There are an estimated 166,000 US nationals living and working in the UK. The two countries operate very different tax regimes that can despite long-standing tax treaties leave US nationals facing unexpected and unwelcome tax liabilities – and no more so than when buying a home.
US nationals working for extended periods of time in the UK will, quite understandably, want a property to call home and even more so when they bring children with them and are considering schooling.
Yet the tax landscape for US nationals is very different to their UK friends and colleagues. Almost uniquely, the US taxes its citizens based on that citizenship rather than on residency or domicile. And that can mean unexpected tax liabilities for US nationals that do not take advice when purchasing a home.
Firstly, any purchase of property in the UK will be subject to stamp duty land tax (SDLT). It is a tiered tax, with the first £250,000 free of tax, a 5% tax rate on property valued between £250,001 and £925,000, rising to 12% for properties valued over £1.5m.
Anyone with a second home, including US nationals owning US property, will be required to pay the second home surcharge, adding a further 3% to those stamp duty rates. US nationals are not exempt from SDLT on property purchases.
It is however, the impact UK property ownership has on US taxes that can cause problems.
Capital gains tax is not paid on your principal private residence in the UK, meaning that any future sale will not trigger a CGT liability. However, the CGT rules in the US are different, and any sale may trigger a capital gains tax liability in the US.
US inheritance tax thresholds are considerably more generous than those in the UK. Whereas a UK national can pass on £325,000 free of IHT, US nationals can pass on US$11.5m without any IHT implications.
UK inheritance tax can be triggered if a US national is deemed domiciled in the UK, something that can automatically be applied if living in the UK for 15 of the past 20 years, irrespective of financial ties with the US.
Buying a property with a mortgage can also trigger an unexpected tax liability should currency exchange rates fluctuate. Broadly, if the dollar amount repaid is less than the dollar amount borrowed, US tax authorities may see this as a gain and will tax it, typically as income.
It is commonplace for US nationals to have a revocable trust as part of their probate tax planning. US nationals should avoid holding UK assets in such a trust to avoid tax liabilities and reporting obligations.
UK probate planning should not, however, be ignored. US nationals are advised to have a Will to reflect their wishes should the worst happen, and they pass away whilst in the UK.
The UK-US tax landscape is complex and steps taken in the UK can have financial implications in their home country. It is advisable to take advice before purchasing a home or making investments to ensure it is approached in the most tax-efficient way.
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The above is accurate as at 18 April 2023. The information above may be subject to change during these ever-changing times. The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.