Introduction: Why US Treasury Bills Punish Americans Living in Britain
Parking cash in US Treasury bills looks like the safest decision an investor can make, and for someone living in America it very nearly is. However, move that same investor to London and the position inverts completely. Britain taxes the profit as income, taxes the currency movement alongside it, and refuses relief when the currency moves the other way.
Worse still, the income is American in origin, so the ordinary foreign tax credit does not reach it. Consequently, we regularly see clients whose combined tax bill on a Treasury position exceeds the return the position actually generated. That is not an exaggeration, and the case study below sets out the arithmetic.
Every page ranking for this subject discusses British Treasury bills for British investors, or American Treasury bills for American residents. Therefore, none of them addresses the reader who holds both passports and both problems. TaxYork prepares returns for exactly that reader, so what follows fills the gap.
What US Treasury Bills Are and How America Taxes Them
Treasury bills are short-dated obligations of the United States government, issued for terms of four to fifty-two weeks. Notably, they pay no coupon at all. Instead, you buy below face value and receive the full face amount at maturity.
US Treasury Bills and the Discount That Counts as Interest
The difference between what you pay and what you receive is your entire return, and America treats that difference as interest rather than capital gain. Accordingly, it is taxed at ordinary rates reaching 37 per cent, never at long-term capital gains rates. TreasuryDirect describes it plainly as the difference between the price you pay and the face value you receive.
That characterisation matters enormously once Britain enters the picture. Furthermore, it removes any argument that the profit is a gain rather than income, which is the argument investors instinctively reach for.
The State Tax Exemption That Does Nothing for You in London
Interest on US Treasury bills is exempt from state and local income tax throughout America. Consequently, the instrument is genuinely attractive to a resident of New York or California. Move to Britain, however, and that exemption becomes worthless, because Britain never taxed you at state level in the first place.
Meanwhile, the federal charge follows you everywhere. America taxes its citizens on worldwide income regardless of residence, so the interest rules in Topic 403 apply identically in London and in Boston.
When the Income Lands on Your 1099-INT
Your broker reports the discount on a Form 1099-INT for the year the bill matures. Importantly, Treasury reports the payment in the year the bill matures rather than the year the cash arrives, which matters when a maturity date falls on a year-end holiday. Therefore, the American year is fixed by the maturity date and nothing else.
Who Holds US Treasury Bills From London and Why
Exposure concentrates among people holding dollars for a reason. Notably, fund partners awaiting carried interest, executives with dollar-denominated deferred pay, and founders who sold an American business all keep material cash in the currency they expect to receive or spend. US Treasury bills are the obvious home for that money.
Accidental Americans and dual nationals form a second group, often holding a legacy American brokerage account they have never reviewed. Additionally, clients who moved to Britain recently frequently arrive holding a Treasury ladder built when they lived in the United States. Consequently, the British charge on US Treasury bills usually surfaces during a first UK filing rather than at the point of purchase.
How Britain Taxes the Same US Treasury Bills
Britain reaches the same instrument through an entirely different route, and the route it chooses is far more expensive.
Deeply Discounted Securities Under Section 430 ITTOIA 2005
A security counts as deeply discounted where the redemption amount exceeds the issue price by more than 0.5 per cent for each year of the redemption period, or 15 per cent of the redemption amount, whichever is lower. Critically, for securities maturing inside a year that 0.5 per cent figure is reduced proportionally, as HMRC explains at SAIM3020.
A six-month bill therefore faces a threshold of roughly a quarter of one per cent. Consequently, at any realistic yield, US Treasury bills are deeply discounted securities without argument. The profit is charged to income tax under section 428 of the Income Tax (Trading and Other Income) Act 2005, and it counts as savings income under section 18 of the Income Tax Act 2007.
The Sterling Conversion That Taxes Your Currency Gain
Here is the provision that does the damage. For a security denominated in a foreign currency, the profit is the difference between the sterling equivalents of the acquisition and disposal amounts, using spot rates at the material dates, per HMRC guidance at SAIM3070.
Consequently, every cent the dollar strengthens between purchase and maturity becomes British taxable income. That currency movement forms no part of your American return, because the dollar is already your functional currency there. In other words, Britain taxes a profit America does not recognise, which means no American tax exists to credit against it.
Losses Are Not Allowable, and the Asymmetry Is Deliberate
Investors holding US Treasury bills assume a falling dollar produces relief. Regrettably, it does not. The Finance Act 2003 abolished loss relief on these securities for transfers and redemptions on or after 27 March 2003, and the narrow survival applies only to listed securities held continuously since before that date, as SAIM3080 confirms.
