Itwillrain

Hello all

If all goes as planned, then I will be moving to Florida later this year. My via appointment is in October.

I have read few posts about selling the house because of complex tax rules. We plan to sell our house before we mo e (to avoid US tax on capital gains), pay off the mortgage and buy a smaller investment property in the UK. In the UK we would get personal tax allowance and Florida tax rates are not as high, so there is some tax benefit I see there on the rental income.

And if we ever have to come back to the UK, then at least we have a house and won't be outpriced in case there is a significant property price appreciation while we are out of the country.

Not sure if I am missing something. Does this decision sound right?

Thank you.

Glasgow Girl

It sounds like you are aware off the capital gains tax payable on a foreign house sale and the income tax payable on foreign rental income (which is subject to federal tax at ordinary income levels as well as Florida tax but I assume that is what you meant when you said Florida tax). You will get foreign tax credits for any tax paid in the UK.

Just be aware that if you subsequently sell your new investment property then you will be subject to CGT on the sale, and there will no CGT grace period (normally applies if you lived in it 2 out the past 5 years) because it was never your primary residence. Also, the IRS requires that you depreciate foreign rental property over 30 years so while you deduct 1/30th of the house value from your rental income annually, when you sell you are required to pay federal tax at 25% plus Florida tax on all the depreciation that you previously took (or should have taken). You MUST pay tax on the depreciation whether you actually deducted it or not. so best to deduct it!

Also be aware of tax on any foreign currency gains calculated when the mortgage is paid back (sale or remortgage). In short, they take the original value of the mortgage when originated and multiply it by the exchange rate on that day and then subtract the original value of the mortgage multiplied by the exchange rate on the day of the sale. If there is a positive value this is considered a foreign currency gain and federal and state tax will be due on the difference. Whether you get hit by that tax depends upon foreign currency movements, if the dollar drops in value against the pound between these two dates then you will have tax to pay.

Renting a property overseas has its own challenges beyond tax but I am sure you have thought of those issues.

If you have savings in anything other than a straightforward savings account, or holding shares directly in a single company then make sure that you sell those investments before you set foot in the USA. The tax payable on foreign savings in any other form (such as Unit Trusts, Investment Trusts, OEICS) are draconian and way above normal CGT rates. ISAs are also subject to these issues because the IRS will not recognize an ISA. Google PFIC taxation if you have any such savings and you will get a good idea of the issues involved.

Itwillrain

Thank you for such a quick and informative response. I will digest the informationn and ask for further feedback.. On your point regarding ISAs, wow. I didn't know that. I will google if pension fund can also get taxed and when? Thanks once again.

durham_lad

Your pension fund will be fine. The IRS won’t tax it until you start making withdrawals. You may well have to report it’s value on an FBAR and as part of your IRS return, but no taxation.

Glasgow Girl

On your pension, whether or not you get taxed on the 25% lump sum withdrawal is a matter of debate. The majority of professionals believe it is taxable by the IRS but there is one who argues that is not the case. There are also opinions on whether or not the tax treaty can be used to avoid tax on the lump sum if you structure the withdrawal appropriately. Suffice to say that it is a minefield to navigate and you really don't want to be the person that the IRS makes an example of. Therefore, if you are likely to be a US resident or US citizen when you want to access these funds, you would be wise to withdraw them now (if you are eligible) before you become subject to IRS taxes, that is the only sure (and easy) way to retain the tax free benefit of the lump sum withdrawal. Also, if you wanted to move it to a SIPP you should do so before you move because although it is possible you will find it very difficult to do so after becoming a US resident. Put everything you can into cash before you leave and reinvest in appropriate products when you get over here.

nun

Any income or gain from assets you have outside of UK pension wrappers is going to be taxable by the IRS when you become a US resident. So you are doing the right thing selling your home before moving to the US so capital gains are only taxable in the UK. However, the same logic follows for bank accounts and investment accounts, even ISAs as they are irrelevant to the IRS. The worst of it is that the US does not like it's citizens or residents owning foreign pooled investments ie UK based investment trusts and funds and so the IRS taxes them under some very draconian rules. The tax on foreign bank interest is ok, but you will have to declare the accounts to the US Treasury above certain amounts. As far as ISAs and general investment accounts it's probably best to liquidate well before you become a US resident and then move the money to the US.

Itwillrain

Thank you so much for sharing with me your thoughts. Very helpful guidance.

tom169

Considered a rental property in the US? Depending on the area it could be outpacing property value appreciation in the UK.