Tax rules for USC in UK

Hi all

Tax rules for USC in the UK are a total disaster as I'm sure you're all aware!  I've been reading up online but noone seems to want to give clear advice
I don't think our situation is particularly complicated, so I'd like to summarise here in the hope someone can tell us in the simplest possible terms what we need to do and what we need to avoid.

Tre's been here since October 2019. He's currently in his third job. In two or all three he's paid into the standard company pension but that's it. Jobs are all <£25k per annum so not high earning and I imagine within any limits set by the US government.

We took out a LISA in his name to benefit from the 1k per year bonus from the UK government for first time home buyers. This was after much research and also reading someone on here saying that their accountant just put the bonus down as additional income.

Further to that, we're about to start house-hunting for somewhere bigger. New place will probably be maximum 300k, so capital gains tax on that probably not going to be anywhere the $250k per person threshold as I guess we'd need a profit equivalent to $500k in total to trigger that? We'd like to buy together in both our names, but despite the above argument, is it best not to just to make sure US government can't take a slice? I presume if he renounces before we sold they couldn't take a slice then?  If we remortgage at the end of say a fixed, 2-year term, is that classed as paying off a mortgage, and so the IRS would look to tax us at the point of remortgage?

We're also hoping to get a small investment buy-to-let property. I guess same questions there in terms of capital gains tax. How does income from a buy-to-let mortgage get treated? If it's in both our names do we just class his half of the rental income as an addition to his salary? Again, is it viable to buy in both our names or is it just asking for trouble?

Regarding investing in a small stocks and shares portfolio, again is it best just done in my name?

How difficult/expensive is renouncing once he has ILR/British citizenship?

So far we've just returned a tax form to the US detailing his salary for the tax year and that's been it, not had any letter back so assuming everything's ok so far but if we're missing anything urgent please let us know so we can try to fix!

Also, we've heard next to nothing regarding student loans - he had one payment taken automatically from one of his US paychecks but then nothing so possibly he only met the threshold one month? And since being in the UK nothing either, and as above his salary still isn't that high so not sure if he's still below a threshold or if we've fallen out of the system or if there's something we should be doing. For information his mum was cosignatory on one of his loans but she's not been contacted either.

Thanks everyone, happy to clarify if anything unclear
G&T

Tre's been here since October 2019. He's currently in his third job. In two or all three he's paid into the standard company pension but that's it. Jobs are all <£25k per annum so not high earning and I imagine within any limits set by the US government.

Company pension is all good, nothing to worry about here.

We took out a LISA in his name to benefit from the 1k per year bonus from the UK government for first time home buyers. This was after much research and also reading someone on here saying that their accountant just put the bonus down as additional income.

Cash or Stocks & Shares LISA? Cash is totally fine, you just report the interest as US-taxable, as well as the UK government bonus - no big deal. S&S you would want to avoid all funds, as they'll be PFICs and subject to punitive US tax plus onerous filing requirements. Individual stocks are fine, if you're comfortable managing them.

Further to that, we're about to start house-hunting for somewhere bigger. New place will probably be maximum 300k, so capital gains tax on that probably not going to be anywhere the $250k per person threshold as I guess we'd need a profit equivalent to $500k in total to trigger that? We'd like to buy together in both our names, but despite the above argument, is it best not to just to make sure US government can't take a slice? I presume if he renounces before we sold they couldn't take a slice then?  If we remortgage at the end of say a fixed, 2-year term, is that classed as paying off a mortgage, and so the IRS would look to tax us at the point of remortgage?

Agree, no worries on capital gains tax, assuming you meet the requirements: https://www.irs.gov/taxtopics/tc701 (no UK capital gains tax on a primary residence). If your husband renounces and exits the US tax system, then US taxes cease to be any concern, but there are checks on exit tax in that process. The IRS would only tax at the point of remortgage if there are phantom currency gains (https://www.bogleheads.org/w/index.php?title=US_tax_pitfalls_for_a_US_person_living_abroad&mobileaction=toggle_view_desktop#Phantom_currency_gains), otherwise remortgaging isn't a taxable event - it's the FOREX transactions that might be taxable, from the IRSs point of view, not the remortgaging itself.

