Claiming NIIT as a Foreign Tax Credit

by Urooj Sheikh, in , ,

In November 2025, HMRC revised its Double Taxation Relief manual to recognise the Net Investment Income Tax (NIIT) as a creditable tax for UK tax purposes. This update directly affects the rules surrounding tax relief claims, providing a potentially advantageous outcome for many American taxpayers residing in the United Kingdom.

Historically, US federal income tax paid by American expatriates in the UK has been recognised as a creditable tax for the purpose of mitigating double taxation. However, since the introduction of the NIIT in 2013, this tax was not initially considered creditable under UK tax law. The reason for this exclusion stemmed from NIIT not being classified within the income tax chapter of the US Internal Revenue Code.

As a result, US taxpayers in the UK who were subject to NIIT on their investment income faced a challenging situation: their tax rate on investment income would be generally higher in the UK and with an additional 3.8% NIIT in the US.

Under the revised updates, a foreign tax credit for NIIT can now be applied in accordance with the UK/US Double Taxation Agreement (DTA). This means that NIIT will be credited against the UK tax liability arising on the following sources:

  • US Rental Profits
  • Capital Gains on the sale of US real estate
  • Dividends from US companies – up to the 15% treaty limit. If your federal rate on dividends is already 15%  prior to the NIIT tax charge, the credit is inadmissible.

Under the DTA, income sources on which the UK has the taxation rights on, such as interest income and capital gains on shares, will not be eligible for the additional foreign tax credit, regardless of the NIIT paid on the US return.

In conclusion, HMRC’s decision to credit the NIIT represents a crucial step towards alleviating the tax burden on US nationals living in the UK, and it provides an opportunity for tax savings that were previously unavailable. This adjustment is expected to have a widespread impact, particularly for those with significant investment income.

If you would like to review previously filed US and UK tax returns to identify any opportunities for amendments, please contact your PJD representative.