The US Exit Tax: Explained for Wealthy UK Dual Filers
The US exit tax is a one-off charge on the unrealised gains of "covered expatriates" who renounce US citizenship or hand back a long-term green card. For wealthy US-UK dual filers, it can turn a clean break with the IRS into a seven-figure bill unless you plan the timing and paperwork years in advance.
By the TaxYork Cross-Border Tax Team — reviewed by a US-UK dual-qualified adviser (CPA / Enrolled Agent).
What is the US exit tax and who does it actually hit?
The US exit tax sits under Internal Revenue Code section 877A and taxes you as if you sold every worldwide asset the day before you left the US tax system. It only bites if you are a "covered expatriate", so most ordinary emigrants pay nothing. The danger zone is reserved for high-net-worth individuals, high earners, and anyone who has fallen behind on US filings.
Two groups can trigger it: US citizens who formally renounce citizenship, and "long-term residents" who give up a green card held in at least eight of the last fifteen tax years. If you are a British-American who has spent decades on both sides of the Atlantic, you almost certainly fall into one of these camps the moment you decide to cut US ties.
The tax is not a penalty for leaving. It is Congress's way of collecting one final capital gains bill before it loses jurisdiction over your assets. You can read the statute itself at Cornell Law School's section 877A page and the IRS overview at irs.gov on expatriation tax.
Am I a "covered expatriate" under the 2025 rules?
You are a covered expatriate if you meet any one of three tests on the date you expatriate. Meeting a single test is enough, so you cannot dodge the rules simply by staying under one threshold. The three tests are the net worth test, the tax liability test, and the certification test.
The net-worth test
You are covered if your net worth is $2,000,000 or more on the date of expatriation. This figure is fixed in statute and not adjusted for inflation, so it captures more people in real terms each year. Property in London, a US 401(k), and a modest pension pot can add up fast when sterling assets are converted to dollars.
The tax-liability test
You are also covered if your average annual net US income tax for the five years ending before expatriation exceeds $206,000 (2025). This threshold is indexed for inflation each year. It is your net income tax liability that counts, not your gross income, so foreign tax credits and the foreign earned income exclusion can pull some high earners below the line.
The certification test
Even a person of modest means becomes covered if they cannot certify, on Form 8854, that they have complied with all US federal tax obligations for the five years before expatriation. This is the test that snares long-term non-filers, and it is the one most within your control to fix before you leave.
Test (2025)
Threshold
Inflation-indexed?
Net-worth test
$2,000,000 or more
No — fixed in statute
Tax-liability test
5-year average net income tax over $206,000
Yes
Certification test
Must certify 5 years of full compliance on Form 8854
Not applicable
Certain dual citizens at birth and some young expatriates can bypass the first two tests, but everyone must still pass the certification test. For details on exceptions, see "About Form 8854" on irs.gov.
How is the US exit tax actually calculated?
If you are a covered expatriate, the IRS assumes you sold all of your worldwide assets at fair market value the day before you expatriated. This "deemed mark-to-market sale" crystallizes every unrealized gain at once. An exclusion then shields the first slice of gain, and only the excess is taxed.
The mark-to-market gain exclusion
For 2025, the mark-to-market gain exclusion is $890,000 and is indexed for inflation each year. Net gain above that figure is taxed at the usual capital gains rates. A couple who are both expatriates each getgetseir own exclusion, which is a powerful reason to plan jointly rather than separately.
Deferred compensation and tax-deferred accounts
The mark-to-market rule does not apply to everything. Deferred compensation, specified tax-deferred accounts such as IRAs, and interests in non-grantor trusts follow their own regimes. Eligible deferred compensation is generally subject to 30% withholding as it is paid out, while IRAs are treated as fully distributed on the day before expatriation and taxed as income.
Asset type
How the exit tax treats it (2025)
Shares, property, most investments
Deemed sold at market value; gain over the $890,000 exclusion is taxed
IRA / specified tax-deferred account
Deemed fully distributed the day before; taxed as ordinary income
Eligible deferred compensation
No mark-to-market; 30% withholding on future payments
Interest in a non-grantor trust
Special rules: 30% withholding on distributions of the taxable portion
Because sterling assets must be valued in dollars, exchange-rate movements can inflate a gain you never economically enjoyed. Careful valuation and timing around a strong or weak pound can materially affect the tax bill.
