US-UK · Journal
The Three Covered-Expatriate Tests, and Which One Catches UK Residents
Any one of the three tests makes you covered. For a long-term American in Britain, certification catches the unprepared and net worth catches the ordinary.
Any one of the three tests makes you covered. For a long-term American in Britain, certification catches the unprepared and net worth catches the ordinary.
Three tests decide whether you are a covered expatriate, and failing any single one of them is enough. Two are monetary — an average annual net income tax figure, and a $2 million net worth figure — and the third asks only whether you can certify five years of US tax compliance on Form 8854. For a long-term American resident in Britain, the certification test is the one that catches the unprepared, and the net worth test is the one that catches the ordinary, because $2 million has not moved since 2004 while a London house and a pension have.
The tests sit in section 877A(g)(1)(A) of the Internal Revenue Code and are reproduced on the IRS expatriation tax page. They are alternatives. Meeting one makes you covered; you do not have to meet all three, and clearing two of them buys you nothing.
Test 1 — the income tax test. Your average annual net income tax for the five tax years ending before the date of expatriation is more than an inflation-adjusted amount. For a 2025 expatriation that amount is $206,000; for a 2026 expatriation it is $211,000. Three details in that sentence carry almost all of its weight:
Most of the pages that rank for this question state the test correctly in substance. Where they slip is the window: "the five years before you expatriate" and "the prior five years" are everywhere, and that looseness is exactly what makes a reader count the wrong five years and reach the wrong answer. Fix your expatriation date first, then count backwards from it.
Test 2 — the net worth test. Your net worth is $2 million or more on the expatriation date. It is worldwide, it is assets minus liabilities, and it is measured on one day.
The decisive feature is what the figure does not do. It is not inflation-adjusted. It has been $2 million since the 2004 amendments, and it will be $2 million next year. Only the income tax threshold and the mark-to-market exclusion move with inflation — a distinction that is easy to lose when all three numbers appear in the same paragraph on the same page.
Test 3 — the certification test. You fail to certify on Form 8854, under penalty of perjury, that you have complied with all federal tax obligations for the five tax years preceding the expatriation date. There is no threshold on this one. The IRS states the consequence plainly: if you do not file Form 8854, or you file it without making the certification, you are treated as a covered expatriate even if you fail neither of the monetary tests.
Taken in order of how often they bite, the ranking is almost the reverse of the order the tests are usually presented in.
The income tax test rarely bites. UK rates on employment income are generally higher than the US equivalents, so a UK-resident American claiming foreign tax credits typically shows a small net US income tax year after year. An average clearing $206,000 or $211,000 implies several years of very large US tax actually paid after credits.
The certification test catches the unprepared. It has no threshold, so modest means are no protection. In a British financial life the usual breaks are:
None of that is neglect. It is what happens when someone lives a normal British financial life while holding a US passport. If this is your position, read the five years of tax compliance you need before renouncing before anything else, because the catch-up has to be finished and the returns filed before a certification can honestly be made.
The net worth test catches the ordinary. This is the one nobody models, and it is where the rest of this article goes.
A threshold fixed in 2004 is doing something different today from what it did when it was written: two decades of UK house prices and pension accrual have moved underneath it, and nothing has moved it back.
A couple who bought in London or the South East two decades ago, who have each paid into a workplace pension throughout, and who hold the usual ISA, cash and general investment account, can reach a seven-figure individual net worth without ever having thought of themselves as wealthy. The house equity and the capital value of the pension do most of it, and neither feels like money you could spend.
And the test is applied to you, not to your household. Form 8854's balance sheet asks for your own assets and your own liabilities, so a jointly held home enters at your beneficial share rather than in full. How that share is actually held — joint tenants, tenants in common, and in what proportions — is a question to answer from the deeds, not from an assumption.
The form asks for fair market value on the expatriation date. It does not hand you a valuation method for a British pension, which is why this is the part of the exercise that stalls.
The home. Enter the gross market value as an asset and the outstanding mortgage as a liability — not the net equity as one line. A formal valuation is not usually necessary, but a documented basis is: a recent agent's appraisal or comparable completed sales nearby, kept with your working papers. Where the home is held jointly and the deeds do not reflect who actually paid for it, the same logic applies to the debt as to the asset: you take your share of the property and your share of the mortgage, not one in full and the other at half.
A defined contribution pension or SIPP. The fund value on the expatriation date is the natural figure, and it is the one the provider will give you in writing.
A defined benefit or final salary scheme. This is the genuine gap, and the one the pages ranking on this subject decline to answer: a promised income stream has no account balance to read off. The obvious British proxy is the scheme's cash equivalent transfer value — issued by the administrator on request, computed by the scheme actuary, expressed as a capital sum on a stated date. It is a proxy, not an IRS-prescribed method, and it can be large enough to change the answer on its own. Request it early; schemes take weeks and quotations are time-limited.
