Do I still file a US tax return after moving from London to Israel?

Yes. The United States taxes its citizens on worldwide income wherever they live, so a US citizen or US-UK dual national living in Israel still files Form 1040 every year once the filing thresholds are met. The move changes the relief you claim, usually the foreign tax credit for UK and Israeli tax or the foreign earned income exclusion, but not the obligation to file or to report foreign accounts on the FBAR and Form 8938.

Can I keep the foreign earned income exclusion if I move from the UK to Israel mid-year?

Usually, yes. Both the UK and Israel are foreign countries, so the IRS physical presence test of 330 full days in any 12-month period, and the bona fide residence test covering one or more foreign countries, can continue through the move. What breaks the count is time spent in the United States, such as a long stopover between the two countries, so the travel log for the departure year needs careful checking.

Does the US-Israel tax treaty stop the IRS taxing me?

No. The US-Israel and US-UK treaties both contain a saving clause, which the IRS describes as preventing US citizens and residents from using treaty provisions to avoid US tax. A US citizen in Israel is still taxed by the United States on worldwide income. The treaties help decide which country taxes certain income first, resolve UK and Israeli residence conflicts, and keep a limited set of exceptions.

Do I need to send HMRC a P85 when I leave London for Israel?

Only if you do not usually file Self Assessment. GOV.UK says people outside Self Assessment use form P85, while those who file returns report leaving on the SA109 residence pages, sent with a paper return due by 31 October, because HMRC's online services cannot be used for this. Most high-net-worth clients already file Self Assessment, so the SA109 route usually applies, and the split-year claim is made there.

Will the UK tax my gains if I sell investments while living in Israel?

Generally not at the time, because UK non-residents are not taxed on foreign gains. However, HMRC's temporary non-residence rules can tax capital gains and certain other items on your return if you had sole UK residence in four or more of the previous seven tax years and come back within five years. The US taxes the same gain in the year of sale regardless, so timing matters on both returns.

Are my UK and Israeli investment funds a problem on my US return?

Often, yes. Most non-US pooled funds, including UK OEICs, UK investment companies and Israeli mutual funds, are passive foreign investment companies for US purposes. That means Form 8621 reporting and, without a qualified electing fund or mark-to-market election, an interest-charge regime on gains and certain distributions. Holding a fund inside an ISA does not change the US treatment, so each holding needs reviewing in the departure year.

US Tax Return Preparation for Expats: London to Israel

US tax return preparation for expats moving from London to Israel comes down to one point: the United States keeps taxing you on worldwide income wherever you live, so the move changes how you get relief from double tax, not whether you file. In the departure year you will usually file a US Form 1040 that reports UK income from before the move and Israeli income from after it, a final or split-year UK Self Assessment return, and FBAR and Form 8938 disclosures that now cover accounts in two foreign countries. Most of the risk sits in that one transition year.

A departure-year return is the first US return that straddles two foreign tax systems. For a wealthy US citizen, often a US-UK dual national, leaving London with UK investments, a UK home, UK pensions and perhaps a UK company, that return has to reconcile three tax years that do not line up: the US calendar year, the UK tax year that runs from 6 April to 5 April, and Israel's own tax year. In the returns we prepare, the errors rarely come from a missed form; they come from treating the move as a change of address when it changes residence status, credit position and investment classification at once.

What does US tax return preparation for expats look like in the year you leave London?

Your US filing obligation does not change. What changes is the mix of income on the return and the relief you claim against it. Before the move, UK salary, bonus, dividends and rent carry UK tax, which usually supports a foreign tax credit. After the move, Israeli earnings carry Israeli tax, and UK-source income such as rent from a London flat may still carry UK tax. You may also have income that neither country taxes in that period, which matters a great deal for the US computation.

UK payslips and the P45 or year-end pay statement, with the departure date clearly shown
UK dividend vouchers, broker statements and rental accounts for the full calendar year
Israeli payslips or invoices from the date of arrival, and any Israeli tax assessments
Year-end and maximum balances for every UK and Israeli financial account, for FBAR and Form 8938
Statements for every UK and Israeli fund holding, to test for PFIC status
Accounts and share register for any UK company you own, for Form 5471
A travel log covering the UK, Israel, the United States and any third country

Does moving from the UK to Israel break the foreign earned income exclusion?