A worked example: how big can the bill get?
The numbers below are illustrative and use round figures. They show how quickly a comfortable but not extravagant dual filer can cross into covered-expatriate territory.
Case study: "Eleanor", a London-based US citizen
Eleanor, 58, was born in Boston and has lived in London for 25 years. She owns a Kensington flat worth $2,400,000 (bought for $900,000), a US brokerage account of $600,000, and a UK pension. Her net worth comfortably exceeds $2,000,000, so she is a covered expatriate the moment she renounces her citizenship.
On the deemed sale, her flat alone shows a $1,500,000 gain. After applying the 2025 exclusion of $890,000, roughly $610,000 of that gain is taxable, plus gains on her brokerage holdings. At long-term capital gains rates plus the net investment income tax, her US exit tax could land near $150,000 — payable even though she has not sold a single asset. Had she gifted or restructured assets years earlier to stay under $2,000,000, the outcome would have been very different.
Can I avoid covered-expatriate status by filing back taxes first?
Often, yes — and this is the single most valuable move for non-compliant dual filers. If you fail the certification test only because of missing returns, coming into compliance first can let you certify five clean years and escape covered status entirely. The usual route is the IRS Streamlined Filing Compliance Procedures.
The streamlined program is designed for taxpayers whose failure to file was non-wilful, a category that includes many "accidental Americans" and long-term expats who never realized they had to file. You typically submit three years of amended returns and six years of FBARs, then, once compliant, you can truthfully certify on Form 8854. Details are on the IRS streamlined filing page.
Timing matters enormously. You cannot certify five years of compliance the day after you file, so streamlining should begin well before you plan to renounce. We cover the mechanics in our guide to streamlined filing for US expats.
What happens on the UK side when I expatriate?
The US exit tax is a US-only charge; HMRC does not impose an equivalent departure tax for renouncing US citizenship. Your UK tax position turns on your residence and domicile status, not on your dealings with the IRS. In many cases, the two systems interact through the US-UK tax treaty and foreign tax credits.
If you remain UK-resident, your worldwide income and gains stay within HMRC's reach under the rules at GOV.UK tax on foreign income. A deemed US disposal does not usually create an actual UK disposal, so mismatches in timing and basis can arise. This is where coordinated US-UK advice earns its keep, because a credit claimed in the wrong year can be lost forever.
We regularly help clients align a US exit with UK planning, particularly regarding remittance rules and pensions. See our overview of the US-UK tax treaty and our note on how US and UK pensions are taxed across borders.
What paperwork and timeline should I expect?
Expatriation is a two-track process: an immigration or State Department step and a tax step. The tax step centers on Form 8854, the initial and annual expatriation statement, which you file with your final US tax return. Miss it, and you are automatically treated as a covered expatriate, regardless of your wealth.
The key steps
First, renounce citizenship at a US embassy or formally abandon your green card. Second, file a final "dual-status" or full-year US return for the year of expatriation. Third, attach Form 8854 certifying compliance and computing any exit tax. A realistic runway from initial advice to a clean exit is often two to three years when back-filing is involved.
For those with the wealth to trigger the tax, planning can include gifting to stay under the net-worth line, harvesting losses before the deemed sale, and choosing the exit year with an eye on exchange rates. Our team walks through the full sequence in our guide to renouncing US citizenship.
Work with TaxYork before you hand back your passport
Renouncing is irreversible, and the US exit tax is unforgiving of last-minute mistakes. TaxYork's dual-qualified US-UK advisers model your covered-expatriate exposure, run back-filing through the streamlined program where needed, and time your exit to keep the bill as low as the law allows. We handle the whole Form 8854 process end-to-end.
Talk to our cross-border team before you commit. Email hello@taxyork.com, call 020 3488 8606, or visit taxyork.com to book a confidential exit-tax planning review.