Could the US Exit Tax Catch You Out?

What it is, who it tends to affect, and how the calculation actually works.

What it is

Picture it like driving down a long US highway. Doesn’t matter how long you’ve been on it or how far you’ve come, eventually most people take the exit signposted home, and for the clients we work with, that’s usually the UK, though the road leads plenty of places. What catches people out is that this particular exit has a tollbooth sitting right on it, and the US doesn’t wave you through without checking whether you need to settle up first, officially known as the exit tax (or expatriation tax, IRC Section 877A, if you want the technical name). Say the word ‘tax’ to most people and they sit bolt upright, and fair enough, but this particular toll tends to get either panicked about needlessly or not thought about nearly enough, there’s not much sensible middle ground. So let’s find it.

The logic behind it is fairly blunt. If the US has been your tax home and your wealth has grown while you were part of that system, the IRS wants that settled before you leave, rather than watching it drive off untaxed. It came in back in 2008, and it’s stuck around through every administration since.

Who is likely to have it

Leaving the US and actually being caught by this are two different things. It comes down to your status, and then, separately, whether you meet certain financial or filing tests.

Your status

• US citizens carry worldwide US tax exposure for life regardless of where they live, that’s simply how citizenship-based taxation works. The exit tax specifically only becomes relevant if you formally renounce citizenship.
• Green card holders only come into scope once they’ve held the card for 8 of the last 15 tax years, known as long-term resident status.
• Visa holders without a green card generally sit outside this entirely, no matter how long they’ve been in the country.

This one is blunter than most people expect, it isn’t really a day-by-day clock, it’s a count of tax years. Whichever tax year your green card is approved in counts as year one, even if that’s November. Whichever tax year you formally surrender it counts as your final year, even if that’s January. Everything in between counts fully, regardless of how much time you actually spent in the US.

That rounding cuts in the IRS’s favour at both ends. Get a green card in November 2020 and formally surrender it in January 2027, and that touches 8 separate tax years, 2020 through 2027, even though the actual time spent holding the card is only around 6 years and 2 months. It’s entirely possible to cross the 8-year threshold without having been a resident for anything close to 8 full years.

Surrendering the card is also a formal step, not simply a decision. Deciding to leave, moving your life elsewhere, or letting the card lapse quietly doesn’t stop the count on its own, the formal filing date is what closes out the final tax year. Worth knowing too, if you’ve held a green card before, given it up, then been granted a new one later, both periods generally count toward that same 8-out-of-15-year window.

The financial and filing tests

Being in scope by status doesn’t automatically mean you owe anything. You’re only a covered expatriate, and only covered expatriates face this tax, if you trip at least one of three tests on your way out:

• Your net worth is $2 million or more on the date you leave. This figure has never been adjusted for inflation, so it’s quietly become a lower bar every year since 2008.
• Your average annual US tax liability was above $211,000 (the 2026 figure, adjusted each year) across the five years before leaving.
• You can’t certify five years of full US tax filing compliance, regardless of what you’re actually worth.

That third one catches more people than you’d think. It’s a paperwork test, not a wealth test, and it can catch someone nowhere near the financial thresholds. Worth being clear too, the US-UK tax treaty doesn’t offer a way round any of this, it specifically preserves the US’s right to tax on exit, so a treaty position isn’t an escape route here.

The two main buckets

Once you’re a covered expatriate, the IRS treats your worldwide assets as though they were sold at fair market value the day before you left, no actual sale happens, it’s a paper exercise, but the resulting gain is what gets taxed. Losses can offset gains within the same bucket, so it’s the overall picture that matters, not each asset in isolation. From there, not everything is treated the same way. Two main buckets do most of the work.

Investments and property

Brokerage accounts, real estate, most everyday assets, wherever they’re held. Only the growth is taxed, and the first $910,000 of total gain across everything in this bucket (2026 figure, adjusted yearly) is shielded entirely. A UK property sits in exactly the same bucket as a US brokerage account, both measured on the growth since you became a US resident, not the full current value.

Tax-deferred savings accounts

This covers accounts built specifically for tax-deferred saving, IRAs, HSAs, and 529 plans are the common examples, though the same treatment extends to similar purpose-built accounts. These sit in a completely different bucket to investments and property. The full balance is treated as paid out to you the day before you leave and taxed as ordinary income. There is no shelter here at all, the $910,000 exclusion does not reach this bucket.

