Renouncing US citizenship or relinquishing a long-term green card is a major decision — and for many Americans living in the UK, it eventually becomes a consideration. What most people do not realise is that the United States imposes a departure tax on certain expatriates: the “exit tax” under IRC Section 877A. Understanding whether you are a “covered expatriate” — and what the exit tax means for your assets — is critical before making any irreversible decision.
Who Is Subject to the Exit Tax?
The exit tax applies to covered expatriates — individuals who renounce US citizenship or who are long-term Green Card holders (held for at least 8 of the last 15 tax years) who give up their Green Card. Not all expatriates are covered expatriates. You are a covered expatriate if any one of the following applies:
- Net worth test: Your net worth on the date of expatriation is $2 million or more (2024 threshold; adjusted periodically)
- Average annual net tax liability test: Your average annual net US income tax liability for the 5 years preceding expatriation exceeds $201,000 (2024 figure, inflation-adjusted annually)
- Certification test: You cannot certify under penalty of perjury that you have complied with all US federal tax obligations for the 5 years preceding expatriation
If you meet any of these three tests, you are a covered expatriate and the exit tax applies. If you do not meet any of them, you file Form 8854 but do not pay the exit tax.
How the Exit Tax Works: The Mark-to-Market Rule
The exit tax under IRC Section 877A operates on a mark-to-market basis: on your expatriation date, you are treated as if you sold all of your worldwide assets at their fair market value for their fair market value on the day before expatriation.
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The resulting gain is subject to US capital gains tax — to the extent it exceeds an exclusion amount. For 2024, the exclusion is $866,000 (this figure is adjusted annually for inflation under IRC Section 877A(a)(3)). Any gain above this exclusion is taxable on your final US return.
Assets covered by mark-to-market
- Cash and bank accounts (generally no gain)
- Investments: stocks, bonds, mutual funds, ETFs
- Real estate (UK property included)
- Business interests
- Non-retirement financial assets
Assets excluded from mark-to-market (taxed separately)
- Deferred compensation: Pensions and deferred compensation items from US employers are taxed differently — treated as if distributed on the day before expatriation, subject to 30% withholding
- Specified tax-deferred accounts: Traditional IRAs, 401(k) plans — treated as fully distributed on expatriation date
- Interests in non-grantor trusts: Subject to a deemed distribution rule
How the Exit Tax Interacts with UK Assets
For US citizens living in the UK with substantial UK assets, the exit tax has significant implications:
- UK property: Your UK home and any investment properties are valued at market rate on expatriation date. The deemed gain is taxable for US purposes. There is no offset for UK Capital Gains Tax purposes at this point — though actual UK CGT will apply when the property is eventually sold
- UK stocks and shares: Any unrealised gains on UK equities or funds held outside pension wrappers are realised notionally and taxed
- UK pension (SIPP, workplace pension): UK pensions may qualify for special treatment under the treaty if properly structured — specialist advice is essential
- ISAs: ISA assets are included in the exit tax calculation at market value — see our UK ISA and US Tax Guide
Filing Requirements: Form 8854
All expatriates — both covered and non-covered — must file IRS Form 8854 (Initial and Annual Expatriation Statement) with their final US tax return. Form 8854 requires:
- Certification that you have complied with all US tax obligations for the 5 preceding years
- Disclosure of all worldwide assets and their fair market values
- Calculation of deemed gain under the mark-to-market rule (for covered expatriates)
- Reporting of deferred compensation and pension assets
Failure to file Form 8854, or filing it incorrectly, results in automatic covered expatriate status — regardless of your actual net worth or tax liability. This is a critical point: even if you would not otherwise be a covered expatriate, failure to properly certify compliance makes you one.
The Inheritance Tax Consequence: Section 2801
A frequently overlooked consequence of covered expatriate status: IRC Section 2801 imposes a special inheritance and gift tax on US citizens and residents who receive gifts or bequests from covered expatriates. The recipient (not the expatriate) pays a tax equal to the highest estate/gift tax rate (currently 40%) on the value of any gift or inheritance received from a covered expatriate, with limited exclusions.
This means that if you become a covered expatriate and later leave assets to your US-based children or family members, they may face a 40% tax on what you leave them — on top of any other inheritance taxes that apply.
Strategic Planning Before Expatriation
The exit tax is largely manageable with proper advance planning. Key strategies include:
- Timing of expatriation: Accelerating or deferring the expatriation date relative to asset values and realised gains can substantially change the exit tax outcome
- Asset restructuring: Reviewing which assets are held in which accounts and structures before expatriation
- Pension planning: Structuring pension withdrawals before expatriation to avoid the deemed distribution rules
- Ensuring 5-year tax compliance: The certification requirement means all prior years must be fully compliant — including FBAR and FATCA filings. Use of the IRS Streamlined procedures to catch up before expatriating is sometimes necessary
- Dual-citizen exception: Individuals who acquired both US citizenship and citizenship of another country at birth, who have been tax resident in another country for 10 of the 15 years before expatriation, and whose net tax liability does not exceed a threshold may qualify for the “dual citizen exception” from covered expatriate status
Frequently Asked Questions: US Exit Tax
If I was born with dual US-UK citizenship, am I subject to the exit tax?
Potentially not, under the dual citizen exception in IRC Section 877A(g)(1)(B). If you became a dual citizen at birth (US and another country), have been a tax resident of the other country for at least 10 of the 15 years before expatriation, and your net tax liability does not exceed the covered expatriate threshold, you may not be a covered expatriate. This is a technical analysis that should be performed by a qualified specialist.
Does the exit tax apply to Green Card holders?
Yes — but only to long-term Green Card holders who held the Green Card for at least 8 of the 15 years immediately preceding the year of abandonment. If you have held your Green Card for fewer than 8 years, the exit tax rules under Section 877A do not apply. However, you still need to file Form 8854 and certify compliance.
What currency are the thresholds calculated in?
All thresholds are in US dollars. UK assets must be converted to USD at the exchange rate on the date of expatriation for the mark-to-market calculation.
Can I defer the exit tax?
Under IRC Section 877A(b), you can elect to defer the exit tax on specific assets until the asset is actually sold. This requires posting security with the IRS and paying interest on the deferred tax. The deferral election must be made with Form 8854.
Get Expert Advice on Expatriation Planning
Renouncing US citizenship or giving up a Green Card is irreversible. The exit tax analysis requires a comprehensive review of your worldwide assets, prior tax compliance, pension positions, treaty elections, and long-term estate planning objectives. This is not an area where generalised guidance suffices.
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