Taxes on sale of flat..

This is a rather complicated situation I am hoping we can get some guidance and insight on. My in-laws are from the UK but have been in the US since the 1960's They both have dual citizenship but spend most of the year in the US.

Way back in the 70's, when the exchange rate was good, they bought a flat in the UK so they could return and see family and vacation there several times a year. They are now getting up in years and are starting to think about inheritance and the best way to manage there retirement.

We now have several questions about how to best handle the sale of the flat. As Im sure you all can imagine the flat in now worth many times what they paid for it. To say the least. So....

1. What are the laws in terms of selling a “Second Home” in the UK if you live in the US?
2. Should they spend a good part of the year there so it is considered a primary residence and avoid these “Second Home” issues?
3. Is there a tax similar to the “capital gains” tax in the US?
4. Is there a penalty or tax for moving large amounts of cash from said sale to the US?
5. I suppose the overriding question is how can they sell this flat and pay the least amount of taxes?

Thanks in advance for any help.

This is a rather complicated situation I am hoping we can get some guidance and insight on. My in-laws are from the UK but have been in the US since the 1960's They both have dual citizenship but spend most of the year in the US.

Way back in the 70's, when the exchange rate was good, they bought a flat in the UK so they could return and see family and vacation there several times a year. They are now getting up in years and are starting to think about inheritance and the best way to manage there retirement.

We now have several questions about how to best handle the sale of the flat. As Im sure you all can imagine the flat in now worth many times what they paid for it. To say the least. So....

1. What are the laws in terms of selling a “Second Home” in the UK if you live in the US?
2. Should they spend a good part of the year there so it is considered a primary residence and avoid these “Second Home” issues?
3. Is there a tax similar to the “capital gains” tax in the US?
4. Is there a penalty or tax for moving large amounts of cash from said sale to the US?
5. I suppose the overriding question is how can they sell this flat and pay the least amount of taxes?

Thanks in advance for any help.

If this is not their primary residence then capital gains tax will have to be paid  without the usual primary residence exemptions. By living in the flat for 2 consecutive years out of the last 5 the IRS would classify it as a primary residence and there'd be a $500k capital gains tax exemption. I think you can get a reduction in the capital gains in the UK for time spent in the residence. In the US the capital gain will also include any currency gains from variations in the exchange rate. The UK capital gains tax would be paid in full and then a credit taken against the US tax due.

Nun-

Thanks so much this is a HUGE help. Do you happen to know if the 2 out of 5 years in residence is required to be 2 consecutive years or can the time be split as long as it equals 2 years out of the 5?

Lastly, do you know of a website where all of this is spelled out. We have had no luck finding anything along these lines.

Thanks so much again.

I would like to offer some additional observations.

I assume that NWKH’s in laws are not UK resident at present. The following comments assume that this remains the case.

The UK does have a capital gains tax. The main rate is 28%.
Until recently the UK did not impose UK CGT on gains on UK situs assets owned by non-residents. Therefore, until recently if the flat had been sold then there would have been no UK tax payable.

From 6 April 2015, the UK has imposed CGT on sales of UK residential property owned by non-residents. However, the charge only taxes any rise in value from 6 April 2015. Accordingly, on a sale now of the flat some UK tax might be payable but it might not be a large amount.

There are special rules about the reporting of such gains and payment of any tax. The UK government website has a readable summary of them.

There is of course a double tax treaty between the UK and US. However it does not prevent the UK from imposing the charge to CGT. Further the UK has primary taxing rights. This means that any tax payable in the UK may reduce the US tax (and not vice versa)

The overall situation is therefore that a small amount of UK tax might be payable, and this would be set against the US tax. The overall concern would be US tax.

If the in laws were to seek to reduce the US by using the flat then they might become UK resident. On a sale, the whole of the gain would then be subject to UK CGT. Part of the gain would be exempt as relating to main residence use, but in the UK this is computed on a time apportionment basis. Therefore while the US tax might be reduced the UK tax could rise considerably. Any planning involving using the flat as a main residence should not be undertaken without detailed consideration of the overall effect.

Dunedin-

WOW.. thank you so much. I am finding some things on UK Gov websites,  now that I know what to search the web for, but this is a HUGE help and puts it in plain English.

So many angles to consider on this one.

Thanks again.

Dundin-

I have had a busy spring so I just have this issue back on my radar.

Here is the thing. My in laws have UK AND US citizenship. At present they spend the vast majority of their time in the US. They are however looking to retire soon and are planning to spend more time in the UK. Especially if as stated above they would need to spend 2 out of 5 years before a sale of the flat.

There are just so many angles to this one.

• How would them spending a majority of there time in the UK effect the future sale as a citizens? Or is it better for them to spend a 180 days in the UK a year so that they would be in the US for "the majority" of their time?

•Or is it better for them to stay in the UK and make it there primary residence?

• Lastly, would they need to spend 2 CONSECUTIVE years in the 5 years before the sale OR is it any number of days that add up to 2 years in the 5 years?



Thanks in advance to any and all replies..

NWKH

• Lastly, would they need to spend 2 CONSECUTIVE years in the 5 years before the sale OR is it any number of days that add up to 2 years in the 5 years?

To qualify as a primary residence when the IRS looks at the capital gain the home must have been lived in as your main residence for 24 months out of the last 5 years. To do that for a place in the UK you would have to satisfy UK residence rules ie number of days in a year and show that you were a "bona fide" foreign resident as well as having post delivered etc.

I would like to add some further comments.

As I understand matters, the US tax on the sale of the flat would be reduced if it were occupied as a main residence for at least two years. It seems to me a crucial question as to whether this is possible without thereby becoming a resident of the UK for tax purposes. I am not familiar with the details of the US rules but I would doubt that this would be possible.

It might be possible for the inlaws to move to the UK, establish the required two years for US purposes, then leave the UK to become non-resident again before selling. This would need detailed planning- and a long period.

It should be understood that the UK now has a statutory residence test. It does not require many days of presence in the UK to become a UK resident, especially if the individual is not in full time employment.

There are then the tie break tests for residence under the double tax treaty to consider. Again this would need careful and detailed consideration.

Suppose that the inlaws were UK resident under both UK domestic rules and remained so after applying the double tax treaty. The impact on the tax liabilities in the UK needs to be understood.

If the inlaws were UK resident, then of course their income and gains would be taxable in the UK.  The remittance basis for non UK income and gains might not be available (because of the detailed changes applying from 6 April 2017, under which anyone who was previously UK domiciled would be deemed to become so again immediately on resuming residence.)  Perhaps more importantly the basis of the calculation of the gain on the sale of the flat would radically change. The starting point is that the whole of the gain would potentially be taxable. There may be a rebasing to 31 March 1982. The main residence relief in the UK operates on a time apportionment basis. This might exempt a small fraction of the gain, based on the final years of occupation. The rate of capital gains tax on residences remains at 28%, notwithstanding the general reduction in the rate to 20%. The result of this might be a much increased UK liability, with a reduced US liability. 

Put bluntly, the US planning might work, but increase the overall tax because of increased UK tax.

Dunedin-

Thanks so much for all the help. Its all so complicated and getting any bit wrong may cost lost of money.

Do you or does anyone know of a tax/law firm in the UK that specializes in issues related to real estate regarding ex-pats?

Thanks in advance.

NWKH