Introduction: Moving to Puerto Rico Is the Only Exit That Changes Your US Tax
Moving to Puerto Rico is the one relocation open to a US citizen in London that can lawfully switch off federal income tax on part of your income. Dubai, Monaco and Singapore remove British tax, yet the IRS follows you to each of them. However, Puerto Rico sits inside the American system, and section 933 of the Internal Revenue Code excludes its local income from your Form 1040 altogether.
Furthermore, the island adds its own incentive. Act 60 has offered new residents a zero rate on investment gains, and a 2026 amendment closes that rate to applications filed after 31 December 2026. Consequently, wealthy Americans in Britain are asking about moving to Puerto Rico now. At TaxYork, we prepare US and UK returns for investment bankers, fund principals and company owners, and we see the same misunderstandings in almost every plan.
Why Moving to Puerto Rico From London Differs From a Mainland Move
Every published guide assumes that you start in New York, Texas or California. Therefore, none of them mentions the UK statutory residence test, the British five-year return trap or the US-UK treaty. Additionally, none explains that your London ties count against you under the American residence rules.
Importantly, a Londoner also arrives with something a mainland mover lacks. You hold UK pensions, UK property, sterling accounts and often shares in a British company. As a result, moving to Puerto Rico from Britain creates a three-way problem between HMRC, the IRS and the Puerto Rico Treasury, rather than a simple two-way one.
Who This Guide Is For
We wrote this guide for US citizens resident in the United Kingdom who hold substantial portfolios or own a business. It also suits dual nationals who hold both passports. Above all, it sets out what moving to Puerto Rico saves, what it costs, and which filings follow you to San Juan.
How Section 933 Works for a US Citizen
The federal benefit of moving to Puerto Rico rests on one provision. Section 933 is a federal exclusion, not a Puerto Rican relief. Specifically, section 933 of the Code removes from US gross income any income from sources within Puerto Rico. The exclusion applies only if you are a bona fide resident of the island for the entire tax year.
What the Exclusion Covers
The exclusion follows the source of the income, not the place you bank it. For example, salary for work physically performed on the island is Puerto Rico source. Similarly, interest from a Puerto Rican bank and dividends from a Puerto Rican company qualify. Moreover, gains on shares generally take the residence of the seller, so a bona fide resident's gains can qualify too.
However, the exclusion stops there. Dividends from American companies remain US source, and dividends from British companies remain foreign source. Therefore, both stay on your Form 1040 at full federal rates. In our experience, this single point undoes most projections that clients bring to us about moving to Puerto Rico.
What Stays on Your Form 1040
You still file a federal return whenever you have income from outside the island. Additionally, IRS Publication 570 confirms that you lose deductions allocable to the excluded income. Notably, wages paid by the US government never qualify, wherever the work happens.
Furthermore, the net investment income tax of 3.8 per cent continues to apply to investment income that section 933 does not exclude. Consequently, a British share portfolio that pays dividends keeps costing you 23.8 per cent in federal tax after moving to Puerto Rico.
Why the Foreign Earned Income Exclusion Ends
Puerto Rico is not a foreign country for the foreign earned income exclusion. Accordingly, section 911 stops applying on the day your tax home leaves Britain. Days on the island do not count towards the 330-day physical presence test either.
As a result, the exclusion you claimed in London covers only the part of the year before departure. In contrast, section 933 takes over only for Puerto Rico source income. Therefore, any consultancy fees for work you perform on visits to London or New York fall between the two reliefs.
Becoming a Bona Fide Resident After Leaving London
Moving to Puerto Rico physically is not enough for the IRS. Bona fide residence is a three-part federal test, and you must pass every part. Section 937 requires presence on the island, a tax home on the island, and no closer connection elsewhere. Importantly, the Act 60 decree does not prove any of them.
The Presence Test and the 90-Day Shortcut
The best-known route is 183 days on the island in the tax year. However, the residence regulations offer four alternatives. You may instead spend 549 days there across three years, with at least 60 days in each year. Alternatively, you pass if you spend no more than 90 days in the United States during the year.
That last route matters for Londoners. A banker who leaves Britain in June rarely reaches 183 island days in the same year without care. Nevertheless, the same person usually spends fewer than 90 days in the fifty states. Therefore, the presence test is often the easy part of moving to Puerto Rico when you come from Britain rather than from the mainland.