Usually not, and this is one of the points competing guides miss. The foreign earned income exclusion, claimed on Form 2555, needs foreign earned income, a tax home in a foreign country, and one of two tests. The IRS explains at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion that the bona fide residence test asks whether you are a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year, and the physical presence test asks whether you were physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Both the UK and Israel are foreign countries for these purposes, so moving between them does not by itself reset the clock. A client who has lived in London for years and moves straight to Tel Aviv can often keep counting days or keep a continuous bona fide residence through the move. What breaks the physical presence count is time in the United States, including a long summer stopover between the two countries. A month in New York between the London lease ending and the Israeli flat being ready can take you below 330 days in every 12-month window that covers the departure year.

Should you claim the foreign tax credit instead, with both UK and Israeli tax in the year?

For most high earners leaving London, the foreign tax credit on Form 1116 does more work than the exclusion. UK income tax on a large salary and bonus is often higher than the US tax on the same income, so a credit can eliminate US tax on that income and leave excess credits that may be carried to other years. The exclusion is capped at an inflation-adjusted figure the IRS publishes each year, often a fraction of our clients' earnings, and it covers earned income only.

The departure year adds three complications. First, the UK tax year does not match the US calendar year, so UK tax for 2025-26 and 2026-27 has to be apportioned to the January to December US year based on when the income arose. Second, the income must be sorted into the right Form 1116 categories, with salary normally in the general category and dividends and interest normally in the passive category; UK rent needs its own analysis. Third, Israeli tax on post-arrival income comes in a different currency and may not be finally assessed when the US return is due, so the credit can need adjusting later. We often run the return both ways, exclusion plus credit and credit only, before choosing, because the exclusion election has consequences for later years if you revoke it.

How do the US-UK and US-Israel tax treaties apply to a US citizen?

Both treaties exist and both are listed on the IRS treaty index at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z. That page also explains the saving clause found in most US treaties, which stops a citizen or resident of the United States from using treaty provisions to avoid US tax on their own income. In plain terms, a US citizen living in Israel or the UK is still taxed by the United States on worldwide income as if neither treaty existed, subject to the specific exceptions each treaty lists.

The treaties still matter, for three reasons. They decide which country has the primary right to tax certain income, which shapes the foreign tax credit. Their residence tie-breaker rules help settle disputes between the UK and Israel if both claim you as resident in the departure year. A return position that relies on a treaty article overriding the Internal Revenue Code may need disclosure on Form 8833. What the treaties do not do is let a US citizen simply pick Israeli or UK taxation and drop the US return.

How does UK split-year treatment work when you leave London for Israel?

On the UK side, residence is decided by the statutory residence test. HMRC's guidance note at https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3 sets out the order: spend 183 days or more in the UK and you are resident; otherwise check the automatic overseas tests, then the automatic UK tests, then the sufficient ties test. For someone leaving London, the most relevant automatic overseas test is the first one: if you were UK resident in one or more of the previous three tax years, you are non-resident for a year in which you spend fewer than 16 days in the UK.

In the year you actually leave, you will normally still be UK resident for the whole tax year under the test, which is where split-year treatment comes in. The same HMRC note explains that a UK-resident year with a departure must be checked against split-year cases 1 to 3, which cover starting full-time work overseas, being the partner of someone who does, and ceasing to have a home in the UK, with priority rules where more than one case applies. Where a case applies, the year is split into a UK part and an overseas part, and foreign income from the overseas part generally falls outside UK tax. The conditions are strict and fact-specific, so we confirm the applicable case against HMRC's detailed manual before filing.

In the following years, the sufficient ties test decides your status if you spend between 16 and 182 days in the UK. Clients leaving London are typically former residents, so HMRC's table applies: 16 to 45 days needs at least four ties to make you resident, 46 to 90 days at least three, 91 to 120 days at least two, and more than 120 days just one.

Family tie: a spouse, civil partner or minor child who is UK resident
Accommodation tie: a place to live in the UK that is available to you, such as a retained London home
Work tie: enough UK work days in the tax year
90-day tie: more than 90 UK days in either of the two previous tax years
Country tie: the UK is the country where you spent the most days, for those resident in one of the previous three years

Do you need a P85 or a final Self Assessment return when you leave?