Therefore, any position in US Treasury bills you take today is one-way. Currency strength creates taxable income; currency weakness creates nothing at all. Additionally, that asymmetry compounds across a rolling programme of US Treasury bills, because each maturity is tested separately.
The Sourcing Trap: Why the Foreign Tax Credit Does Not Work
Most Americans in Britain treat the foreign tax credit as an automatic solution to US Treasury bills. Here it fails at the first step, and the reason is sourcing rather than quantum.
US-Source Interest and the Limits of Form 1116
Interest paid by the United States government is US-source income under section 861. Meanwhile, the foreign tax credit relieves foreign tax on foreign-source income. Consequently, a straightforward claim on Form 1116 fails, because the income has the wrong source.
Britain does not fill the gap either. Under Article 24(6)(b) of the treaty, the British credit is limited to the tax America could impose on a UK resident who is not a US citizen, and Article 11(1) sets that figure at nil for interest. Accordingly, HMRC gives no credit whatsoever.
Article 24(6) and the Re-Sourcing Rescue
The US-UK income tax treaty provides the answer, though you must claim it. Article 24(6)(d) deems the income to arise in the United Kingdom to the extent necessary to avoid double taxation. Therefore, the interest becomes foreign-source for credit purposes, and a separate treaty re-sourced category on Form 1116 carries the claim.
That phrase, to the extent necessary, is a genuine limit rather than decoration. Consequently, the credit is capped at the American tax on that item, and any British tax above that figure simply strands. We disclose the position on Form 8833, and our guide to treaty re-sourcing of US-source income works through the mechanics in full.
Selling Before Maturity Versus Holding to Redemption
Selling early changes the computation without improving it. On the American side, gain on the disposal of a short-term government obligation is ordinary income to the extent of the discount accrued to that date, so no capital treatment emerges. Meanwhile, Britain charges the profit on a transfer under section 428 exactly as it charges a redemption.
Therefore, an early sale simply moves both charges into an earlier year. Nevertheless, it can help where a maturity would otherwise straddle 5 April awkwardly, and we occasionally use it for that reason alone. Selling US Treasury bills to crystallise a currency loss, by contrast, achieves nothing at all in Britain.
The 3.8 Per Cent Charge the Treaty Cannot Reach
The net investment income tax applies to this interest once your income clears the threshold. Importantly, the Tax Court has held that a treaty credit does not reach that surcharge. Accordingly, an American in Britain pays 3.8 per cent on US Treasury bills with no relief from either country.
Timing, Rates and the Personal Savings Allowance
Even where re-sourcing works, the calendar frequently defeats it.
Two Tax Years That Never Line Up
America taxes on the calendar year; Britain runs to 5 April. Consequently, a bill maturing in February sits in one American year and one British year that overlap only partially. Furthermore, most Americans abroad claim credits when they pay British tax, which for a Self Assessment liability means the following 31 January.
Therefore, the British tax on a February maturity can arrive almost two years after the American charge it is meant to relieve. Credits carry back a single year and forward ten, so the mismatch regularly costs real money rather than merely creating paperwork.
Electing the accrual basis under section 905(a) aligns credits with the year the British liability accrues rather than the year you settle it, which closes much of the gap on a rolling programme of US Treasury bills. However, the election binds you permanently across your whole return. Consequently, we weigh it against the rest of a client's position rather than making it for a single instrument.
Where Additional-Rate Taxpayers Lose the Allowance Entirely
Savings income from US Treasury bills attracts the personal savings allowance, worth £1,000 to a basic-rate taxpayer and £500 to a higher-rate taxpayer. However, additional-rate taxpayers receive nothing at all. Consequently, the wealthy clients most likely to hold large Treasury positions face the full 45 per cent charge from the first pound of profit.
Structuring Around the Problem
Several routes exist for holding US Treasury bills, and the obvious ones fail for Americans specifically.
The ISA and SIPP Routes an American Cannot Rely On
A British investor shelters this income inside an individual savings account without difficulty. An American cannot, because America recognises no such wrapper and taxes the income inside it exactly as if the wrapper did not exist. Consequently, an ISA converts a creditable position into an uncreditable one and makes matters worse.
Pensions differ, because the treaty does recognise them. Nevertheless, locking short-term cash into a pension to solve a tax problem rarely suits an investor holding US Treasury bills for liquidity.
Matching the Currency to Your Spending
The cleanest fix is structural. Britain taxes the sterling movement because the instrument is denominated in dollars, so a sterling instrument removes that element entirely. Therefore, we routinely split a client's cash between dollar and sterling holdings according to which currency they actually spend.
Additionally, that split limits the one-way loss described above. You cannot claim relief when the dollar falls, so you should not carry more dollar exposure than your spending genuinely requires.