We're also hoping to get a small investment buy-to-let property. I guess same questions there in terms of capital gains tax. How does income from a buy-to-let mortgage get treated? If it's in both our names do we just class his half of the rental income as an addition to his salary? Again, is it viable to buy in both our names or is it just asking for trouble?

I'll skip this one, as I'm not versed enough in buy-to-let to comment. Do look into the recent/upcoming changes in UK taxes on buy-to-let and make sure it makes financial sense, I've heard anecdotes/noise that it's getting much harder to actually make money with buy-to-let, even for UK-only taxpayers.

Regarding investing in a small stocks and shares portfolio, again is it best just done in my name?

Does your husband file as Married Filing Separately or Head of Household? If so, yes, this would be ok, as long as he's ok with everything being in your name. But if you're in the US tax system as well, as with Married Filing Jointly, the same rules apply to you, with PFIC being the big scary one to avoid.

How difficult/expensive is renouncing once he has ILR/British citizenship?

The renunciation fee is $2,350. There may also be expatraition (aka exit) tax due: https://www.irs.gov/individuals/international-taxpayers/expatriation-tax Many countries shut down renuciantions during COVID, not sure if that's gotten better in the UK yet. Note that you would NOT want to renounce until he has British citizenship - ILR doesn't count. He'd wind up stateless, no passport, very bad juju.

So far we've just returned a tax form to the US detailing his salary for the tax year and that's been it, not had any letter back so assuming everything's ok so far but if we're missing anything urgent please let us know so we can try to fix!

Did you also report any other income? Interest on a savings account, dividends or capital gains from any stocks, that kind of thing? And do you know if you used the Foreign Earned Income Exclusion or the Foreign Tax Credit?

If you do a buy to let, keep the USC name off of it.  It’ll already be HEAVILY taxed in the UK.  Keep the USA out of it.

We got out of the rental market as the government made loads of changes making it virtually impossible to break even, let alone have a revenue stream. That was the reason behind the government changes and it worked on us!  We had ours solely in my husband (the UKC’s name).  I did my research to ensure I was comfortable (been burned before).  I do literally have all my eggs in his basket! 

Thanks KFdancer and tubaleiter

We've been chatting and researching and would like to ask some further questions.

With regard to buy-to-let, what are the changes that have made this so difficult? I think there's been a tax threshold change recently. Is there also more bureaucracy? We live on the edge of Manchester city centre where there is a considerable student and young professional rental market; having said that we have seen quite a few ex-rental properties during our search for a new residential purchase.

It's a cash LISA, and I think if we do any investing we'll keep that in my name for now. He files as Married Filing Separately, so that's all good.

The residential purchase has to be in both our names I think, if we're to use both our salaries? I don't know if there's any workaround to that?
It sounds like we might avoid any mortgage related taxes provided we don't remortgage while Tre is a USC?
To clarify, by remortgage I simply meant moving to a new product or provider at the end of a fixed term, rather than a whole new property or freeing up equity.

We're weighing up just putting more of a deposit down on our new residential and investing the rest in my name for the time being, and revisiting all this once Tre's tax implications are less complicated!

I think we used the Foreign Earned Income Exclusion, but honestly couldn't say for sure. I'm pretty sure he qualifies for it, although his first few months we weren't sure as there's a whole year residency stipulation. He used turbotax.com to complete the return. He pretty much just has his income, and whatever titchy bits of interest the bank might have added to his current account from time to time. No stocks capital gains or dividends etc. And no property capital gains as yet as the current flat is the one in my name that he moved into.

If anyone has anything to chip in re the student loans, that would be great.

Thanks everyone
G&T

With regard to buy-to-let, what are the changes that have made this so difficult? I think there's been a tax threshold change recently. Is there also more bureaucracy? We live on the edge of Manchester city centre where there is a considerable student and young professional rental market; having said that we have seen quite a few ex-rental properties during our search for a new residential purchase.