The Tax Home and Closer Connection Tests
The harder tests concern where your life sits. Your tax home is your main place of business or employment. Moreover, you must not have a closer connection to the United States or to a foreign country than to Puerto Rico. Britain is a foreign country for this purpose.
Consequently, your London ties work against you. The IRS weighs your permanent home, your family's location, your belongings, your clubs, your bank accounts and your driving licence. Keeping a furnished Kensington house, a spouse in Britain and children at English schools points to Britain. In that case, moving to Puerto Rico fails on the American side even if HMRC accepts that you left.
The Year-of-Move Rule
Section 933 demands residence for the whole year, which no mid-year mover can show. Fortunately, the regulations supply a year-of-move rule. You qualify for the year of arrival if you were not a bona fide resident in the three preceding years, and if you have your tax home and closer connection on the island for the last 183 days of the year.
Additionally, you must remain a bona fide resident for each of the following three years. In practice, a 2027 move must therefore be complete by 2 July 2027. Leaving early in year three unwinds the first year retrospectively, so a short trial stay is dangerous.
Form 8898 and the IRS Campaign
You must tell the IRS when your status changes. Specifically, Form 8898 is due for the year you become a bona fide resident if your worldwide gross income exceeds $75,000. The penalty for failing to file is $1,000.
Moreover, the IRS runs a dedicated compliance campaign on Puerto Rico incentive claimants among its active examination campaigns. Examiners request flight records, phone data and card statements. Therefore, we recommend a contemporaneous day count from the first week of moving to Puerto Rico.
Act 60 in 2026: The Zero Rate, the 4 Per Cent Rate and the Deadline
The local incentive is the second reason people consider moving to Puerto Rico. Act 60 is Puerto Rico's Incentives Code, and it governs the island's own tax, not the federal one. Without a decree, a resident pays Puerto Rico income tax on worldwide income at rates rising to 33 per cent. With an investor decree, most investment income escapes local tax.
What the Resident Investor Decree Gives You
The Individual Resident Investor decree exempts interest and dividends from Puerto Rico income tax. Furthermore, it exempts capital gains on securities to the extent that the gain accrues after you become a resident. The Department of Economic Development and Commerce issues the decree as a contract with the government.
In return, you must donate $10,000 each year to Puerto Rican charities and buy a principal residence on the island within two years. Additionally, you file an annual compliance report with a fee. Importantly, the decree does nothing for salary, which the Puerto Rico Treasury taxes at ordinary rates.
What Act 38-2026 Changed
Act 38-2026, signed in March 2026, rewrote the investor programme. It extended the regime from 2035 to 31 December 2055. However, it replaced the zero rate with a 4 per cent rate on interest, dividends and post-arrival gains for applications filed after 31 December 2026.
Notably, the filing date of the application decides which regime you receive, not the date of the move. Applicants under the new rules must also show six years of prior non-residence. Meanwhile, existing holders keep their zero rate until 2035 and may elect into the 4 per cent regime to run until 2055. When signed, the law still awaited endorsement from the Financial Oversight and Management Board, so confirm its status before you file.
The Export Services Decree for Business Owners
Company owners moving to Puerto Rico look at a second decree. An export services business that serves clients outside the island pays a 4 per cent corporate rate on qualifying profit. Furthermore, dividends from that profit are exempt in the hands of a resident shareholder.
However, the work must genuinely happen on the island. A fund consultant who flies to London each month performs those days of services in Britain. Consequently, that slice of income is neither Puerto Rico source nor excluded under section 933. You must also take a reasonable salary, which bears full local tax.
The Pre-Move Gain Rule Almost Every Guide Gets Wrong
The largest misconception about moving to Puerto Rico concerns gains you already hold. Many guides state that a bona fide resident pays no federal tax on capital gains. In fact, a specific regulation blocks that result for appreciation built up before arrival.
The Ten-Year Rule
Under the source regulations in section 1.937-2, gains on investment property that you owned before you became a bona fide resident are not Puerto Rico source. The rule applies if you were a US citizen or resident at any time in the ten preceding years. A US citizen living in London meets that description every year.
Therefore, if you sell within ten years, the whole gain stays federally taxable by default. After ten full years of bona fide residence, the rule falls away and the gain becomes Puerto Rico source. At that point, Act 60 charges 5 per cent on the pre-arrival slice.
