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UK/USA capital gains tax help

UK/USA capital gains tax help

Old Dec 4th 2012, 1:03 am
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Default UK/USA capital gains tax help

My husband is a green card holder. His dad, who lives in the UK, had to move into a home last year and gave his flat to my husband and his sister. They have decided to sell it. There is no capital gains tax in the UK because the cost basis was about the same as today when they are looking at selling it. As far as inheritance tax goes, they do need to keep some money safe should their father pass away within the next seven years.

The issue is that capital gains tax in the USA is different to the UK. My accountant just told me that my husband does have to pay CGT because the US government doesn't take the cost basis from when it was given to my husband, but from the date his dad acquired it! This is a huge gain that my husband, it seems, is liable to pay but his sister (a UK citizen) does not have to pay.

We are going to consult an international lawyer/accountant but thought I'd put this out to you guys too. Do you see anything that could be done to get around this? If my husband put the flat in his sister's name and she sold it and then gifted us the money over time, would that work? I know she would have to look into the gift tax laws in the UK, but do you see that as a possibility?

Any ideas would be greatly appreciated! We are proud tax payers, but this seems like a raw deal. He only recently became a green card holder and to think that if this happened before we moved to the US, we wouldn't have to pay this.

Thanks!
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Old Dec 4th 2012, 1:12 am
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Default Re: UK/USA capital gains tax help

Originally Posted by carmen blue View Post
My husband is a green card holder. His dad, who lives in the UK, had to move into a home last year and gave his flat to my husband and his sister. They have decided to sell it. There is no capital gains tax in the UK because the cost basis was about the same as today when they are looking at selling it. As far as inheritance tax goes, they do need to keep some money safe should their father pass away within the next seven years.

The issue is that capital gains tax in the USA is different to the UK. My accountant just told me that my husband does have to pay CGT because the US government doesn't take the cost basis from when it was given to my husband, but from the date his dad acquired it! This is a huge gain that my husband, it seems, is liable to pay but his sister (a UK citizen) does not have to pay.

We are going to consult an international lawyer/accountant but thought I'd put this out to you guys too. Do you see anything that could be done to get around this? If my husband put the flat in his sister's name and she sold it and then gifted us the money over time, would that work? I know she would have to look into the gift tax laws in the UK, but do you see that as a possibility?

Any ideas would be greatly appreciated! We are proud tax payers, but this seems like a raw deal. He only recently became a green card holder and to think that if this happened before we moved to the US, we wouldn't have to pay this.

Thanks!
I can't help you with the tax but unless your FIL has financial means to pay for his stay in the home I think the gov can come after the equity in the house. We looked into this a couple of years ago when my FIL died. My MIL's solicitor told us that if my MIL was taken into a home within 7 years of her house being sold the gov would expect the equity to be used for her care.
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Old Dec 4th 2012, 1:39 am
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Default Re: UK/USA capital gains tax help

Thanks. My FIL had a stroke and was moved into a home and it's fully funded by the NHS (this was while the flat was in his name and they knew that). Apparently because he was moved into a home due to a sudden stroke, they fully fund it. If he had to be moved in due to 'old age', then he would have had to pay.
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Old Dec 4th 2012, 4:46 am
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Default Re: UK/USA capital gains tax help

In the US if you inherit a home the basis for CGT is taken as the fair market value on the date of death. If you gift it the tax basis is the original purchase price. You need estate planning for this one.
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Old Dec 4th 2012, 12:43 pm
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Default Re: UK/USA capital gains tax help

Exchange rate will be taken into account as well. So whatever the rate was when FIL acquired to date is the cost basis.

It may work in his favour depending on when it was done.
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Old Dec 5th 2012, 9:37 pm
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Default Re: UK/USA capital gains tax help

Your accountant is correct. I think a better option than having your husband's sister take the whole flat and gift half the proceeds to your husband (which the IRS could easily look through as to what it really is - a disguised sale), how about have your FIL change his will to leave your husband proportionately more than his sister when he does pass away to make up for the entire flat going to the sister (assuming he has other assets?).

If the house has already changed hands, not sure how this can be undone - I guess lawyers would have to be consulted for that.
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Old Dec 9th 2012, 3:19 pm
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Default Re: UK/USA capital gains tax help

There was doubtless a form 3520 filed last year on receipt of the gift as well as FBAR filing if your husband is included in an EPA or LPA.

This was incredibly daft planning and obviously not what was intended. There would have been a solicitor involved and if he did not advise the donor to take US tax advice you may want to pursue the solicitor for compensation. Obviosly whether a court in the UK would agree with you would depend on the facts.
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Old Dec 9th 2012, 7:15 pm
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Default Re: UK/USA capital gains tax help

Thank you for all your replies. Our accountant also confirmed that he can't gift his share to his sister, have her sell it and then gift him the money.