Treasury Funds, ETFs and the PFIC Question
A US-domiciled Treasury money market fund is an American fund and raises no passive foreign investment company issue. By contrast, a UK or Irish domiciled Treasury exchange traded fund is a passive foreign investment company and is taxed punitively. Consequently, the fund route through a London platform is almost always the wrong answer for an American.
Reporting US Treasury Bills on Both Returns
Reporting US Treasury bills is simpler than clients expect, with one exception.
Why FBAR and Form 8938 Usually Do Not Apply
Holding US Treasury bills through an American brokerage account creates no foreign account and no foreign asset. Therefore, neither an FBAR nor a Form 8938 entry arises from the Treasury position itself. That is a genuine and underappreciated advantage over holding gilts, which we cover in our guide to UK gilts and US tax.
However, holding the same bills through a British or offshore platform reverses the position entirely. In that case the account becomes reportable, and our FBAR and FATCA compliance service handles it.
The Additional Information Pages
On the British side, the profit goes on the additional information pages as savings and investment income, computed in sterling using spot rates on the acquisition and disposal dates. Furthermore, you must keep the exchange rates you used, because HMRC will ask for them on enquiry.
Correcting Returns That Missed the Charge
Many investors have never declared this profit, because no British statement reports it and no American statement mentions Britain. Fortunately, the IRS Streamlined Filing Compliance Procedures remain open for non-wilful cases, while British corrections run through amendment or disclosure to HM Revenue and Customs.
A US Treasury Bills Case Study With Real Numbers
The following reflects a live client position with details adjusted.
The Position
David is a US citizen, a UK resident and a partner at a London private equity firm, taxed at the additional rate. He parks deal-cycle cash in US Treasury bills through his American brokerage account. On 5 February 2026 he buys $2,000,000 of face value for $1,960,000, maturing on 6 August 2026, giving a discount of $40,000.
Sterling stood at $1.32 when he bought and $1.26 when the bill matured.
The Two Tax Bills
America is straightforward. The $40,000 discount on his US Treasury bills is interest on his 2026 return, producing $14,800 of federal tax at 37 per cent plus $1,520 of net investment income tax.
Britain is not straightforward at all. His cost converts to £1,484,848 and his redemption proceeds convert to £1,587,302, giving a deeply discounted security profit of £102,454. Only £31,746 of that reflects the actual dollar return; the remaining £70,708 is pure currency movement. At 45 per cent, with no personal savings allowance, HMRC charges £46,104, equal to roughly $58,091.
The Outcome
Without a treaty claim, David faced both charges in full. With Article 24(6) re-sourcing he eliminated the $14,800 of regular American tax, yet the $1,520 surcharge survived and roughly $43,000 of British tax stranded because the credit is capped at the American tax on that income.
His combined cost therefore exceeded the $40,000 the position earned. We restructured the following quarter, moving his sterling-spending cash into sterling instruments and keeping only genuine dollar liabilities in US Treasury bills. That single change removed the currency element from the British computation entirely.
How TaxYork Can Help
We advise Americans in Britain on where to hold short-term cash, and we prepare both returns so the treaty claim is made properly rather than discovered late. Consequently, our clients size their dollar exposure deliberately, file the re-sourcing election with the disclosure it requires, and stop paying British tax on currency movements they never realised.
Additionally, our US tax return preparation for expats and cross-border planning services cover the surrounding portfolio, and our guide to the accrued income scheme addresses the equivalent problem on coupon-bearing bonds.
Conclusion
US Treasury bills remain the safest credit in the world and one of the least efficient assets an American in Britain can hold in size. Britain taxes the discount as income, taxes the currency alongside it, and denies relief when the currency moves against you. Meanwhile, the American charge is US-source, so relief depends entirely on a treaty claim you must make deliberately.
Importantly, none of this makes the instrument unusable. Size the dollar position to your dollar spending, claim the re-sourcing, and accept that the surcharge is unrelievable. Ultimately, investors who plan the currency exposure keep the yield, and investors who do not hand it to two tax authorities.
Contact Us
Speak to us before you roll the next maturity. You can book a consultation with our cross-border team, email hello@taxyork.com, or call 020 3488 8606. We will compute the British charge on your existing US Treasury bills, model the treaty position, and tell you how much dollar exposure your circumstances actually justify.
Disclaimer
This article provides general information on the United Kingdom and United States taxation of US Treasury bills held by US persons resident in the United Kingdom, and reflects rules and rates in force at 1 September 2026. Exchange rates used are illustrative. It does not constitute tax or investment advice and should not be relied upon for any transaction. Outcomes depend on individual circumstances, residence status and the terms of the securities held. Please obtain professional advice before acting. TaxYork accepts no liability for any loss arising from reliance on this material.