autumn Budget last November ended it. For anyone returning to the UK on or after April 6, 2026, every dividend and distribution you take from a close company while temporary non-resident gets taxed on your return. Doesn’t matter when the profits arose. A close company, is broadly any private company controlled by five or fewer shareholders or by its directors. That’s basically every UK owner-managed business.

The Budget called the old treatment a loophole. Either way, it’s gone. The same package also scrapped the deemed tax credit non-residents used to get on UK dividends, in case anyone thought this was accidental.

One small mercy buried in the new legislation: there are fresh relief provisions for foreign tax you already paid on those dividends. So, keep every record of US tax you pay while you’re here. You may be very glad you did.

Why California Can Make Double Taxation Even Worse

This is usually the point in the conversation where I have to deliver the second piece of bad news.

The two tools Americans use to fix double taxation don’t work for him. The Foreign Earned Income Exclusion is for US taxpayers living abroad. James is a foreign taxpayer living here, the exact opposite fact pattern. The Foreign Tax Credit does work, but only on his federal return.

California recognizes neither. The state taxes residents on worldwide income at rates up to 13.3%, gives zero credit for foreign taxes, and ignores the US-UK treaty entirely, because treaties bind Washington, not Sacramento.

So, James’s UK rental income could get taxed by HMRC, offset federally by the credit, then taxed again in full by California. His ISA, which HMRC politely ignores, is fully taxable to the IRS and the FTB. Because it holds UK funds, it comes with PFIC paperwork, which in some cases can cost more than the tax. His SIPP grows tax-deferred on his federal return under the treaty. California doesn’t follow the treaty, so the state’s position on that growth is a problem all its own.

Example: How One Return to the UK Created a Six-Figure Tax Bill

James was drawing about £150,000 a year in dividends. Three years in California means roughly £450,000 taken while abroad.

While he’s here, every one of those dividends already gets taxed twice. Federal tax at qualified dividend rates plus the investment income surtax, then California at 9.3% and climbing. No credit softens any of it, because the UK isn’t withholding a penny for anyone to credit.

Then he moves home in 2028, inside the window. Under the new rule, the full £450,000 lands on his UK return in the year he arrives, most of it at the 39.35% additional rate. Call it north of £150,000 to HMRC, on money California already took its share of. The new relief rules might credit some of the US tax. They’re brand new and untested, and I’d bet the California slice is the piece that falls through the cracks.

His planned share sales followed the same script. Sell $800,000 of appreciated stock in year two and California taxes it immediately. Return in 2028 and UK capital gains tax at up to 24% shows up on the same gain, in the year he lands.

California taxes now and shares with nobody. The UK taxes later and dumps everything into one year. James was standing directly between them.

*The example presented is hypothetical in nature and not reflective of a real client or scenario. There is no guarantee nor is the intention of this example to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome.

Living in New York? The Tax Risks Are Similar

Swap Redondo Beach for Brooklyn and James’s story barely changes.

New York taxes its residents on worldwide income too. The state tops out at 10.9%, and if you live in the five boroughs the city stacks up to another 3.876% on top. Call it nearly 15% before the IRS has said a word.

And New York’s resident credit contains one of my favorite quirks in all of state tax. It covers taxes paid to other states, to DC, and, oddly enough, to provinces of Canada. Pay income tax to Ontario and Albany gives you a credit. Pay income tax to the United Kingdom and you get nothing. Same UK rent, same UK dividends, same stack, zero relief.

There is one genuine difference. New York starts its math from your federal AGI, so a few treaty outcomes that survive onto your federal return carry over more cleanly than they do in California. Your SIPP’s growth has a better argument in Albany than it does in Sacramento. But the headline problem is identical, and HMRC’s five-year drawer doesn’t care which state you were sitting in when you filled it.

New York also has its own trap for the half-out. Keep a place in the city and spend more than 183 days in the state and you’re a statutory resident for the year, whatever your domicile paperwork says. I’ve watched Brits manage to be tax resident in New York and the UK at the same time. Nobody enjoys it.

ISAs: Tax-Free in the UK, Taxable in the US

Many British expats I have worked with have asked me about this one, usually with a hopeful tone. So here is the ISA’s strange position in all of this.

To HMRC, your ISA stays sacred. Income and gains inside it are tax free whether you live in Leeds or Los Angeles, and because those gains are never chargeable in the UK, the five-year rule can’t touch them. Sell inside the wrapper while you’re abroad and nothing goes into HMRC’s drawer. The ISA is the one account the clawback ignores.