That depends on whether you already file Self Assessment. GOV.UK explains at https://www.gov.uk/tax-right-retire-abroad-return-to-uk that people who do not usually file a return tell HMRC they are leaving with form P85, while people who do file tell HMRC through the residence pages, form SA109, sent with a paper return, because HMRC's online services cannot be used to report leaving. That page notes that the deadline for paper returns is 31 October. Most of our clients already file Self Assessment, so the SA109 route applies. Those working full-time abroad for a UK employer for at least a full tax year file both a P85 and a return with SA109.

What are the UK temporary non-residence rules, and why do they matter for gains?

Temporary non-residence is the UK rule that taxes certain income and gains received while you were abroad if you come back too soon. Under HMRC's RDR3 guidance it applies where you had sole UK residence in four or more of the seven tax years before departure and your period of non-residence lasts five years or less. Items caught include capital gains, close company distributions, offshore income gains, chargeable event gains and certain pension payments and lump sums, and HMRC states the list is not exhaustive. Those amounts are then taxed in the year you return.

For our London-to-Israel clients this has a direct US link that most guides ignore. A client who sells a UK share portfolio in the first year in Israel may pay no UK tax at the time, so there is no UK tax to credit on the US return, and the US tax on the gain is paid in full that year. If the client then returns to London within five years, UK tax falls due on the same gain in the year of return. Crediting that later UK tax against the earlier US tax often does not line up cleanly. We map any planned return to London before major disposals are timed.

What UK-source income stays taxable in the UK after you move to Israel?

Non-residents do not pay UK tax on foreign income or gains, but GOV.UK confirms on the same leaving-the-UK page that you may still owe UK tax on UK income, with rent from a UK property as its example, and that double taxation agreements are meant to stop the same income being taxed twice. For our clients the main continuing UK-source items are rent from a retained London home, dividends from UK companies, interest on UK deposits and income from any UK business.

If you sell the London home, the US measures the gain in dollars, using the exchange rate at purchase and at sale. A property that has barely moved in sterling can show a significant dollar gain or loss purely because of currency movement, and paying off a sterling mortgage can create a separate currency gain or loss. The US home sale exclusion may help if its ownership and use tests are met, and UK relief for a main home may apply on the UK side, but the two systems test different periods and the results often differ. UK rules can also bring a non-resident's disposal of UK property into UK tax with its own reporting, so the sale needs checking on both returns.

How do FBAR and Form 8938 change when you hold both UK and Israeli accounts?

The thresholds do not change, but the number of accounts usually rises in the departure year, because UK accounts are rarely closed straight away and Israeli accounts are opened before or soon after arrival. FinCEN explains at https://www.fincen.gov/report-foreign-bank-and-financial-accounts that a US person must file an FBAR if the combined value of foreign financial accounts exceeds 10,000 dollars at any time during the calendar year, and that individuals can file through the BSA E-Filing System. Every UK and Israeli account counts toward the same total.

Form 8938 is separate and is attached to the income tax return. The IRS comparison at https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements gives the thresholds for taxpayers living abroad: more than 200,000 dollars at year end or more than 300,000 dollars at any time in the year for single filers and married filing separately, and more than 400,000 dollars at year end or more than 600,000 dollars at any time for married couples filing jointly. The same page confirms the FBAR is due on April 15 with an automatic six-month extension to October 15.

UK current, savings and deposit accounts, including those kept open for rent or bill payments
UK brokerage and ISA accounts, which have no special status for US purposes
UK pension arrangements, which need a separate reporting analysis
Israeli current and deposit accounts, including any opened before arrival
Israeli brokerage, savings and study fund products
Accounts held by a UK company over which you have signature authority

Late FBARs are filed through the BSA E-Filing System with a reason for late filing, or within the Streamlined Filing Compliance Procedures where there are also unfiled or incorrect tax returns. The IRS page once titled Delinquent FBAR Submission Procedures was withdrawn around 1 July 2026 and should not be treated as a live route.

Why do UK and Israeli funds create PFIC exposure?

A passive foreign investment company, or PFIC, is broadly a non-US corporation whose income or assets are mainly passive, and most non-US pooled funds meet that description. UK OEICs, UK investment companies and most Israeli mutual funds and listed index products are typically PFICs for a US investor, whatever their local tax status. Holding them inside an ISA makes no difference for US purposes.