The transfer took place this summer (so no 3520s have been filed yet). They are getting ready to sell it - the buyer is in place.

Cook_County - the solicitor who transferred the deeds was aware my husband was a US person. She never told him to get US tax advice. However, she has a general statement in a letter saying that she does not offer tax advice and they should seek that themselves. He and his sister talked to an accountant in the UK to make sure they knew the score in the UK (that if they sell they wouldn't be liable for CGT, etc). Unfortunately as he was never told explicitly to get US tax advice, he didn't. He hasn't even been a green card holder for two years, so he's unfamiliar with how Uncle Sam works.

Our attorney here has asked us to talk to the solicitor and see if she can undo the transfer and put it back in the dad's name (then he would sell and gift them the money). We'd like to send her an email tomorrow to see if this is possible. But if she did this, then she would be admitting that she didn't tell my husband explicitly to get US tax advice. I can't see her agreeing to that. Do you think she should have explicitly told him to get US tax advice? Can we 'blame' her for that and therefore see if we can get the transfer undone??? I wasn't in the UK at the time this happened, but I am disappointed that, as their solicitor, she didn't point that out to my husband. I don't think we'd be in this mess otherwise...

One final thing, our accountant in the UK doesn't think my husband is liable for CGT here in the US - and he's a UK/US tax consultant! In the UK, my father in law's cost basis stepped up the date he gave the property to his kids. This is UK law. I could even get a letter from a solicitor saying that my husband's father's cost basis is X amount. So here's our UK accountant's argument: if the IRS says what is the donor's income tax rate, for example. The answer is what that donor's income tax rate is in the UK. If the IRS says what is the donor's lifetime gift allowance? Again, the answer is what that donor's lifetime gift allowance is in the UK obviously. But, in this instance, when the IRS says what is donor's cost basis (this is verbatim from the IRS for this situation)?, the IRS is 'forcing' US law on the non-US person. Even though we could get a letter from a UK solicitor saying that the donor's cost basis is $X, apparently the IRS can say this is not true. Hope that makes sense!
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Old Dec 9th 2012, 7:58 pm
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Default Re: UK/USA capital gains tax help

I don't really follow this

Originally Posted by carmen blue View Post

One final thing, our accountant in the UK doesn't think my husband is liable for CGT here in the US - and he's a UK/US tax consultant! In the UK, my father in law's cost basis stepped up the date he gave the property to his kids. This is UK law. I could even get a letter from a solicitor saying that my husband's father's cost basis is X amount.
Your father in law has no CGT due because of Private Residence Relief. When he gifted the house to his children their UK CGT basis will be the value of the house when it was gifted. As they don't live in the house they won't get Private Residence Relief when they sell it so CGT is due, but they can apply the CGT allowance.

So here's our UK accountant's argument: if the IRS says what is the donor's income tax rate, for example. The answer is what that donor's income tax rate is in the UK. If the IRS says what is the donor's lifetime gift allowance? Again, the answer is what that donor's lifetime gift allowance is in the UK obviously. But, in this instance, when the IRS says what is donor's cost basis (this is verbatim from the IRS for this situation)?, the IRS is 'forcing' US law on the non-US person. Even though we could get a letter from a UK solicitor saying that the donor's cost basis is $X, apparently the IRS can say this is not true. Hope that makes sense!
The IRS is going to apply it's rules to your husband's situation. When the house was gifted to your husband he assumed the cost basis of his father and when he sells it he will have to pay US CGT on the difference between the price his father paid for the property and the selling price. He could avoid this if he lived in the property for two years so that he could get his US CGT allowance, or he could gift the house to his sister and his father's will could be changed to leave him correspondingly more.

Last edited by nun; Dec 9th 2012 at 8:01 pm.
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Old Dec 9th 2012, 10:17 pm
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Default Re: UK/USA capital gains tax help

When you say he could gift the house to his sister and the father's will could be changed - I'm confused. If he gifts the house to his sister, his sister will then sell it in her name. Where would their father's will come into it?
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Old Dec 9th 2012, 10:40 pm
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Default Re: UK/USA capital gains tax help

To try to clarify a little more about what our UK accountant is saying, he explained that, in the UK, when a donor gives a gift of his primary residence, the donor's cost basis increases at that moment. So if the IRS asks 'what is the donor's cost basis?', the answer is that it is the FMV on the date the gift was given. If the IRS asks: 'what would the donor's cost basis be if the donor lived in the US', that would be a different answer.

