US-UK · Journal
Which UK Taxes Are Actually Creditable on a US Return?
Council tax, stamp duty, VAT and National Insurance get claimed on Form 1116 constantly, and none of them qualifies. The test, and what to do instead.
Council tax, stamp duty, VAT and National Insurance get claimed on Form 1116 constantly, and none of them qualifies. The test, and what to do instead.
Only UK income tax — and a narrow class of taxes imposed in lieu of income tax — is creditable on a US return. Council tax, stamp duty land tax and VAT are not creditable. National Insurance is excluded separately, because the US–UK totalization agreement covers it.
That sentence disposes of the most common error we see on Form 1116 prepared by Americans in Britain. The instinct behind it is understandable: you paid these amounts to a foreign government, under compulsion, out of money you had already earned, and the US is now taxing the same income again. It feels like double taxation, because economically it often is. But the foreign tax credit is not a general relief for "tax paid abroad". It is a credit for one specific kind of tax, and everything outside that definition has to be dealt with another way — or not at all.
The IRS sets out four conditions for any foreign levy to be creditable: the tax must be imposed on you, you must have paid or accrued it, it must be your legal and actual foreign tax liability, and it must be an income tax or a tax in lieu of one. The fourth condition is where UK levies fall over, so it is worth unpacking.
Two ideas sit inside it. The first is that the payment must be a compulsory levy rather than consideration for something. In the IRS's phrasing, the tax "must be a levy that is not a payment for a specific economic benefit" — if you hand money to a government and get an identifiable service, licence or entitlement back, you have bought something rather than paid a tax. The second is that the levy must be an income tax in the US sense: imposed on realised net gain, with the foreign rules for what counts as income and what may be deducted substantially conforming to US concepts.
The "in lieu of" route is the escape hatch for levies that are not measured by net income but that a country substitutes for its income tax — a withholding tax on gross royalties, for instance. The base can be gross income, gross receipts, or even units produced or exported. What it cannot be is an additional tax sitting alongside an income tax the same country also charges you. That substitution requirement is what kills most of the candidates below.
The IRS sets out its own version of the test on Foreign taxes that qualify for the Foreign Tax Credit, with the full mechanics in Publication 514.
Council tax is a local charge on the occupation of a dwelling, calculated from the property's valuation band and the billing authority's rate, with discounts for single occupancy and certain household circumstances. Nothing in that formula touches your income. A banker and a student in identical flats pay the same bill.
So it fails the income-tax test twice over: it is not imposed on net gain, and it is not imposed instead of UK income tax, because the UK charges you income tax as well. In US terms it is a property tax, and the IRS is explicit that taxes based on assets, property taxes included, do not qualify for the credit.
The follow-up question is always whether council tax is at least deductible instead. For an individual, generally no. Section 164 of the Internal Revenue Code lets you deduct state, local and foreign income taxes, and state and local real property taxes — but the limitation added for individuals from 2018 onwards provides that "foreign real property taxes shall not be taken into account", and the 2025 amendment removed that limitation's end date rather than letting it lapse. A rental property is a different matter: council tax borne as a cost of producing rental income is an ordinary expense of that rental activity, which is not the same thing as an itemized deduction for a home you live in.
Stamp duty land tax is a transaction tax on the purchase of UK land, charged on the consideration you pay, in slices, with surcharges for additional dwellings and for non-UK-resident buyers. It arises whether the purchase ever produces a penny of income, and whether the eventual sale produces a gain or a loss. It is a transfer tax, not an income tax, and the UK does not impose it instead of income tax.
The US treatment that does help is capital rather than revenue: acquisition costs of real property, SDLT included, are generally added to your adjusted basis in the property. That reduces the gain when you sell — a real benefit, just one that lands years later and in a different part of the return. For the layered surcharges themselves, our note on stamp duty when an American buys a home in England walks through which ones bite.
