CL09

Hi everyone:

I will be relocating from the UK to the California later in the year on a Green Card visa and wish to understand the CGT considerations in respect of my current house in London as fully as possible in order to avoid making an expensive mistake.

I currently own a house in London which I have lived in continually as my principal private residence since 2003 and which has seen an increase in value of c. £1.2 million in this period.

My intention is to retain ownership of this house and let it out while I live in California (as I am unsure whether or not I will eventually return) and to buy a condo in California either just before or just after I relocate from London. If, in due course, I decide to remain permanently in the US then I will sell the house in London; or if I decide to expatriate back from the US to the UK then I will sell the condo and begin living in the house in London again.

From reading through the various helpful threads on this helpful forum my understanding of the key points concerning CGT on the London house is as follows:


1. If I sell the house in London within 2 years of entering the US then US CGT will not be due since, under IRS rules, there is a full exemption when the property has been used as one's home for 3 out of the prior 5 years.

2. If I sell the house in London within 3 years of entering the US then UK CGT will not be due since the last 3 years of ownership of a former PPL are exempt from CGT irrespective of how the property was used within this period.

3. If I sell the house in London more than 5 years after entering the US then UK CGT will not be due since, under HMRC rules, former UK residents are fully exempt after they have been resident outside of the UK for more than 5 years.

4. If I expatriate back to the UK without selling the house in London beforehand at any time within the 8 years of entering the US then US CGT will not be due on any eventual sale of this house.

5. If I expatriate back to the UK without selling the house in London beforehand at any time more than 8 years after I entered the US then, under IRS 877A, a "mark-to-market" valuation will be applied to the house in London and US CGT will be due as though I had sold the house on the day I left the US.

Or, in simple terms, the way to avoid a big CGT hit on the house in London is either to sell it within 2 years of entering the US, or to not sell it at all and return to the UK within 8 years of entering the US.

I would be most grateful if anyone who is more experienced in this area can comment on whether my basic understanding as above is correct and / or whether there are any other potential "gotchas" I should be thinking about.

Thank you!

christmasoompa

I thought that had changed to the last 18 months of ownership, rather than 3 years, from April 2014 onwards? I may well have misunderstood, but it's something to double check.

HTH.

Michael

1. If I sell the house in London within 3 years of entering the US then US CGT will not be due on part since, under IRS rules, there is a $500,000 exclusion from capital gains if married filing jointly ($250,000 if single or filing separately) when the property has been used as one's home for 2 out of the prior 5 years.

CL09

Thank you, Michael -- I also now have the correct IRS section references for point #1 as follows based upon your correction:

Section 121 of the Internal Revenue Code allows the exclusion of a realized capital gain of up to $250,000 ($500,000, if married filing jointly) from income if it is the sale of the taxpayer's principal residence, which is the residence that is lived in most of the time. To qualify for the exclusion, the taxpayer must have lived in the house for at least 2 years out of the previous 5 years before the sale, and the taxpayer did not claim the §121 exclusion within the prior 2 years.

All other comments and corrections will be greatly appreciated.

Sally Redux

I am not on this position (unfortunately) but I think I have seen things on BE about new rules such as:

http://britishexpats.com/forum/usa-5.../#post11115258

christmasoompa

Ditto, neither am I but I'm sure I remember the Chancellor announcing a change of the last period if ownership, from 3 years to 18 months in the last budget.

Now that you mention it, I seem to recall something about non-residents not being able to escape CGT anymore as well, due to the large number of rich Russians, Middle Easteners etc, that own property in London and don't pay CGT.

But I didn't pay a huge amount of attention as the changes wouldn't have affected me personally, so the OP needs to check what new rules came in to effect on 5th April.

CL09

Thanks for your comments, HTH and Sally.

It appears you are quite correct that the exemption from CGT for absence from your home during the final 3 years of ownership, is being reduced from this year (2014/15) to the final 18 months of ownership.

However, full exemption nonetheless applies for a longer period of absence provided you are working outside of the UK during this period.

Here is the current wording from the HMRC website:

"In his Autumn 2013 statement the Chancellor announced that from 2014 to 2015 this final period relief will only apply to the final 18 months of ownership. There will be an exception for people who are disabled or in long-term care. This measure is set to become law later in 2014.

You'll still get the full relief if you couldn't live in your home because you were employed and either: you carried on all of your work or duties outside the UK, or the distance from work or the requirements of your job stopped you living at home - and you were absent for less than 4 years.

The following must also apply: the house was your only or main home both before and after you worked away; and you were not entitled to Private Residence Relief on any other property during that time."

It would be interesting to know what HMRC's definition is for being employed and carrying out all of your duties outside of the UK -- can anyone help with this?

JAJ

Unlikely on an online forum. At a certain level, you may wish to consider obtaining professional tax advice.

Anyway - you're asking the wrong question. If you see your future in the United States, your primary concern should be the U.S. capital gains tax liability whenever you sell. Which is going to be substantial - the entire period of ownership is considered, federal tax around 20% + 3.8% investment surcharge + California tax (over 10%). In other words, a lot of money.

Why would you seek a green card if your intention is ultimately to expatriate. Is there any chance you might instead want to become a United States citizen?

Another issue to consider is U.K. Inheritance Tax - even if you manage to lose your U.K. domicile, if you have one (and retaining property doesn't help), a U.K. situate property will be subject to Inheritance Tax. That's also a lot of money, based on the property value you talk about.