The Election That Splits the Gain
Fortunately, you can elect to split the gain. For listed securities, the Puerto Rico portion is the sale price less the market value on your first day of residence. For other assets, you apportion the gain by days held. Consequently, only the pre-arrival growth remains on your Form 1040.
Importantly, this election turns the date of moving to Puerto Rico into a valuation date. We therefore recommend a full schedule of closing prices for every holding on that day. Without it, you cannot prove the split five years later.
What It Means for a London Portfolio
A London portfolio usually carries large unrealised gains. Additionally, many clients hold shares in a private British company with almost no basis. As a result, the first years after moving to Puerto Rico often save less than the brochures promise.
In contrast, moving to Puerto Rico works best for growth that has not happened yet. A founder who relocates before a company's value rises captures the most. Similarly, an investor who expects to trade actively benefits more than one who holds for income.
The UK Exit: What HMRC Still Taxes
The British side of moving to Puerto Rico matters as much as the American side. You must first cease UK residence under the statutory test, and you must then stay away long enough. Otherwise, HMRC taxes the very gains that Act 60 exempts.
Breaking UK Residence
The statutory residence test decides your status by day counts and ties. A recent UK resident is automatically non-resident on fewer than 16 UK days in a tax year. Alternatively, full-time work overseas allows up to 90 days, with no more than 30 UK workdays.
Between those limits, your ties decide the answer. A UK home, UK-resident family and substantial UK work each reduce the days you may spend here. Furthermore, the British tax year runs from 6 April, so split-year treatment decides how the year of departure divides.
The Five-Year Temporary Non-Residence Trap
Leaving is not enough. Under the temporary non-residence rule, gains on assets you owned at departure become taxable in Britain if you return within five years. HMRC charges them in the year you come back, at capital gains tax rates currently reaching 24 per cent.
Consequently, moving to Puerto Rico for three years and then returning to London can produce the worst result of all. You would pay federal tax on the pre-move gain, British tax on the whole gain, and fees throughout. Additionally, certain dividends from a closely held company fall into the same trap.
The Treaty Gap Nobody Mentions
The US-UK treaty does not cover Puerto Rico. Specifically, the Treasury technical explanation confirms that the term "United States" excludes Puerto Rico and the other possessions. Moreover, a US citizen is a treaty resident only with a substantial presence, permanent home or habitual abode in the United States as so defined.
Therefore, after moving to Puerto Rico you generally cannot claim treaty relief from British tax, and Britain has no separate treaty with Puerto Rico. Your UK pension stays taxable here under domestic law. Meanwhile, the IRS taxes the same pension as foreign source income, and Puerto Rico taxes it as a resident's worldwide income. The foreign tax credit then has to do the work the treaty would have done.
UK Property and UK Income
Britain continues to tax what stays here after moving to Puerto Rico. Rent from a let London home falls under the non-resident landlord rules, with basic rate withholding unless HMRC approves gross payment. Similarly, a sale of UK land remains chargeable under the non-resident capital gains regime, with a 60-day return.
In contrast, UK dividends and bank interest fare better. Section 811 of the Income Tax Act 2007 can limit a non-resident's liability on that income to tax deducted at source, at the price of the personal allowance. Overall, the HMRC guidance on UK income for people living abroad is the starting point.
Reporting That Follows You to San Juan
Your filing burden changes shape rather than disappears. In our experience, clients who are moving to Puerto Rico expect one return and end up with three. Furthermore, the foreign account rules continue for everything you leave in Britain.
FBAR and Form 8938
Puerto Rican accounts are not foreign for FBAR purposes, so a San Juan bank account stays off FinCEN Form 114. However, your British accounts, pensions and ISAs remain reportable once the combined total passes $10,000. Moving to Puerto Rico changes nothing about them.
Additionally, Form 8938 still applies to your British assets. Notably, you lose the higher thresholds for Americans living abroad, because the island is not a foreign country. Therefore, more of your holdings may fall into reporting than in London. Our FBAR and FATCA reporting service covers both forms.
The Three Returns You Now File
You file a Puerto Rico resident return on worldwide income, a Form 1040 for everything outside section 933, and a UK return while British income continues. Moreover, self-employed residents pay US self-employment tax through Form 1040-SS, because the island sits inside Social Security.
