Treaty Re-Sourcing on Form 1116: Crediting UK Tax on US Dividends and Gains

Treaty re-sourcing lets a US citizen living in Britain treat US-source income as foreign, so UK tax on it can be credited against the US tax. Without it, US dividends and gains taxed by HMRC produce a UK bill with no matching US credit. It needs its own Form 1116 category. The UK–US tax treaty provides the mechanism.

This is the hardest corner of an expat return and the one that quietly costs the most. The foreign tax credit is limited to US tax on foreign-source income, and US dividends, interest and gains are US-source by default — so ordinary credit rules give you nothing against them.

The double-tax gap treaty re-sourcing closes

Suppose you live in London and hold a US brokerage account. The UK taxes you on worldwide income, so the dividends are taxed by HMRC. The United States also taxes them, as US-source income of a citizen. Two countries, one dividend, and no credit in either direction under the default rules.

Article 24 of the treaty, published with the IRS's United Kingdom tax treaty documents, solves this for US citizens resident in the UK by treating such income as arising in the UK for credit purposes. The income keeps its US source for every other purpose; only the credit limitation changes.

A separate Form 1116 for re-sourced income

The Instructions for Form 1116 require a separate foreign tax credit limitation for income for which you claim treaty benefits, using a separate Form 1116 for each amount of re-sourced income from a treaty country. The category is "certain income re-sourced by treaty", and it sits alongside the general and passive categories rather than inside them.

Keeping it separate matters. Excess credits in this category cannot subsidise general-category tax, and general-category carryovers cannot help here — the categories are explained in the foreign tax credit carryover.

The order in which the two countries tax

Re-sourcing only works if the UK has the primary right to tax. Article 24 sets an order: for income the treaty allows the UK to tax as the country of residence, the UK charges first and the United States gives the credit, notwithstanding that the income is US-source.

There is a second step that catches people out. Because the United States taxes its citizens regardless of residence, the treaty's relief article works in layers: the UK gives credit for the tax the United States could charge a non-citizen, and the United States then gives credit for the remaining UK tax on re-sourced income. The result is meant to be a single net bill at the higher of the two rates, not a third layer of tax.

Where the treaty gives the United States the primary right — US real property income, for example — the order reverses: the US taxes first and the UK gives relief for the US tax. Applying re-sourcing to that income would be wrong.

Disclosure and paperwork

• Re-sourcing is a treaty-based position, so consider Form 8833 — see when Americans in the UK must file Form 8833.
• Prepare the UK return first, so the UK tax on each item is known before the US credit is computed.
• Allocate UK tax between items of income on a reasonable, consistent basis, and keep the workings.
• Match the years: UK tax for 2025-26 relates to two US calendar years, and an accrual election usually aligns them.
• File a separate Form 1116 for the re-sourced category, and keep its carryovers separate on Schedule B.

The same machinery underpins ordinary credits, covered in Form 1116 explained, and the treaty positions that do and do not need disclosure sit under the foreign tax credit and double taxation.

When it is worth the trouble

For a portfolio of a few thousand dollars, the compliance cost can exceed the credit. For an American in Britain with a substantial US brokerage account, a US pension in payment or a large gain on US shares, it is often the difference between a manageable bill and paying twice.

It also matters in the year you move. Income earned before the move is generally outside the UK charge under split-year treatment, so only part of the year's US income needs re-sourcing at all — see moving to the UK from the US.

Tranzesta prepares both returns together and computes the re-sourced category from the UK figures rather than estimating it. Book a consultation if you hold US investments while living in Britain.

Frequently Asked Questions

What is treaty re-sourcing?

It is treating US-source income as foreign-source for foreign tax credit purposes, under a treaty provision, so that foreign tax paid on that income can be credited against the US tax on it. For Americans in Britain it is provided by Article 24 of the US–UK treaty and is claimed in a separate Form 1116 category.

Why can't I credit UK tax on my US dividends without it?

Because the foreign tax credit is limited to US tax on foreign-source income, and dividends from US companies are US-source by default. Without re-sourcing there is no foreign-source income in that category to support a credit, so UK tax on the dividends has nothing to offset and the same income is taxed twice.

Do I need a separate Form 1116 for re-sourced income?

Generally yes. The Instructions for Form 1116 require a separate foreign tax credit limitation, and a separate form, for each amount of income re-sourced by treaty from a treaty country. Its credits and carryovers stay within that category and cannot be used against general or passive category tax.

Does re-sourcing apply to US rental income?

Normally no. The treaty gives the United States the primary right to tax income from US real property, so the US taxes it first and the UK gives relief for the US tax. Re-sourcing applies where the UK has the primary taxing right as the country of residence, such as portfolio dividends and interest.

Do I have to disclose re-sourcing on Form 8833?

Re-sourcing is a treaty-based return position, and positions of that kind are generally disclosed on Form 8833 unless a waiver applies. Disclosure costs nothing and removes the $1,000 penalty risk for an individual, so many advisers file it whenever the position is material.

Is there equivalent relief for Americans in the UAE?

No. Re-sourcing depends on a treaty provision, and there is no comprehensive US–UAE income tax treaty. In practice the issue rarely arises, because the UAE does not tax personal income, so there is no foreign tax on US-source income needing a credit.