US-UK Real Estate

So we have real estate questions that takes some explaining.

Our mother and father, who are 76 and 83, were both born in the UK but are also US citizens as well. (Dual citizens) They own a flat in the USA that is currently their “primary residence”. They also own a flat in the UK that they had always planned to retire to once work in the USA was over. My husband and I are currently living in this UK flat.

The plan was to sell the flat in the USA first. Since that was their “primary residence” they would owe no Capital Gains Tax on this sale. Then they would move to the UK flat, and live in this flat for at least two years to establish it as a “primary residence”. (We would move out once they move in.)  After this time they will sell this UK flat and again since it would be their “primary residence” would avoid CGT in the USA. Then they would move in with us. Easy !

So all of that would have been great, but unfortunately, due to one of my parents being ill we are having to do a rethink.

Obviously from the above explanation, the goal is to avoid paying CGT in the USA.

The main question is what options do we have? Can they gift the UK flat to us (or sell it to us for £1) so that it would be our “primary residence” and we would not have to pay CGT upon selling after two years since we are currently living in the flat?

Or if they gift it or sell it to us would they then be charged the fair market CGT since it is not at present their “primary residence”?

Any way to do this besides our original plan?

Thanks,

NWKH

Assuming they are not UK tax resident and are resident in the USA they should be able to gift the flat in the UK and report the gift on IRS form 709. The value of the gift will go against their lifetime estate tax exemption which is over $11m per person, $22m for a married couple.

Is that an option?

Durhamlad-

Thanks so much. Not even close to the 22m.  But would we then be accountable for all of the CGT in the USA? A little more background my husband and I are also dual citizens (US UK) so we have to pay Uncle Sam also. The parents have owned this flat for. a number. of. years, since 1978 to be exact, so it has risen in value quite. a bit and the. CGT is potentially very large.

This brings up another question. Can either party, parents, or us, whoever ends up selling this UK flat be taxed on capital gain on both sides of the pond?

I seem to remember reading The Crown wants 28% CGT on the sale of a flat. Can we own in both places?

Thanks,

NWKH

Durhamlad-

Thanks so much. Not even close to the 22m.  But would we then be accountable for all of the CGT in the USA? A little more background my husband and I are also dual citizens (US UK) so we have to pay Uncle Sam also. The parents have owned this flat for. a number. of. years, since 1978 to be exact, so it has risen in value quite. a bit and the. CGT is potentially very large.

This brings up another question. Can either party, parents, or us, whoever ends up selling this UK flat be taxed on capital gain on both sides of the pond?

I seem to remember reading The Crown wants 28% CGT on the sale of a flat. Can we own in both places?

Thanks,

NWKH

I’m far from being an expert on this but my reading would be as follows.

If your parents sell their US place they will be subject to US cap gains taxes which has a $500k cap gain exemption on the sale of the primary home. (If the cap gain turns out to $600k they will only pay tax on $100k). Being non UK resident they won’t be subject to UK taxes on the sale. This $500k primary home exemption resets every 2 years, so you can sell, buy, stay for at least 2 years and sell again.

If the persons selling the UK flat are UK resident at the time and it is their primary home then no UK cap gains tax as the UK has no cap gains on the primary home but will be subject to US cap gains taxes ($500k exemption for a couple).  Boris Johnson, who used to be an accidental American got caught out on this. While renouncing his US citizenship he had to file back taxes to the USA and the prior sale of his primary home in the UK triggered US taxes to the tune of over £100k.

Yes, you can own property in both places and the sale of the one that is not your primary residence is subject to cap gains when you sell.

Durhamlad,

This has so many moving parts. The 500k exemption on the US side was the main reason the parents were originally planning to move over to the UK. That plus they wanted to be in the UK of course so.. win-win. But from what i am reading even though the UK flat will then be their "primary residence" after two years it looks like they will still owe the UK CGT because they have not lived in the flat the entire time of ownership.

It does look like they will both be able to get £11,300 Foreign Tax Credit for a total of 22,600 against the UK CGT since they will be paying in both places. But do they get that if they are living on the US side of the pond or only if they sell while living in the UK?

THanks

It doesn't matter which side of the pond they are living on when it comes to foreign tax credits.  If they pay capital gains taxes twice on the same sale then they can use foreign tax credits to offset the tax paid.

The foreign property has ALWAYS been subject to capital gains from the USA!  Regardless of primary residence or not. 

The foreign property has ALWAYS been subject to capital gains from the USA!  Regardless of primary residence or not.

Of course it has, but if you are a USC living in the UK then even though your primary home is in the UK you still get the $500k exemption per couple every 2 years when you sell.  We went through this when we moved to the USA. We sold our UK home within 2 or 3 years  of moving to the USA so it was counted as selling our primary home. (We were renting in the USA and on temporary visas at the time).

Thanks so much. Always appreciate all the help.