American expats buying property in the UK

Tax challenges for US Citizens buying a house in the UK face tax challenges in the USA that should be borne in mind. Additionally, if American-based parents give you some cash towards a deposit, you need to be aware of the impact of estate planning. Therefore, whether buying property alone or with a UK spouse, understanding the tax landscape is essential to avoid unexpected liabilities. Proper planning can help mitigate these taxes, ensuring compliance while minimising financial impact.

Can Americans buy property in England, Scotland or Wales?

Yes, there are no legal restrictions preventing expats from buying property in the UK, so nearly anyone, regardless of nationality. There are 2 different legal systems to consider as Scotland has a different tax system to the UK.

US Property Sales Tax Rates for the UK houses

US citizens pay capital gains tax on any profits from selling a UK property. Positively, there is a capital gain exclusion for Americans selling their primary residence in the UK:

  • US$250,000 for single filers.
  • US$500K if married and joint filing.

It must have been the seller’s principal residence for two out of the past five years. It needn’t be consecutive, with exemptions that apply for work-related travel. But dual nationals, or the US citizens of the UK who are married to one another, should be careful. The US$250,000 exemption is available to a UK spouse, but it can also trap the spouse into international earnings and assets into the US tax code.

US Property Sales Tax Rates for any UK Second Homes

Any gains on the sale of second homes, including UK rental properties, are taxed at 15–20%.

Other Tax Considerations

Foreign Mortgage Gain

When a US person sells a UK house which has an outstanding mortgage they must translate the sale into US dollars and report the sale. The fluctuation in the rate of exchange of currency is taxable if there is a “mortgage income gain” that is subject to US income tax rates. Losses due to the difference in exchange rates are not deductible.

Net Investment Income Tax (NIIT)

Exceeding the capital gain exclusion also attracts the 3.8% NIIT if the seller’s gross income exceeds:

  • US$200,000 for single filers.
  • US$250,000 for married filing jointly.

How are gifts from American resident parents treated?

Depending on where you live, there could be national and state tax consequences for gifts to family members to help them purchase a property. For example, US-based parents give gifts to siblings who are UK residents are subject to tax rules in both countries. Here’s a breakdown:

US Tax Rules

Gifts from a parent to a child are exempt from gift tax in the US due to the annual exclusion that allows one parent to give up to $17,000 (2023) to any number of people without gift tax. When the gift is higher than this, the excess may be subject to gift tax, but there is also a lifetime exemption amount that can be applied.

UK Tax Rules

Gifts from parents to children don’t normally incur UK inheritance tax (IHT) in the UK if the parent doesn’t live in the UK. But if the parent lives in the UK, the gift could be subject to IHT if it is more than the nil-rate band (currently £325,000). For spouses and civil partners, gifts are generally IHT-free if the recipient is a resident of the UK.

Estate and Gift Tax Treaty between the US and the UK

The US-UK estate and gift tax treaty prevents double taxation as only one country imposes its axes and the other allows foreign tax credits against taxes already paid.  Gifts and estates are exempt from double taxation under this treaty, so it eases the burden on individuals with cross-border financial interests.

Considerations for Expatriates

If you’re a US expat in the UK, you must be well-versed in US and UK tax rules and their interplay. Working with a cross-border tax specialist financial advisor can help keep you compliant and tax-efficient.

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