Foreign Housing Exclusion in London: 2025 and 2026 Limits

The foreign housing exclusion London residents claim on Form 2555 lets an American exclude rent and utilities above a base amount, up to a London-specific cap. For 2025 the base is $20,800 and the London cap is $68,600 (IRS Notice 2026-25, applied back to 2025), so up to $47,800 of housing cost can come off US taxable income.

That is on top of the foreign earned income exclusion itself. For anyone paying central London rent on a salary near the exclusion limit, it is the difference between a zero US liability and a residual bill. It is also one of the most frequently under-claimed lines on an expat return, because the high-cost locality figures live in an IRS notice rather than on the form.

What the foreign housing exclusion is

The foreign housing exclusion is a relief under section 911 of the Internal Revenue Code. It lets a qualifying US citizen or resident working abroad exclude the housing cost amount: reasonable housing expenses for the year, minus a base housing amount equal to 16% of the maximum foreign earned income exclusion. The result is capped at a limit that is normally 30% of the exclusion, but the IRS raises that limit for expensive cities.

Three conditions apply:

• You must qualify under the bona fide residence test or the physical presence test (330 full days abroad in a 12-month period), exactly as for the foreign earned income exclusion.
• Your tax home must be in a foreign country.
• The exclusion covers housing paid for with employer-provided amounts, which in practice means a salary. The self-employed claim a housing deduction instead, on the same Form 2555.

The rules are set out in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and the city caps in the annual IRS notice on housing cost amounts.

Foreign housing exclusion limits for London, Dubai and Abu Dhabi

The IRS publishes a table of adjusted limitations for high-cost localities each spring. London has its own row. The 2025 table in IRS Notice 2025-16 set London at $67,000. The 2026 table in Notice 2026-25 raised it to $68,600, and Section 4 of that notice lets a taxpayer use the higher 2026 figure for 2025 as well.

Notice that the maximum London exclusion falls slightly in 2026 even though the cap rises: the base amount rises with the exclusion, and the London cap rose by less. Several other UK locations have their own rows too, including Reading, Bracknell, Caversham and Surrey. A UK town without its own row uses the standard cap.

What counts as a housing expense

Publication 54 defines housing expenses narrowly. The test is what you pay to occupy the home, not what you pay to own it.

Council tax needs a considered position. Some advisers treat it as an occupier's charge that belongs in housing expenses. Others treat it as a local tax that sits outside them. Pick one position, apply it every year and keep the bills. A refundable tenancy deposit is not an expense at all.

Homeowners get little from the exclusion. Without rent, the qualifying costs are usually utilities, insurance and repairs, which rarely exceed the $20,800 base.

A worked London example

This example is illustrative. A US citizen employed in London for all of 2025 earns the equivalent of $180,000 and pays $5,500 a month in rent plus $3,000 a year in utilities and contents insurance.

• Housing expenses: $66,000 rent + $3,000 = $69,000.
• Capped at the London limit, using the 2026 figure for 2025: $68,600.
• Less the base housing amount: $68,600 − $20,800 = $47,800 housing cost amount.
• Housing exclusion: $47,800. Form 2555 takes this first.
• Foreign earned income exclusion: the lower of $130,000 and the $132,200 of foreign earned income left after the housing exclusion. That is $130,000.

Total excluded: $177,800, leaving $2,200 of salary in US taxable income. Under the standard $39,000 cap the housing exclusion would have been only $18,200, leaving $31,800 exposed to US tax. Using the right city row takes $29,600 off taxable income.

Housing exclusion or foreign tax credit?

For most London earners the question is not whether the housing exclusion is correct, but whether excluding income is right at all. UK income tax rates are generally higher than US rates, so the foreign tax credit on Form 1116 often wipes out the US liability on its own and leaves excess credits to carry forward. Our FEIE vs foreign tax credit comparison walks through that decision, and the foreign tax credit and double taxation hub covers the credit side in depth.

Three points decide it:

• No double benefit. You cannot claim a credit for UK tax paid on income you have excluded, so the credit is scaled down in proportion.
• The five-year lock. Once you revoke the Form 2555 election you cannot elect again for five tax years without IRS consent. Choosing the exclusion in a low-tax year can cost you later.
• The UAE is different. In Dubai or Abu Dhabi there is no personal income tax to credit, so the exclusions are usually the only relief. The housing exclusion is often the most valuable line on a UAE-based return.

How to claim it on Form 2555

The exclusion is claimed in Part VI of Form 2555, with the housing deduction for the self-employed in Part IX. The form asks for qualifying days, total housing expenses and the location-specific limit. Where you use a figure from the IRS notice rather than the standard 30% cap, keep a note of which notice and which row you relied on. The About Form 2555 page links to the current form and instructions. The underlying mechanics of the form are in our Form 2555 guide.

If you moved to London part-way through the year, both the base amount and the cap are pro-rated by the number of qualifying days. Use the daily figure from the notice ($187.95 a day for London in 2026) rather than the annual one.

Tranzesta prepares the US return alongside the UK Self Assessment, so the exclusion-or-credit decision is made against both liabilities, not in isolation. Book a consultation if you rent in London or the Gulf on a US passport.

Frequently Asked Questions

What is the foreign housing exclusion limit for London in 2025?

IRS Notice 2025-16 set the 2025 housing expense limit for London at $67,000. Notice 2026-25 raised the London limit to $68,600 for 2026 and, under its Section 4, allows a qualifying individual to apply that higher figure to 2025. After subtracting the $20,800 base housing amount, the maximum 2025 London housing exclusion is $47,800.

Can I claim the foreign housing exclusion if I own my home in the UK?

Yes, but it rarely helps. Mortgage principal, the purchase price, improvements and deductible interest and taxes are not housing expenses under IRS Publication 54. A UK homeowner can usually count only utilities, insurance and repairs, which seldom exceed the base housing amount of $20,800 for 2025 or $21,264 for 2026.

Is UK council tax a qualifying housing expense?

The IRS has not addressed council tax directly. Some advisers include it as an occupier's charge. Others exclude it as a tax, because Publication 54 removes deductible taxes from housing expenses. Take one documented position, apply it every year and keep the bills.

Is there a higher housing limit for Dubai and Abu Dhabi?

Yes. The IRS notices set Dubai at $57,174 and Abu Dhabi at $49,687 for both 2025 and 2026, compared with the standard caps of $39,000 and $39,870. Because the UAE levies no personal income tax, Americans there usually rely on the foreign earned income and housing exclusions rather than the foreign tax credit.

Can self-employed Americans in the UK use the housing exclusion?

Not the exclusion itself, which applies to housing paid for with employer-provided amounts. Self-employed individuals claim a foreign housing deduction instead, in Part IX of Form 2555. It uses the same base amount and city caps, but it is limited by self-employment income and is claimed as a deduction rather than an exclusion.

Can I claim both the housing exclusion and the foreign tax credit?

You can claim the foreign tax credit on income you have not excluded, but not on excluded income. UK tax attributable to salary removed by the foreign earned income and housing exclusions must be taken out of the Form 1116 calculation. Revoking the Form 2555 election later bars a new election for five tax years without IRS consent.