Tax burden - UK company and house
 

Hiya.

We've got a rather complex situation and are looking for some advice.

We are moving to the US on my husband's H1B and my H4 (with a view to move to green card asap).

Our question relates to property and income still in the UK. I own a property which will be rented out. I'm assuming that I'll have to pay US taxes on that income (it'll come under the UK tax PA threshold) - is this a standard tax rate?

Also, we MAY come back after between 3-5 years (some complicated reasoning here, but bear with me).

If we stay in the USA, and have green cards, and want to sell the house - is it possible to move back to the UK on a temporary basis (as well as CGT, my older parents will require my being around for multiple months at a time - it's whether I stay with them, or friends, or - if it were worthwhile - staying in my own home with it as my main residence. Is this a thing? Or will we be stuck with CGT regardless (or potential loss of green card status)?

The other thing is, my husband part-owns a company in the UK, as well as his job working in the USA. Where might I find more information about what the US tax situation might be for this?

Depending on the situation we can push out the green card application until the H1B renewal time.
Thanks for this! I'm at a bit of a loss as to where to start with understanding all this!

Re: Tax burden - UK company and house
 

You will pay income tax on your net rental income added to all your other income, but US rules for deductions on rental income are quite generous.

To reach net income you deduct mortgage interest, depreciation on the value of the building (not the land) at 2.5% of the cost, depreciation on appliances at 20% of the cost, insurance premiums, management fees, advertising and marketing, repairs and maintenance, and property taxes (if any), plus anything else that is an expense specific to the rental property. In practice you may be left with little, or even no taxable profit under the US tax code.

Re: Tax burden - UK company and house
 

Is the UK company considered a CFC or a PFIC? Why would your husband want shares in something intrinsically "bad" for US tax purposes once he activates a green card?

Re: Tax burden - UK company and house
 

I must admit I haven't a clue what any of that means. He started up a small company in the UK four years ago. He's now received a job offer from a US university which is providing H1B + Green card.

It's the tax implications of his portion of this asset that I'm unsure about.

Re: Tax burden - UK company and house
 

Please excuse CC, his posts are usually fairly impenetrable - but he meant to ask what sort of company is it that your husband owns - is a trading company that produces or sells things or is it an investment holding company, so buying and selling investments, securities, derivative, etc?

Either way will complicate your taxes, but a company trading or holding investments would be much worse from a tax complication perspective.

You should also be aware that US taxation is heavily skewed to taxation of couples, not individuals, so it may be difficult to extract yourself temporarily from the clutches of the IRS to avoid paying CGT on the sale of property in the UK. And gains are calculated from the date of acquisition, not from when you enter the US, also gains relief ends typically three years after you move out of your home - the relief is granted to people who have lived in that home for "two of the last five years, which generally means three years after you moved out. So it would be senile to decide after two years whether you are staying in the US, to give yourselves a year to sell.

Relief for CGT on your home is capped at $500,000 of gains for a married couple, or half that if you file taxes as individuals (which is possible, but rarely advantageous if you are married).

Re: Tax burden - UK company and house
 

Don't forget any tax for foreign currency gain on the mortgage if you have one.

I've just been stung by this although nowhere near as badly as I originally thought.

Re: Tax burden - UK company and house
 

RE: the shares, there is also the reporting side that needs to be considered. Have a look at form 5471 and see if it applies.

Re: Tax burden - UK company and house
 

My question is not tax related for you, but rather if hubby has an ongoing business in the UK at the time he accepts the H1B visa, I was under the impression that he cannot work for said company while in the US under that visa. If this is correct, is he willing to cut his ties and have someone else run the business.

Re: Tax burden - UK company and house
 

Hiya. The company provides services and products in the UK. It's not an investment doodad.

He will be on H1B for about six months. He will retain ownership of the company, but while in the USA his partner will handle the running of it.

Tax on foreign currency gain is a new one on me, re: mortgage, and nothing on Google explains it in PLAIN ENGLISH. Are you able to tell me what this is exactly?

Thanks for all the advice guys!

Re: Tax burden - UK company and house
 

When you sell a house in the UK as a US taxpayer, what matters to the IRS is the capital gain in dollars, which equals the price in dollars when you sell it, minus the price in dollars when you bought it. Usually you can also account for selling costs and documented maintenance costs, though I don't know the details.

What that means, is that you can have no capital gain to be taxed if you calculate it in pounds, but if the value of the pound has increased relative to the dollar, you can still have a capital gain in dollars, that might be taxed.

Re: Tax burden - UK company and house
 

Foreign currency gain on the mortgage is known as a Section 988 transaction and this is treated entirely separately from the purchase and sale of the property as Owen778 describes above. Section 988 is all about the borrowing and repayment of your mortgage and as far as I can tell having recently been through this myself, there is no way out of it.

Lets say that you bought your house and took out a mortgage for £100k in 2012. To the IRS, you received a loan of $160k due to the exchange rate at the time. If you then decided to tell the house in 2016 and paid back the £100k mortgage, from the IRS' perspective you're only having to pay back a loan of $130k due to the drop in exchange rate. Therefore they view that $30k difference as a "gain" to you and is therefore taxable at your regular income percentage (usually around 22%-28%).

This is exactly what I'm going through on my tax return now although luckily I remortgaged my house in 2016 just after Brexit so the exchange rate had tanked and I will only have a ~$1k tax bill as opposed to a ~$15k bill had I not remortgaged.

I was furious at having to pay an early exit penalty to the Halifax at the time I sold but I'm very glad I did now!

Re: Tax burden - UK company and house
 

This is almost correct, except that if you moved to the States within the past 10 years you may well have excess foreign tax credits to claim.

Re: Tax burden - UK company and house
 

Deloitte told me that my foreign tax credits would not be claimable against it.

Re: Tax burden - UK company and house
 

Perhaps you should use a different accountant then? Have they mentioned in your discussions that there is substantial authority to treat this as a capital gain rather than ordinary income (which you would do if this saved you tax)?

Re: Tax burden - UK company and house
 

I'll look into it. Nothing has been filed yet, it's all going through final review.

My employer have laid on Deloitte for me and I must confess to being far from impressed by them overall.