Future U.K. capital gains tax is probably the least of your worries, although you are retaining exposure to a foreign tax regime (when you are U.S. resident) any U.K. capital gains on sale would likely offset U.S. tax. However, if you return to the U.K. in the future, and still retain the property, a substantial part of the overall gain will be subject to tax. Again, get some professional tax planning on this is important.

You shouldn't let tax considerations rule everything, but first decide what you want to do in life and then work out the tax consequences. Retaining the property may keep options open, but these options may come at the cost of significant tax risk. There may be no best answer.

And separately, you should review all your other investments/assets to see if you should realize capital gains and/or divest those which do not fit easily into the U.S. tax system. Keep in mind that tax free in the U.K. doesn't mean tax free in the U.S., worldwide income is taxable, and you need to understand that there is significant information reporting required on foreign assets.

nun

+1.

You should understand the US tax implications of any UK funds, ISAs, pensions etc.

You will have to apply the UK/US DTA to deal with any capital gains tax from sale of the UK property or from any income if you rent it out. IMHO you would do best to sell your house and any non retirement investments you have in the UK and transfer them to the US when you move. Having a Green Card means that the US will tax your worldwide income and you just don't want to be bothering those complications.

CL09

Hi JAJ and Nun –

Your considered comments and suggestions are much appreciated.

As you propose, I will be engaging professional tax planning advice in the near future but, as you may agree, I generally feel I can get more value from professionals when I also understand the basics of the terrain in question myself. The BE forum seems to be extremely valuable for this purpose.

The background considerations in my case are that there is a possible future scenario where aging / ailing parents will need close support which I will be unable to provide from the US and, for better or worse, once one leaves the rampant London property market it can be quite tough to get back in. Therefore, I am looking at the London house in terms of its possible exposure to UK and also US property taxes according to whether I settle permanently or return.

From the helpful clarifications above concerning the recent reduction in the UK of the CGT exemption period at the end of ownership from 3 years to 18 months, it is clear that this “window“ is now too short to be relevant in my case and I should concentrate on gaining a good understanding of a) the conditions under which UK CGT may not be applicable due to working in the US or being non-resident in the UK for the requisite period, and b) the conditions under which US CGT may not be applicable due to the timing of a possible return to the UK. In this regard the following seems to the case in my current understanding:

1) Under HMRC rules, full UK CGT relief applies if you do not live in your home because you before returning to the UK;

2) Under IRS rules, if one expatriates back to the UK after not more than 8 years of entering the US then no US CGT will be due on the sale of UK property owned while resident in the US but sold after return to the UK (but if one expatriates after more than 8 years then the IRS will consider the UK property to have been sold as on the date of expatriation and apply CGT on the full gain from the date the property was originally purchased).

In other words, if one is going to be working (in a manner that meets the HMRC conditions) while in the US, then there is a “CGT-free window” in respect of one’s [former] home in the UK if one returns permanently to the UK in years 1 through 8; but, if one is not working in such manner while in the US, then the such “CGT-free window” only arises by virtue of selling one’s UK home before entering the UK as a resident.

All additional comments and / or corrections from those with experience in this area will be gratefully received!

nun

If you sell the house while the IRS (or CA) deems you to be US tax resident then you will pay US CGT. Your CGT exclusion amount will be dictated by how many years it is since you used the house as your permanent residence. If you sell the house the only way to avoid US CGT is to do it before you become US resident or to expatriate before you become a long term permanent resident by returning to the UK and filing an 8854 and an I-407.

JAJ

Have you considered the option of selling the property and reinvesting into another London property? This realizes your capital gain for the U.K. up to now (tax free if it's your home), and keeps the gain out of the U.S. federal tax net if done before you become U.S. tax resident (there may be some special rules in California that look back to the whole year, but you could delay taking up CA residence if that was an issue).

You talk about expatriation, do you understand that this means permanently surrendering your green card, or giving up U.S. citizenship? You would have to qualify for a new Immigrant Visa from scratch if you wanted to return to the United States.

CL09

Thanks nun --

And my understanding is that a US permanent long term resident is someone who has been a Green Card holder for at least 8 out of the last 15 years and, in the event of their expatriation, a permanent long term resident is required to file a Form 8854 to notify the IRS of their change in residence status and to pay an "expatriation tax" which generally means that all their property is deemed sold for its then fair market value and tax is due on the gain -- ouch! However, a Green Card holder who is not also a permanent long term resident is not required to file an 8854 nor pay the "expatriation tax".

Thanks also to you, JAJ --

I very much like your idea of selling the London house and buying another one in the UK shortly before entering the US in order to reduce exposure to the retroactive reach of US CGT.

(PS -- I also appreciate that expatriation means permanent renunciation of one's Green Card, but thank you for checking)

MMcD

just a sidenote OP but.....

Impressive!
Your posts should serve a a textbook case for those coming here seeking answers to matters involving rules and regulations.

First of all you'd already "done your homework" and attempted to inform yourself as fully as you were able before posting about your dilemma.
You'd thought about what your goal was and possible ramifications of various actions, as you understood them. And it was all expressed simply, clearly and eloquently.

That, in turn, elicited thoughtful, helpful, informative replies - which you acknowledged. (Amazing how often people fail to do that).
And 'tho this issue is not one with which I have any personal concern at all - I nevertheless, found myself reading thru the thread with avid interest

In summary: (and make that plural)

nun

+1

many people don't do enough research when moving. I think the OP understands the ramifications of a move form the UK to the US for CGT on real property. I hope that the OP also understands the implications for the rest of their investments and finances.