The same reasoning rules out the annual tax on enveloped dwellings, a charge on the value of a company-held dwelling, and business rates, a charge on the rateable value of commercial premises. Both are value-based; neither is income-based.
No. VAT is a consumption tax collected on supplies of goods and services. Its base is the price of a transaction, not anyone's income, and the UK does not charge it in place of income tax.
VAT can still reach your US figures, but as an expense rather than a credit. If you run a business and bear VAT you cannot recover from HMRC, that unrecovered VAT is part of the cost of what you bought and belongs in the relevant expense line of your Schedule C, Schedule E or corporate return. If you are VAT-registered and recover your input tax, it was never your cost and nothing flows to the US return at all. VAT on personal consumption gives you nothing in either country.
National Insurance is the one that genuinely surprises people, because NI is charged on earnings. Class 1 primary contributions come out of wages; Class 2 and Class 4 come out of self-employment profits. They look far more like an income tax than council tax ever did.
The reason they are not creditable is statutory rather than conceptual. The IRS's list of foreign taxes for which no credit is allowed includes, in terms, "Social security taxes paid or accrued to a foreign country with which the United States has a social security agreement". The US and the UK have exactly such an agreement. Congress wrote that exclusion in when it authorised totalization agreements, on the logic that the agreement already prevents the double charge: it allocates you to one country's system rather than both, so there is no second contribution left to relieve.
That changes where you look for relief. Instead of claiming NI on Form 1116, you establish which system you belong to under the agreement — the IRS summarises the framework on its totalization agreements page — and get a certificate of coverage to prove it, so that only one country charges you. Where you have paid into both systems over a career, the agreement also lets each country count the other's periods towards benefit entitlement. The practical decision tree is in our piece on US and UK social security and National Insurance, and the voluntary-contribution angle in voluntary National Insurance from abroad.
One nuance is worth keeping. The exclusion covers contributions paid in accordance with an agreement. Levies in a foreign country that only look like social security, and that fall outside the scope of that country's agreement, have been treated differently — the IRS has conceded that France's CSG and CRDS are not covered by the US–France agreement and will not challenge credits for them on that basis. UK National Insurance is not in that category: it is squarely the system the US–UK agreement names.
Working from the other direction, the UK levies that do qualify are the income taxes, in all their delivery mechanisms:
Two cautions on even these. First, you cannot credit UK income tax attributable to income you have excluded from your US return — tax on income covered by the foreign earned income exclusion is specifically non-creditable, which is a large part of why the exclusion-versus-credit choice is a real decision rather than a formality. Second, the credit is computed basket by basket on Form 1116, and the amount usable in a year is limited by the US tax on that basket's foreign-source income, so a perfectly creditable tax can still be partly unusable and pushed into carryover.
Putting council tax, SDLT or NI into the "foreign taxes paid" box does not merely invite an adjustment if the return is examined. It inflates the tax in a basket, which inflates the carryover you believe you are holding, which then shapes decisions for years: whether to accelerate income, whether to revoke an exclusion election, whether a pension or Roth step is affordable. People usually discover the error at the moment they try to use a carryover that was never there.
The clean approach is to split every payment you made to a UK authority during the year into three columns before the return is drafted: creditable income taxes; amounts that belong in a basis or expense computation; and amounts that give no US relief at all. It is a short exercise with a long payoff, and it is the first pass our US-UK tax specialists make on any dual-filing engagement. If you want the scope in writing, our US-UK expat tax accountant service sets it out, the calculators let you sketch your own numbers, and you can book a consultation to walk through your particular mix.
Every credit computation we prepare is reviewed and signed by an IRS Enrolled Agent who is also ACCA-qualified, so the US and the UK side of the position are checked by one person rather than argued between two advisers.
Reviewed by an IRS Enrolled Agent who is also ACCA-qualified. This article explains general principles and is not advice on your own facts. UK and US rules change; confirm the current position before acting.