Other nuances worth knowing

• Pensions and deferred comp depend on where the plan sits, not what type of account it is. A plan with a US-based payor can qualify for ‘eligible’ treatment, nothing taxed today, instead 30% withheld from each payment as you actually draw it in retirement. A foreign pension, a UK workplace pension being the obvious example, almost never qualifies, so it’s taxed in full immediately instead. The treaty doesn’t reduce any of this either way.
• Trust interests follow their own separate rules again, and genuinely depend on how the trust is structured. Worth raising directly with us if it applies to you, rather than assuming a general answer.
• Now for the good news. A Roth held for 5 years or more escapes almost all of this, since the money going in was already taxed. Hold it for less time and only the growth gets taxed as income, your original contributions still come out tax-free either way, and either way it’s a considerably better outcome than a traditional IRA.

Let’s make this real

Take Sarah, a UK national who has held a US green card for 9 years and is now moving back to the UK. Her total net worth is $2.4 million, so she trips the net worth test and is a covered expatriate.

• US brokerage account, worth $1.4 million, bought over the years for $500,000, a gain of $900,000.
• UK property, owned since before she moved to the US, worth roughly £200,000 when her green card started and £460,000 now, a gain of £260,000 (about $330,000) since arrival. The growth before she became a US resident isn’t caught at all.
• Traditional IRA, worth $150,000, no exclusion available.
• Roth IRA, worth $80,000, held well over 5 years, so it’s largely outside this regime.
• UK workplace pension, worth $200,000. No US payor is involved, so it doesn’t qualify for the spread-out treatment, and the full amount is taxed as income now.
• US 401(k), worth $180,000. This one does have a US payor, so nothing is taxed today, it’s deferred instead. But when Sarah starts drawing on it in retirement as a UK resident, 30% is withheld from every single payment, and the treaty doesn’t reduce that rate, it’s a flat charge on the way out, entirely separate from whatever she ends up owing HMRC on that same income.

Add the brokerage and UK property gains together, $900,000 plus roughly $330,000, that’s $1.23 million in the investments and property bucket. The $910,000 exclusion covers most of it, leaving around $320,000 taxed at capital gains rates. The IRA adds $150,000 of taxable income, and the UK pension adds a further $200,000, both taxed today in full. The Roth contributes nothing to the bill, and the 401(k) doesn’t either, not yet, its bill simply arrives later, 30% at a time.

What’s actually driving Sarah’s bill today is the IRA and the UK pension, not the brokerage account, even though the brokerage account is worth the most by far. And today’s bill isn’t necessarily the end of the story either, if she later sells that UK property as a UK resident, HMRC will look at it entirely on its own terms, quite separately from anything already settled with the US.

Keeping track as you go

The value of everything you own on the day your green card status begins becomes the baseline for measuring growth later, so it’s worth keeping a simple record of that from the outset, particularly for property and anything held outside the US. If that record doesn’t exist by the time it matters, it isn’t the end of the road, but it does get a little harder to establish.

How you’d actually pay it

Worth being clear on the mechanics here. Nothing is automatically deducted from the accounts themselves, this isn’t a case of the IRS reaching in and taking a slice. It’s a tax liability like any other, calculated and then settled separately, from whatever funds you have available, in the same way you’d pay any other tax bill.

The one thing worth planning for is that the gain being taxed can exist only on paper, so it’s worth having a sense of where the cash to cover it would actually come from, particularly if a chunk of what you own isn’t easy to sell quickly.

A couple of things worth flagging

• The compliance test doesn’t care about the size of your finances. One missed filing from years ago is enough to trip it on its own, regardless of how modest everything else looks.
• If family, trusts, or gifting are part of the picture, timing can matter well before the exit tax question itself even arises, worth flagging early rather than assuming it’s unrelated.

Worth talking through

This isn’t the kind of thing with a single fix, and we wouldn’t want to suggest otherwise, the tax itself will still be there. What does help is understanding it properly ahead of time, rather than working it out after the fact. If you think this could apply to you, or to family navigating a US departure, it’s certainly worth speaking to a tax professional, and Damien and I are always happy to talk it through with you.