To the IRS and to Sacramento or Albany, your ISA is just a brokerage account with a British accent. Every dividend and every gain is taxable in the US in the year it happens, state included, and if it holds UK funds the PFIC filings usually cost more than the tax.

Two traps potentially follow from that mismatch. Strip investments out of the wrapper into a normal account and sell them while you’re in the US, and you’ve converted protected gains into exactly the kind the five-year rule catches on your return. And the US gives you no fresh start on arrival. There is no basis step-up when you become a US taxpayer, so it will happily tax growth that built up years before you landed.

Which is why the real ISA planning happens before the move, not after. Realizing gains inside the wrapper while you’re still only a UK taxpayer costs nothing in either country and resets your US cost basis. James didn’t get that memo in time. Most people don’t.

One housekeeping note. Once you’ve moved, you can’t add new money to an ISA after the tax year you leave. It just sits there, growing quietly, generating American tax returns.

The discussion so far explains how the rules generally work. The planning decisions in the example below reflect James's particular circumstances and are included for illustrative purposes only. Different planning approaches may be appropriate depending on an individual's tax situation, financial goals, and expected plans to return to the UK.

Cross-Border Tax Planning Considerations

We started with the only question that matters: is 2028 real, or is it “probably, unless the kids are settled”?

For James, it was real. His parents are in Surrey and getting older. So, we planned like the clawback was certain, because for him, it was.

The dividend autopilot stopped first. Every future distribution now gets priced on both sides of the Atlantic before it’s paid, and a chunk of profit stays in the company until he’s either home or past the five-year line.

The share sales got resequenced. Gains on assets he owned at departure wait, either until after the window closes or until we’ve knowingly accepted both bills. New investing happens in US accounts, because assets bought after leaving generally sit outside the rules. That one detail turns portfolio construction into an actual planning tool.

The ISA got dismantled and rebuilt as something California doesn’t punish him for owning. We built a tracker for UK tax years, split dates, and his UK day counts, because the Statutory Residence Test can quietly pull you back into UK residence a year before you meant to return, which shortens your window without telling you. And every dollar of US and California tax on his dividends now gets documented for the day HMRC’s new relief provisions matter.

If you’re never moving back, none of this touches you. The five-year rule is aimed at short-term leavers, and it shouldn’t distort decisions you’re making as a permanent California resident. You’ll still want to think about the UK’s new inheritance tax residence tail and your UK source income, but that’s a different topic.

Takeaways for British Expats Returning to the UK

James still takes money out of his company. Just not on autopilot, and not without knowing what each payment costs in two countries. Asking the question early may have saved him from a costly tax surprise.

If you’re British, in California or New York, and a return home within five years is even possible, the time to plan is before the dividend is paid and before the shares are sold. After that, you’re not planning anymore. You’re just paying.

Planning across two tax systems requires more than filing the right forms; it requires a coordinated strategy. If you're a British expat living in the US or preparing for a future move back to the UK, an experienced advisor can help you evaluate the tax implications before financial decisions are made.

Connect with an EP Wealth advisor today to discuss your cross-border financial plan and build a strategy to support your long-term goals.

Sources:

•  HMRC, HS278 Temporary non-residents and Capital Gains Tax 

• HMRC, Temporary non-residence rules, post departure trade profits (tax information and impact note)

• HM Treasury, Budget 2025 Overview of Tax Legislation and Rates

• Burges Salmon, The UK’s Temporary Non-Residence Rules

DISCLOSURES:

• This post is for informational and educational purposes only. Nothing here constitutes legal, tax, financial, or investment advice, and it should not be relied upon as such. Scenarios described are illustrative composites with details changed and do not depict any actual client. Any planning approaches discussed are presented solely to illustrate how cross-border tax rules may apply in certain circumstances and are not recommendations for any particular individual. All figures, rates, and examples are illustrative and based on publicly available law and guidance as of April 2026. Individual circumstances vary significantly, and actual tax treatment will depend on your specific facts, residency status in each jurisdiction, and applicable law at the time.

• Legal and tax matters are complicated. All legal and tax references are general in nature and are not intended to supersede professional advice. Please consult with an accountant and/or attorney before implementing any of the strategies discussed. EP Wealth Advisors is not engaged in the practice of law or accounting.

• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.

• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability.