Complicated US CGT for a gifted UK property

I was posting this on a different forum and someone suggested I post here. Here's the situation:

My husband is a green card holder of just under two years. His dad, who lives in the UK, had to move into a home and gave his flat (primary residence) to my husband and his sister about six months ago. They have decided to sell it and have a buyer. There is no UK CGT 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 CGT in the USA is different to the UK. We discovered 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.

We have received legal advice here and now understand that it was really, really stupid of this transfer to happen. My husband's father wanted to give them his home but he would have happily kept it in his name and sold it and gave them the money if he knew that my husband would have this potential tax bill.

We have explored all avenues and it's not looking good.

My husband wasn't told to get US tax advice by the UK solicitor who transferred the deeds - in fairness, she said to get tax advice but didn't explicitly say US tax advice. My husband is considering contacting her to see if the gift can be undone because he wasn't advised of this. Not sure if that's even possible for her to do though.

Secondly, a UK accountant we've contacted has this argument: He doesn't think my husband should have to pay US CGT because 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, in this case, 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. But he doesn't live in the US.

Anyway, here's his email in more detail:

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.


Thanks in advance for any other suggestions. This is very unfortunate - it's a lot of money and my husband is ready to pack his bags and go home to England...

You're asking the wrong kind of professional for advice: you need a UK/US tax planner, a UK accountant would not usually be in a position to solve the problem.
These are the questions to ask:-
1. "If we sell this property at a loss to the FMV, how would the basis change, and therefore would we end up with no gain from this transaction in the US?"
2. "Is the transfer of property in the UK capable of being set aside by the local authority on the grounds that it was a scheme to avoid selling the home to pay care fees (and thereby force the council to pick up the fees) and if there was such a court order in arrears how would it affect the tax treatment of our sale?"
3. "If we went to live in the property for some months, and claimed it as a principal residence, and then sold it, would we be able to claim principal residence relief on the UK house without affecting our gains-tax free position on our US home?"
(and read this:-
http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses,-Sale-of-Home/Property-(Basis,-Sale-of-Home,-etc.)/Property-(Basis,-Sale-of-Home,-etc.)
This forum isn't the place to give tax advice, but I hope the above shows you there are solutions and a pitfall to watch out for. The forum rules prohibit advertising, and the expectation is that you pick a firm you want to talk to.

I hope others will weigh in with their opinions, but the crux of the issue seems to be the different way the US and the UK treats the cost basis for the CGT calculation on the gift of the house; ie the donor's basis does not transfer to your husband for UK tax purposes but does for US tax so there is a possibility for a large CGT bill in the US when the house is sold.

If your husband has the house as his main residence he'd get $250k of capital gains tax free on his US taxes when he sells. The UK inheritance tax is going to be determined by the size of the estate, the size of the gift relative to the 325k GBP inheritance tax allowance and the taper relief if his father lives less than 7 years after the date of the gift.

I have no idea if the gift and be "reversed" or other recourse you have with your UK advisers or how the county council will view such gifts in relation to your father in law's on going care. Maybe others can offer some guidance for you.

Thanks for your comments. We spoke to the UK solicitor who was surprised to hear the news and agreed that my husband would not have agreed to accepting the gift if he had all this information. His father just wanted them to have the flat and sell it or renovate it - and they got lots of UK advice but unfortunately he was never told to look at the US side.
The solicitor is looking into 'undoing' the transfer, or seeing what else she can do.
We are fully aware that if his father dies within seven years, this gift will form part of his estate. My husband and his sister are making provisions for this. Believe me, they crossed their t's and dotted their i's on that side of the pond!

So what are you going to do? What does your sister in law think about all this? as gifting the house is surely a good move for her.