Anyway, here's his email:

In the UK where an asset is gifted, it is treated as a disposal for capital gains tax purposes. At the time of the realisation of the gain, it has taken place in the UK and the seller is UK resident, it is therefore only subject to UK tax. The essence of the gift itself triggers a chargeable event that gives rise to a tax calculation based on the value at that date. Their father has disposed of an asset which, as it has been is main residence for the whole period of ownership, qualifies for Private Residence Relief and consequently no tax is payable. It does not however take away from the fact that in calculating the liability, the value of the property is taken as the FMV at the date of the gift.
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Old Dec 9th 2012, 10:54 pm
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Default Re: UK/USA capital gains tax help

Hang on...you have a UK accountant and a UK solicitor involved and nobody told you this was daft.

Let's slow down. Is there an EPA or an LPA or did the donor truly have the capacity to make the gift.

If there is an EPA or LPA who made the gift, who decided and when.

You may be wise to threaten to litigate but had best be sure that the donor or his attorney(ies) or the police do not have a counter claim against you if capacity was in question when the gift was made.
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Old Dec 9th 2012, 11:12 pm
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Default Re: UK/USA capital gains tax help

Originally Posted by carmen blue View Post
When you say he could gift the house to his sister and the father's will could be changed - I'm confused. If he gifts the house to his sister, his sister will then sell it in her name. Where would their father's will come into it?
If he gifts it to his sister and then she sells it she will get the entire value of the house. Assuming it's not her main residence when she sells it she'll have to pay UK CGT on the gain between the date it was gifted and the date it was sold and she'll be able to exclude around 10k of any gain because of the CGT allowance.

Your husband is now out by half the selling price of the house, so he should get that amount more in the father's will. Both sister and brother come out equally after the death of the father and capital gains tax has been minimized.

Last edited by nun; Dec 9th 2012 at 11:18 pm.
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Old Dec 9th 2012, 11:16 pm
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Default Re: UK/USA capital gains tax help

Originally Posted by carmen blue View Post
To try to clarify a little more about what our UK accountant is saying, he explained that, in the UK, when a donor gives a gift of his primary residence, the donor's cost basis increases at that moment. So if the IRS asks 'what is the donor's cost basis?', the answer is that it is the FMV on the date the gift was given. If the IRS asks: 'what would the donor's cost basis be if the donor lived in the US', that would be a different answer.

Anyway, here's his email:

In the UK where an asset is gifted, it is treated as a disposal for capital gains tax purposes. At the time of the realisation of the gain, it has taken place in the UK and the seller is UK resident, it is therefore only subject to UK tax. The essence of the gift itself triggers a chargeable event that gives rise to a tax calculation based on the value at that date. Their father has disposed of an asset which, as it has been is main residence for the whole period of ownership, qualifies for Private Residence Relief and consequently no tax is payable. It does not however take away from the fact that in calculating the liability, the value of the property is taken as the FMV at the date of the gift.
This strikes me as a really long shot. Are you sure your UK accountant understands US taxation and is dual qualified? The IRS has no interest what so ever in the UK tax situation. Under UK law the tax basis steps up when the house is gifted, but under US law it doesn't; that only happens if the house is inherited.

From the web
"For US tax purposes capital gains or losses on property received as a gift are calculated with respect to the original owner's cost basis in the property. In other words, when property is given, the recipient receives both the property and the property's cost basis. The recipient also receives the donor's holding period in the property for determining whether a gain is long-term or short term."

Now I'm not a professional, so I could be wrong, but I find it hard to imagine your accountant's argument will work.

Last edited by nun; Dec 10th 2012 at 12:31 am.
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Old Dec 9th 2012, 11:40 pm
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Default Re: UK/USA capital gains tax help

Originally Posted by carmen blue View Post
To try to clarify a little more about what our UK accountant is saying, he explained that, in the UK, when a donor gives a gift of his primary residence, the donor's cost basis increases at that moment. So if the IRS asks 'what is the donor's cost basis?', the answer is that it is the FMV on the date the gift was given. If the IRS asks: 'what would the donor's cost basis be if the donor lived in the US', that would be a different answer.
That is probably what the IRS will ask.

How much money is being talked about? It may be best to simply pay the capital gains. IF it can be counted as a long term capital gain (you'd need to check) then the federal tax rate in 2012 will be no more than 15% (and may be 0% depending on your filing status and other income). You'd still need to declare it on your tax return and it would affect state tax and certain other income dependent issues, but you should certainly calculate how much tax is going to be involved before you take any other decision.

Note that in 2013, capital gains tax rates may be higher.

Same goes for Inheritance Tax - if the value of the gift is less than the nil rate band, I'm not sure if there is any risk of tax in the future if your father dies before 7 years is up.
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