The IRS explains at https://www.irs.gov/forms-pubs/about-form-8621 that Form 8621 is filed by a US person who is a direct or indirect PFIC shareholder when they receive certain payments, realise a gain on disposal, report a qualified electing fund or mark-to-market election, make an election, or must file an annual report. Without an election, gains and certain distributions are taxed under an excess distribution regime with an interest charge, which can be expensive on long-held UK funds. The move to Israel is often when new Israeli fund holdings are acquired through local providers who are unaware of US rules, so the PFIC problem doubles. We review every fund position in the departure year and, where it fits, consider elections before the exposure grows.

What about Israel's tax regime for new immigrants and returning residents?

Israel has a special tax regime for new immigrants and certain returning residents that can relieve Israeli tax on some foreign-source income for a period after arrival. Its scope, duration and reporting conditions are set by Israeli law and have changed over time, so we confirm the current position with the Israeli side of each client's team rather than assuming it applies to a given item of income.

The US consequence is the gap angle almost no one explains. If Israel exempts your UK dividends, interest or gains, there is no Israeli tax on that income to credit on the US return. Your foreign tax credit then depends only on any UK tax, which for a non-resident is often small on investment income. The result is that a client who expected the move to Israel to reduce total tax can find that US tax on passive income becomes the main liability, because nothing is left to offset it. We model the US position on UK passive income before arrival so the client is not surprised by the first US return filed from Israel.

What if you own a UK company when you move to Israel?

A UK company that you control is very likely a controlled foreign corporation for US purposes, and you remain a Form 5471 filer whether you live in London or Israel. A filer who meets both Category 4 and Category 5a checks only Category 4. The US inclusion rules for controlled foreign corporations continue to apply after the move, so a UK company with passive income or low-taxed profits can still create US income for you without any dividend being paid.

The move raises two further questions. If you manage the company from Israel, where the company is centrally managed and controlled can affect its own residence status in the UK and Israel. And any large dividend or distribution paid while you are non-resident in the UK may be caught by the temporary non-residence rules as a close company distribution if you return within five years. We prepare the Form 5471 alongside the personal return so the company's earnings and any distributions are reported consistently.

Worked scenario: a London-to-Israel move in 2026 (illustration)

The figures below are illustrative only and are not drawn from a real client. We assume an exchange rate of 1 pound to 1.30 dollars for the whole year and convert Israeli income at an assumed average rate; actual returns use the appropriate rates for each item. Daniel is a US-UK dual national who has lived in London for 12 years. He stops work in London on 30 June 2026, flies to Israel on 15 July after a 10-day family visit in the United States in early July, keeps his London flat as a rental, and holds a UK fund portfolio and 100 percent of a small UK consulting company.

UK salary and bonus to 30 June: 180,000 pounds, or 234,000 dollars at the assumed rate, all taxed under PAYE
London flat rent from August to December: 20,000 pounds, or 26,000 dollars, reported to HMRC and taxed in the UK
UK fund portfolio: six UK OEIC holdings, all PFICs, one sold in October for a sterling gain
Israeli consulting income from September: invoiced in shekels, with Israeli tax still to be finally assessed
Physical presence: the 10 US days leave more than 330 full foreign days in a 12-month window covering most of 2026, so the test is met despite the country change
UK position: resident for 2026-27 under the statutory residence test, with split-year treatment claimed on the SA109 under the applicable case
Accounts: four UK accounts and two Israeli accounts, with an aggregate maximum well above the FBAR and Form 8938 thresholds

On the US 2026 return we compare two routes. Using the exclusion on part of the salary would waste high UK tax, so the better result here is a foreign tax credit on the full 234,000 dollars of UK salary in the general category, with UK tax apportioned to the January to June earnings. The rental income goes in its own category with the UK tax paid on it. The October fund sale is reported on Form 8621 under the excess distribution rules, because no election was ever made, and the remaining five holdings each get their own Form 8621 review. The Israeli consulting income carries an estimate of Israeli tax with a note that the credit will be adjusted once assessed. The UK company goes on Form 5471 under Category 4. FBAR and Form 8938 list all six accounts. The date Daniel left the UK has to be identical on every form.

How do we prepare a London-to-Israel departure-year file?

We prepare the US and UK returns together from one timeline and one set of exchange rates, then reconcile them against the Israeli figures. The failure mode we see most often is three preparers working separately: a UK accountant who files the split-year return, an Israeli preparer who applies the new immigrant regime, and a US preparer who receives the documents months later and claims a credit for tax that was never paid, or misses the PFIC holdings entirely.