Capital Gains Tax planning for the main home: considerations for US persons in the UK
1 February 2024
The US is unusual in its approach to taxation, taxing its citizens on the basis of nationality rather than residence. Where a US citizen settles in the UK, there is a need to give careful thought to the interaction between the two complex tax systems. In this article we focus on the taxation of gains realised on the sale of a main home in the UK.
The UK vs the US position
Capital Gains Tax (CGT) is a tax which is payable on a disposal of an asset that has increased in value since it was acquired. In the UK, CGT is not generally chargeable on the disposal of your main residence, i.e. the home in which you live and spend most of your time, due to Private Residence Relief (PRR). Therefore, for most people in the UK, the sale of a house will not be a taxable event.
In contrast, from a US perspective, gains realised on disposal of such a property will generally be subject to US tax where the gain exceeds any available tax-free ‘exclusion amount’. Although there is a reasonably large threshold, property prices (in the UK and elsewhere) have seen substantial gains over the past few years, and the threshold may be quickly exceeded where, for example, there is a sale of a large London property.
An example which highlighted this issue very publicly was in relation to the tax affairs of Boris Johnson, a US citizen by birth, but who has lived in the UK since he was young. It was reported across the UK press that Johnson had received a US tax bill on the 2009 disposal of his North London main residence. He vocally disputed this with the IRS, claiming it was “absolutely outrageous”, but it came to light in 2015 that he had agreed to pay the bill. Johnson went on to renounce his US citizenship in 2016, which is not a decision to be taken lightly, and would not be a suitable course of action for many US individuals.
There will be particular CGT planning considerations in the context of US citizens married to UK (or other non-US) citizens living in the UK. It is important to consider the beneficial ownership of a property as between a US and non-US citizen couple, ideally prior to purchase, but otherwise prior to disposal, to manage the gain from a US tax perspective. Depending on the couple’s personal preferences and the context of their relationship and finances, it may be appropriate to hold the whole property (or a substantial proportion of it) in the name of the non-US spouse from the outset.
However, where a property is already held jointly by a US-UK couple as joint tenants, planning can be undertaken to mitigate a future US CGT burden. One approach which we often discuss with clients is altering the beneficial ownership percentages of the jointly owned property, so that the non-US citizen owns a greater share of the property. This can be achieved by way of a gift (or series of gifts) from the US spouse to the non-US spouse. By reducing the US spouse’s beneficial ownership of the property, the capital gain attributable to the US person on a disposal is also reduced.
From a UK CGT and Inheritance Tax perspective, such gifts between spouses are tax neutral. From a US perspective, gifts to a non-US citizen spouse will not be subject to US gift tax, provided the gift does not exceed the marital deduction for gifts, set at $185,000 for 2024. Where the value of the property to be gifted exceeds this amount, a series of gifts may be made over a number of US tax years so as to avoid a US gift tax liability. From a practical standpoint, an up-to-date property valuation will be required before each gift is made, to ascertain the proportion to be transferred. In determining the value to be transferred it will be important to consider exchange rates and allow for a buffer to ensure US tax gift thresholds are not inadvertently breached. The process concludes when the US spouse’s beneficial ownership is reduced to a point where any gain on the sale of the property would not exceed the US CGT tax free exemption.
Property and succession law considerations
It is also important to consider the different types of property ownership in this context. English law provides for two types of joint ownership of a property, each of which has different succession implications. If the property is owned as joint tenants, in the event of the death of a joint owner, the property passes automatically by survivorship to the surviving joint owner, outside and irrespective of the provisions of any Will. A joint tenancy is the more usual ownership structure we see for married couples. In contrast, if a property is owned as tenants in common, each party has a distinct and separate interest in the property, which will pass under a Will or intestacy provisions.
To gift a share of the US spouse’s beneficial interest in a property, the property must be owned as tenants in common. If the property is owned as joint tenants, it will be necessary first to convert that joint tenancy into a tenancy in common. Therefore, when undertaking this type of planning, consideration should be given to existing Wills, to ensure that existing succession planning is not unduly disrupted by this change in the status of what is often a person’s main asset. If you do not already have a Will in place, this would be a good time to consider your wishes, as it can be helpful to consider your succession planning holistically, and whilst ownership structures for key assets are at the forefront of your mind.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2024.