neilc

First off, apologies if a similar thread already exists! I looked around but didn't find anything that answered my questions

I bought a flat in London in 2001 and then moved to US in 2004 when my company asked me to relocate - I've lived here full-time but am not a US Citizen (green card holder). Since 2004 the flat has been rented out. I've decided to sell the flat and use the profit (over $100K) as a down-payment for a primary residence here in the US.

Are there any "tax efficient" ways I can use the UK money as a down-payment on the US house and minimize/avoid Capital Gains Tax (CGT)? Can I set up a trust fund in the UK and then use that to buy the US house (paying rent back to the trust)?

Any help would be greatly appreciated! I've spoken to one Tax Accountant who stated I cannot avoid CGT - is this true or are there other options at my disposal?

Thanks in advance for your guidance here.

nun

As you haven't lived in your UK flat for 2 years out of the last 5 you are liable to pay US CGT when you sell it and don't get the $250k (single) or $500k (married) CGT free allowances. As you had to leave the flat to start a job more than 50 miles away you could get an exemption.......but you've had it as a rental so long now I'm not sure you'd qualify for much reduction....still you should check that out.

The other thing to consider is that after 6th April 2015 the UK will start charging CGT on the sale of homes owned by non-residents. Gains prior to April 6th 2015 won't be taxed and there's a 11k GBP tax free allowance, so I assume this won't be an issue for you, but you should be aware of the change.

neilc

Thanks nun - as you will have guessed, I'm trying to minimize/avoid the CGT (6-figure sum) and am not yet willing/wanting to accept that I have no choice but to pay the entire amount. Are there other options available to me as I look to use the profit to buy a house here in the US?

I was told I could create a UK trust fund and then channel the profit of the UK house sale directly there; once complete I could then use the entire fund as a down payment for the US house, paying a nominal annual rent back to the fund to stay at the property. Is this feasible?

nun

Well you could defer CGT with a 1031 exchange, basically if you reinvest the money from the sale of your house in another rental property, but foreign properties can only be exchanged for other foreign properties.

Trusts are a bit above my pay grade, but as far as I know if you put the house in an irrevocable trust you would not be liable to pay the CGT because you have given up control of your home. You cannot be a beneficiary or a trustee of that trust. If you retain control of the property it's a grantor trust and you are still personally liable to pay the CGT.

If you have a spouse, relative or someone else you trust they could be the trustee and beneficiaries. Then the trust could sell the house and buy another one and you could live in it. The trust would have to distribute income to the beneficiaries and they'd pay tax on the money.

Such arrangements are usually for estate planning and I'm not sue I'd want to give away my home and lose all that capital to avoid a CGT bill. You need to rune this by a well qualified trust professional/lawyer.

nun

FYI I did a bit of reading and see that there's a scheme called a Private Annuity Trust that was widely used until 2006. With this a capital appreciated asset is transferred to the PAT and then income is paid out from the annuity. There is no CGT and the tax is spread out in over the annuitant's lifetime as they pay tax on the annual annuity income. This was used lots by charities.

In 2006 the IRS stepped in and wrote new rules that required the CGT to be paid on transfer of the asset.

neilc

nun - thanks again - this is hugely insightful and really appreciate your insights and guidance here.

Cook_County

You'd want to be very cautious of an immediate IHT charge if you settle money into a US trust or throwback rules in the US if you settle into a UK trust.

Presumably you have a bunch of excess FTC or maybe some suspended passive losses?