Jenny Judd is a Director at London & Capital, with over 20 years’ experience in wealth management. She specialises in helping clients through significant life events, with a particular focus on supporting high-net-worth and ultra-high-net-worth individuals with US connections. London & Capital is an independent wealth manager offering specialist investment services for Americans in the UK, including assistance and advice on Owning Property in the UK as a US Citizen.
Selling a Property in the UK
In the UK, individuals benefit from Principal Private Residence (PPR) relief. This allows individuals to sell their main home and pay no capital gains tax, assuming a few conditions on occupation are met.
Unfortunately, the Americans amongst us have another set of rules to play by. The Internal Revenue Service (IRS) has a worldwide reach on US citizens’ tax affairs, and the gain made on the sale of the family home, i.e. the main residence, is potentially subject to capital gains tax in the US.
How does this work?
US tax and the $250,000 exclusion
At the moment, the first $250,000 of the gain (per individual) is exempt, but the excess is taxable. This can possibly change if the Biden administration decides to introduce tax changes in the future. While this may be a little way off yet, it could see capital gains being taxed at a new highest rate of 39.6%, for those with income above $1m.
Similar to the UK’s PPR rules, the IRS also has some specific requirements on who qualifies, based on occupation. Assuming all the rules are met, a couple could benefit from a $500,000 exemption in total.
Currency
Americans who have lived in the UK for an extended period of time can easily overlook this, as they may consider their financial affairs in British pounds, but the IRS does not.
Even though the property would have been purchased and sold in British pounds, the IRS would consider the equivalent dollar amounts for the purchase and the sale. Chances are this would have spanned several years, with large fluctuations in the exchange rate.
Phantom Mortgage Gain
Quite surprisingly, the potential pitfalls don’t stop there.
If a mortgage is held, you might assume that the debt is deducted from the asset value to reduce the potential gain. However, the mortgage is in fact considered a separate asset to the property.
Paying off the mortgage can lead to negative US tax consequences due to currency conversion on purchase and sale.If the debt being paid off on sale is lower than was originally taken out, this may be considered a ‘phantom mortgage gain’ which is taxable in the US.
Are there any other aspects I need to think about?
Mixed Marriages
Joint ownership common for couples, but if one spouse is non-US citizen, sole ownership may have tax benefits.
If the property is currently solely owned by the US citizen, there may be an option to transfer ownership. Be wary, there are limits on how much a US person can gift to their non-US spouse for gift tax purposes.
Mortgages
If there are sufficient assets to purchase a property outright, this may be advisable.
Of course, there is no ‘one size fits all’ approach to this type of planning. So, it is vital to take advice and ensure your unique situation is considered with appropriate advice provided.
Inheritance Tax
Another aspect to consider is whether a property falls into the value of an estate for inheritance tax (IHT) purposes.
In the UK, the exempted amount from IHT is notably low compared to the US estate tax exemptions. Therefore, planning is often required to ensure the best outcome for the next generation.
To speak to Jenny, please give her a call on +44 (0) 207 396 3388 or alternatively email invest@londonandcapital.com
No tax advice provided; content based on London & Capital’s understanding of US and UK tax systems at the time.
Disclaimer:
The value of investments and any income from them can go down as well as up and investors may not receive back their original investment amount. This communication is for information purposes only.
London & Capital Investment Team’s views on background, economy, and asset market effects. This document is not an invitation to subscribe and is by way of information only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. If you are considering investing, you should consult your London & Capital adviser. The views expressed herein are those at the time of publication and are subject to change. Correct at time of going to press.
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