Everything else. ISAs and general investment accounts at market value, unquoted shares in your own UK company on a reasoned basis you can support, cash at balance. Then translate the whole balance sheet into dollars at a defensible rate for the expatriation date, and record the rate you used.
If the pension is what tips the balance sheet over the line, that is worth knowing months ahead rather than afterwards.
The mortgage reduces your net worth for the threshold test. It does nothing at all to the charge that follows if you fail it. The deemed sale under section 877A works from the fair market value of the property; the lender’s charge over it is simply not part of that computation. So a heavily mortgaged London house can keep you under the line and, if anything else pushes you over it, deliver the same deemed gain as an unmortgaged one.
That asymmetry disposes of the manoeuvre people reach for first. Borrowing against the house before the expatriation date does not reduce net worth, because the cash you raise is an asset of exactly the size of the debt you take on. Paying the mortgage down does not reduce it either, for the same reason in reverse. Moving money between accounts does nothing. Net worth only falls when something genuinely leaves your ownership — which is a gift, with its own US gift tax consequences, or a sale with the proceeds spent. None of that is a decision to take in the weeks before an appointment, and none of it is a reason to renounce.
It also cuts the other way, and more kindly: an ordinary repayment mortgage on a house that has appreciated for twenty years may be the only reason an otherwise ordinary balance sheet lands under the threshold. That makes the mortgage balance on the expatriation date a figure worth pinning down from the lender’s statement rather than estimating.
The two are routinely confused. Covered expatriate status is a classification; the exit tax is a computation that follows from it. Under section 877A all your property is treated as sold at fair market value on the day before the expatriation date, and the net gain is reduced by an exclusion amount that is indexed each year: $890,000 for a 2025 expatriation, $910,000 for a 2026 one. A covered expatriate whose unrealised gain sits below the exclusion owes nothing under the deemed sale, and plenty do.
Four categories are carved out of the deemed sale and handled under their own rules: eligible deferred compensation, ineligible deferred compensation, specified tax-deferred accounts, and interests in non-grantor trusts. A specified tax-deferred account — an IRA is the common example — is treated as distributed in full rather than sold, while eligible deferred compensation is taxed when it is paid instead. Which category your retirement savings fall into is a question for the return, not a rule of thumb.
The tests do not apply only to citizens. A long-term resident who gives up a green card runs the same regime, and you are a long-term resident if you held lawful permanent residence in at least 8 of the last 15 tax years ending with the year your residency ends. Anyone quietly letting a green card lapse after moving to Britain should read green card abandonment and its tax consequences before assuming the question does not reach them.
Form 8854 carries its own penalty. Failing to file it, or filing it incomplete or incorrect, attracts a penalty of $10,000 for that year — the Form 8854 failure-to-file penalty specifically, not the FBAR reporting threshold, which happens to be the same number and means something entirely different. There is a reasonable-cause defence. The mechanics of the form are set out in our guide to Form 8854.
Covered status follows your gifts. Under section 2801, a US citizen or resident who receives a gift or bequest from a covered expatriate pays a tax at 40% — the top US estate tax rate, which has nothing to do with any UK income tax band — and reports it on Form 708. The tax falls on the American recipient, not on the former American who gave it. For a family with US-citizen children, that consequence outlives the renunciation and belongs in the decision.
1. Fix the expatriation date you are modelling. Every test counts from it.
2. Build the balance sheet first, requesting pension figures at the outset — they take longest and are most likely to decide the answer.
3. Test certification honestly. The streamlined procedures cover 3 years of returns and 6 years of FBARs against a certification reaching back 5 tax years; the lengths do not line up, and the gap has to be closed deliberately.
4. Run the income tax average from the filed returns for the right five years, not from memory.
5. Then, and only then, look at the deemed sale.
We do not advise anyone to renounce — that is a decision about citizenship, and it belongs to the person making it. What we do is make sure the tax picture in front of them is the real one.
We build the Form 8854 balance sheet from the actual UK documents — title deeds, mortgage statement, CETV quotation, fund valuations — and run all three tests on the real expatriation date rather than a rounded year. Where certification is the problem we scope the catch-up first, because a certification made on an incomplete filing history is worse than none.
Every return and every form we prepare is reviewed and signed by a licensed professional — an IRS Enrolled Agent who is also ACCA-qualified — so the US filings and the UK position are looked at by one person rather than two who never speak. You can see what this work costs, book a consultation, or read more on our renouncing US citizenship page. If you want to model the numbers yourself first, start with our calculators.
The indexed figures above are tied to the year of expatriation and the 2027 amounts have not been released. Confirm the figures for your own year before acting on them.