Buy to let is not my area of expertise, but here's a couple of articles that describe the changes and the impact (without trying to sell you anything!):
https://www.unbiased.co.uk/life/homes-property/is-buy-to-let-still-worth-it

https://monevator.com/its-too-late-to-get-into-buy-to-let/

It's a cash LISA, and I think if we do any investing we'll keep that in my name for now. He files as Married Filing Separately, so that's all good.

That's all reasonable.

The residential purchase has to be in both our names I think, if we're to use both our salaries? I don't know if there's any workaround to that?
It sounds like we might avoid any mortgage related taxes provided we don't remortgage while Tre is a USC?
To clarify, by remortgage I simply meant moving to a new product or provider at the end of a fixed term, rather than a whole new property or freeing up equity.

The mortgage and the deed don't necessarily have to match, but this will very much depend on your lender. You can also choose between tenants in common vs joint tenancy and potentially adjust the % that each of you own. Definitely worth talking to your conveyancing solicitor (and this is a case where it probably makes sense to pay for a real lawyer here, not just the cheapest/fastest conveyancing firm). Can be impacts on estate planning, impacts if there ever were a divorce (hopefully not!), etc.

I think we used the Foreign Earned Income Exclusion, but honestly couldn't say for sure. I'm pretty sure he qualifies for it, although his first few months we weren't sure as there's a whole year residency stipulation. He used turbotax.com to complete the return. He pretty much just has his income, and whatever titchy bits of interest the bank might have added to his current account from time to time. No stocks capital gains or dividends etc. And no property capital gains as yet as the current flat is the one in my name that he moved into.

FEIE is fine for that situation, should result in zero US tax liability. FTC would do the same, so if FEIE is easier to file, no harm in that. FTC really starts to be advantageous if he starts to earn over the FEIE threshold, or if there's enough passive income (interest, dividends, capital gains) that you're paying UK tax on it.

Did he also file an FBAR to report any foreign (i.e. UK) bank accounts, the pension, etc.? No tax due on that, but need to make sure the box gets checked.

Buy to Lets in the past:

EVERYTHING was deductible towards taxes.  So the mortgage payment, all repairs, all fees, etc., all could be deducted.  Then the balance was taxed.
  Example, rental income £1,000.  Mortgage payment £500, Repairs £100, Fees, £200. 

Income £1,000 - Expenses £800 = £200 taxable income
Tax on £200 * 20% = £40
at 40% tax rate = £80

NOW:
You can no longer charge fees for applications, etc.  You can still deduct repairs.  You can no longer deduct mortgage payments.  So the same situation above:
Income £1,000 - Expenses £100 = £900 taxable income
Tax on £900 * 20% = £180
at 40% tax rate = £360

So you can see the taxes have increased by 450%.

There's a lot more to it, but you get the idea.

When it comes to investing in buy to lets it really depends on yours goals. If your main concern is cash flow (ie profit coming in every month), then the rule changes have certainly impacted that for those with small buy to let portfolios in their own name. If, however, your main goal is investing your savings in a safe long term appreciating asset, then it is still a very viable option. Yes the monthly cash flow would be less after tax than it used to be, but you still benefit from the capital appreciation of the property if you are holding it for the long term. Appreciation can also be maximised by buying below market value at the beginning, and/or adding value to the property.

It is worth noting that if you plan on having multiple buy to lets, it could be worth setting up and running it through a limited company. Limited companies can still deduct expenses, mortgage interest etc, and only pay the corporate tax rate on profits. This is currently the most tax efficient way to go, however you do have the added expense of filing annual accounts. You should also note that owning part of a limited company would complicate your US returns, so a US/UK tax professional on that end would be advisable if the US citizen was going to be a shareholder.

There are plenty of strategies to make BTL a strong investment, it just comes down to personal circumstances and the strategies utilised.

A bit late, but all student loan repayments (assuming they are not private loans) have been paused due to the pandemic. They are due to restart January 2023. Biden is proposing to forgive up to $10K in loans for persons earning under $125K a year, and up to $20K in loans with that same income cap if the student also had Pell Grants while in school.

