The UK residential property market is currently experiencing high levels of activity as buyers look to take advantage of the temporary Stamp Duty Land Tax reduction. James Radcliffe (who specialises in tax planning for Americans living in the UK) set outs his top tips to be aware of for US citizens considering the UK housing market.
Tip 1 – Inheritance Tax
The purchase of UK real estate will result in an exposure to UK Inheritance Tax (IHT). The UK Nil Rate Band allowance and Residential Nil Rate Band may help to mitigate, or even eliminate, the tax payable on death but these tax-free allowances are nowhere near as generous as the US Estate Duty equivalent.
Tip 2 – Mortgages (advantages and disadvantages)
IHT is only payable on the net value of a property so thought should be given to whether a mortgage can be used to reduce the property's taxable value on death. However, mortgages in the UK can create separate tax difficulties for US taxpayers if the Sterling v's Dollar exchange rates fluctuate over time. In broad terms, if the dollar value of the sum repaid is less than the dollar sum borrowed then the US will seek to charge the difference as a gain (taxed at income rates). To avoid this problem, US citizens may wish to explore the possibility of a US denominated loan against their UK property.
Tip 3 – Insurance
As an alternative to a mortgage, you might want to consider purchasing life insurance to cover the anticipated IHT liability on death. Any policy should be written into trust but beware of off-the-shelf trust documents from Life Offices. They are unlikely to be fit for purpose from a US tax perspective.
Tip 4 – Beware of Revocable Trusts
Many US domestic estate planners advise that a US citizen should hold all assets through a US Revocable Trust to avoid probate on death. As a general rule, it is not sensible to hold UK real estate through a structure of this nature. Outright ownership is usually the preferable approach in order to avoid adverse UK tax implications.
Tip 5 – a Will
Make sure you sign a Will that covers the devolution of your UK real estate in the event of death.
Tip 6 – capital gains
On a sale of your home all capital gains (irrespective of value) will be free of UK capital gains tax (CGT) to the extent attributable to a period of occupation as your principal home. This does not match up with the US position of limiting tax free gains on a principal home to a maximum sum of $250,000. If there is a non-US citizen spouse, thought should be given to weighting ownership in their favour. If capital gains in the name of the US spouse are kept below the US tax free threshold of $250,000, there should be no gains tax to pay on either side of the Atlantic.
Tip 7 – SDLT
Stamp Duty Land Tax (SDLT) is a tax payable by the buyer on the purchase of residential property in the UK. The good news is that reduced rates of SDLT are in force until 31 March 2021 in order to help stimulate the British housing market. It is, however, worth being aware that enhanced rates of SDLT are payable if you already own another home (anywhere in the world) albeit that there is a reclaim mechanism if your existing main home is subsequently sold within 18 months. Similarly, from April 2021 onwards enhanced rates of SDLT apply to any buyer who is not a tax resident in the UK. The above points may influence the timing of any purchase as SDLT can be a significant additional cost of buying property in the UK.