Whether you are buying your first home or investing in real estate, owning property in the UK as an American can be complex - particularly when it comes to the many tax considerations involved.

However, with careful planning and the right guidance, the challenges of owning property abroad as a US citizen can be managed effectively.

To illustrate how these rules can be managed in practice, we’ve shared Shirley’s story. Shirley moved to the UK and bought a house with her husband. She is not a Buzzacott client but represents real cases.

Our advice would have helped Shirley save the following:

• A potential US income tax saving of $50,000 

• A potential US income tax saving of $7,377 on re-mortgaging 

• A potential saving of $1,900 in Net Investment Income Tax

Case study

How to reduce the US tax bill on UK property.

Shirley moved to the UK in early 2000 and not long after, Shirley and her non-American husband bought their first home together. With a growing family, they found themselves ready to move to a larger home but facing a potentially significant US tax bill on Shirley’s share of the property. Here is how our US/UK tax team helped Shirley and her family reduce their global tax exposure when they decided to move house.

The situation

As is the case with many married couples, Shirley and her husband held their home under a joint tenancy. This means that as an American, Shirley was taxable in the US on 50% of the overall increase to the value of her home. She also had a UK mortgage, something for which the US has some rather unusual rules.

Capital Gains Tax: US v UK

On the US side, as Shirley owned her home and used it as her main residence for at least two years out of the five-year period ending on the date of sale, Shirley was eligible to claim a capital gain exclusion in the US of up to $250,000. Any additional taxable gain would then be taxed at a rate of 20%. By contrast, in the UK Shirley and her husband could claim the UK property as their Principal Private Residence (PPR) as they lived in the property from the date of purchase to the date of sale. Therefore, the entire gain arising from the sale was exempt from UK Capital Gains Tax, leaving Shirley with a potential US tax bill of $50,000 on her anticipated share of the gain of $500,000.

Net Investment Income Tax (NIIT)

This was an additional tax of 3.8% imposed on investment income and capital gains where the taxpayer’s income is over certain thresholds. Shirley, who was ‘Head of Household’, suffered this tax on all her gains over a modified adjusted gross income threshold of $200,000, which resulted in an additional tax bill of $1,900. All in all, Shirley’s US tax bill was $51,900.

Foreign mortgage gain

Having taken out a joint mortgage with her husband to purchase their home, Shirley also had to deal with the US tax rules governing mortgage debt denominated in foreign (non-US) currencies. Under US rules, Shirley was deemed to transact in US dollars, consequently, any foreign currency transaction is always deemed a ‘trade’ for US purposes. In other words, paying off her UK mortgage would trigger a gain or loss when the mortgage is relinquished. Shirley and her husband re-mortgaged in 2015 (the last re-mortgage but they have changed product with the same bank since), and unfortunately, since then the US Dollar rose against the pound, leaving her with an exchange rate gain of $36,833 on the relinquishment of her mortgage. This resulted in a potential tax bill of $7,377. Fortunately for Shirley, she had enough excess tax credits to offset this on her return and reduce the liability to nil.

Stamp Duty Land Tax (SDLT)

SDLT is a progressive tax levied on the purchase of UK (excluding Scotland) properties on a sliding scale system starting at 0% with a purchase price of up to £125,000, up to 12% on property values over £1.5m (Scotland has a similar Land & Buildings Transaction Tax). Once paid, the SDLT is added to the cost basis of the property to reduce the eventual gain upon disposal. In addition to her joint property in the UK, Shirley inherited a property in the US from her mother in the early 2000s. As of 31 October 2024, a surcharge of 5 percentage points above the standard SDLT residential rates will be charged on the purchase of a UK property if at the end of the day a person owns two or more residential properties. This means that because of Shirley’s old family home in the US, she faced an additional 5% SDLT on the purchase of her new home in the UK. However, there is an exemption for replacement of main residence, assuming the sale of the first UK main residence is done within 36 months of acquiring a new UK main residence.

Our solutions

Capital Gains Tax

Since Shirley was taxable in the US on 50% of the gain above $250,000, the most effective solution was to reduce her holding in the UK property before it was sold.

Our advice to Shirley would have been for her and her husband to change their ownership from joint tenants to tenants in common. By utilising the US annual gift allowance of $194,000 per year, and the lifetime gift allowance of $15,000,000 Shirley would be able to reduce her holding in the property down to 25%. This would leave her with a US taxable gain of $250,000, which would be covered by the US exemption. Great news for Shirley as it would remove both her US Capital Gains Tax and NIIT liability entirely.

This advice would have saved Shirley $51,900 on her US tax bill.

Stamp Duty Land Tax (SDLT)

When transferring property in this way, it is important to establish whether any consideration has been given for SDLT purposes. HMRC may charge SDLT on the value of the consideration provided in exchange for the property. In Shirley’s case, her husband would have taken on an additional 25% of the mortgage in exchange for a further 25% share of the property. If this portion of the mortgage had exceeded the relevant SDLT threshold of £125,000, SDLT may have been payable. However, the amount was below the threshold, so no additional charge arose in this instance.

A transaction of this nature may also have legal implications. For example, wills may need to be reviewed or updated, and a conveyancing solicitor would be required to prepare the property transfer documents. Although Buzzacott does not provide legal advice, we can work alongside a client’s legal advisers to help ensure the tax and financial implications are considered as part of the wider transaction. Had Shirley come to us, she could have benefited from joined-up US and UK tax and financial planning advice.

Our team has extensive experience supporting American individuals living in the UK with US and UK tax advice and compliance services. Buzzacott Financial Planning’s independent financial advisers are regulated by the Financial Conduct Authority. As independent advisers, their recommendations are generally based on a whole-of-market review, helping to ensure that the advice provided is comprehensive and suited to each client’s circumstances.

Get in touch

If you would like advice tailored to your circumstances, please complete the form below and one of our specialists will be in touch to discuss how we can help.

Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided. For advisory-only clients, our minimum charge is £2,000 plus VAT.

The full Stepping Stones series can be found here.