Consequently, credit ordering becomes critical. Britain taxes first on UK source income, the IRS credits that tax, and Puerto Rico then gives its own credit. Our US tax return preparation for expats and treaty and foreign tax credit work deal with that sequence.
Clearing Missed Returns Before You Go
A decree application invites scrutiny, so old gaps matter when you are moving to Puerto Rico. If you have missed US tax returns or missed FBAR filings from your London years, correct them before the move. Otherwise, an IRS examiner reviewing your residence claim will find them first.
Similarly, missed reporting of a UK pension or investment account undermines the credibility of the whole file. We bring earlier years into line through our catch-up filing service before any application goes in.
Case Study: A London Managing Director Weighs the Move
This illustrative case shows how the numbers behave for a banker moving to Puerto Rico. Daniel is a US citizen and a managing director at a City bank, resident in Britain for twelve years. He holds a listed share portfolio worth $6 million, with a cost basis of $3.6 million. He plans to stop working and manage his own investments.
The Facts and the Plan
Daniel files his decree application in December 2026 and arrives in San Juan on 1 June 2027. He sells his London home, moves his family and passes the year-of-move rule. His portfolio is worth $6 million on his first day of residence, so $2.4 million of gain is pre-arrival. In 2031, he sells everything for $8.5 million, a total gain of $4.9 million.
The Result in Puerto Rico
Daniel elects to split the gain. The $2.5 million that accrued on the island is Puerto Rico source, so section 933 excludes it and his decree charges nothing. However, the $2.4 million pre-arrival gain stays on his Form 1040. At 20 per cent plus the 3.8 per cent net investment income tax, he owes $571,200. Puerto Rico's own charge on that slice is normally covered by its credit for the federal tax.
Had he filed in January 2027 instead, the 4 per cent rate would add $100,000 on the island gain. Additionally, five years of donations cost him $50,000 under either regime.
The Result If He Had Stayed in London
In London, Britain would tax the whole $4.9 million at 24 per cent, or about $1,176,000. The foreign tax credit would cover the 20 per cent federal charge. Nevertheless, the 3.8 per cent surtax of $186,200 would remain payable, because that tax accepts no foreign credit. His total would reach roughly $1,362,200.
Therefore, moving to Puerto Rico saves Daniel about $741,000 after donations. Importantly, the saving comes from leaving Britain as much as from Act 60. If he returns to London in 2030, the temporary non-residence rule restores the British charge and the saving disappears.
How TaxYork Can Help
TaxYork provides comprehensive tax preparation and compliance for Americans with British connections. For clients moving to Puerto Rico, we prepare the final UK return with the split-year claim, the departure-year Form 1040 and Form 8898. Furthermore, we build the arrival-date valuation schedule that supports the gain election.
Additionally, we keep the British side compliant after you leave. That covers non-resident landlord returns, FBAR and Form 8938 for UK accounts, and foreign tax credit claims on UK pensions. Clients comparing destinations can also read our guides on moving to Dubai as a US citizen and Monaco residency for Americans.
Conclusion
Moving to Puerto Rico is the only relocation that reduces a US citizen's federal tax as well as the British one. However, the benefit is narrower than the marketing suggests. Section 933 excludes only island source income, the ten-year rule keeps pre-arrival gains taxable, and the treaty stops at the water's edge.
Furthermore, the British rules decide whether the plan survives. You must break UK residence cleanly, cut the ties that the closer connection test examines, and stay away for more than five years. Finally, the Act 38-2026 cut-off means that the application date now carries a 4 per cent price. Ultimately, moving to Puerto Rico rewards those who model all three tax systems before they book the flight.
Contact Us
If you are considering moving to Puerto Rico from the United Kingdom, speak to us before you file a decree application or sell a home. Please book a consultation with our team, email hello@taxyork.com or call 020 3488 8606. We will review your UK departure, your US filing position and any missed returns together.
Disclaimer
This article is for general information only and does not constitute tax, legal or investment advice. Tax rules in the United States, the United Kingdom and Puerto Rico change frequently, and Act 38-2026 remained subject to further endorsement when this article was written. The correct treatment of any relocation depends on your individual facts, residence status and the evidence you hold. The case study is illustrative, uses rounded dollar figures and ignores exchange rate movements. You should obtain professional advice before acting. TaxYork accepts no liability for decisions made in reliance on this article.