I am not an expert, but I think the tax situation on buy-to-let for a USC is a bit complicated and needs some careful planning and advice. In the US system, it is compulsary to book depreciation of the property each year, I think it is something like 1/40 of the value of the building (but not the land). Even establishing this in the UK can be a bit complicated for flats, particularly if leasehold. This depreciation is often enough to offset already any income tax due on the rental income on the US side, and if not UK tax credits would help. So no problem year to year. The problem comes when you sell the property. In the UK, potential for capital gains is computed from the difference between the sale price and the purchase price, while in the US it is between the sale price and now depreciated purchase price (ie purchase price less the depreciation booked each year). So in the US system tax gets deferred from rental incomes to capital gains on sale. As I say not an expert so worth taking advice.

In terms of joint ownershbip if equal share you would just split everything 50% (rental income and deductions) and put that on your US return, and same for the depreciation would be on your 50% of the value of the property.

Thanks everyone for the input

All seems fiendishly complicated.  We'll come back to the buy-to-let as for the time being we're just trying to get our residential purchase sorted. If things work out, we'll stay there until after Tre has renounced US citizenship so the IRS won't have a claim on any capital gains.

More pressingly, what's the easiest/cheapest way for Tre to submit a tax return to the IRS? Nowhere online seems to give a straightforward answer.  Surely there's a place online to say 'this is what I earned and it's way less than the expat overseas allowance and I paid tax correctly in the UK therefore I owe you nothing'?

Is the IRS freefile option a viable one for us?  Tre literally just has his salary (in the low £20ks) and our contributions to the LISA which is in his name (I think there's about 10k in there now, 8k from us and 2k government bonus but I think I read elsewhere that someone's accountant said the 2k bonus can be classed as additional income). So we just need a cheap and simple way to put that to the IRS to keep his records up to date so they don't get ma if he comes to renounce.

Any help appreciated!
Thanks

More pressingly, what's the easiest/cheapest way for Tre to submit a tax return to the IRS? Nowhere online seems to give a straightforward answer.  Surely there's a place online to say 'this is what I earned and it's way less than the expat overseas allowance and I paid tax correctly in the UK therefore I owe you nothing'?

Is the IRS freefile option a viable one for us?  Tre literally just has his salary (in the low £20ks) and our contributions to the LISA which is in his name (I think there's about 10k in there now, 8k from us and 2k government bonus but I think I read elsewhere that someone's accountant said the 2k bonus can be classed as additional income). So we just need a cheap and simple way to put that to the IRS to keep his records up to date so they don't get ma if he comes to renounce.

Free file should be a viable option, you're under the threshold where it applies. Not all the free file options will support foreign situations. Two options that get mentioned quite a lot in US expat forums are TaxSlayer and OLT. I've played around with both, both seem entirely usable (both of those you don't even need to go the formal "free file" path - they're just free). Unfortunately, the IRS doesn't have an "official" free option (like HMRC does), beyond either paper forms or free fillable forms. Both of those put a lot of onus on the preparer to read IRS instructions - absolutely possible, not terribly user friendly. But for simple situations, also entirely doable.

As far as income, you've just got earned income (Tre's salary) and the government top-up for the cash LISAs. I imagine you probably also have some interest in bank accounts somewhere? Might be tiny, but don't forget to report it (and do an FBAR, if required).

Thanks everyone for the input

All seems fiendishly complicated.  We'll come back to the buy-to-let as for the time being we're just trying to get our residential purchase sorted. If things work out, we'll stay there until after Tre has renounced US citizenship so the IRS won't have a claim on any capital gains.

More pressingly, what's the easiest/cheapest way for Tre to submit a tax return to the IRS? Nowhere online seems to give a straightforward answer.  Surely there's a place online to say 'this is what I earned and it's way less than the expat overseas allowance and I paid tax correctly in the UK therefore I owe you nothing'?

Is the IRS freefile option a viable one for us?  Tre literally just has his salary (in the low £20ks) and our contributions to the LISA which is in his name (I think there's about 10k in there now, 8k from us and 2k government bonus but I think I read elsewhere that someone's accountant said the 2k bonus can be classed as additional income). So we just need a cheap and simple way to put that to the IRS to keep his records up to date so they don't get ma if he comes to renounce.

Any help appreciated!
Thanks

Is it a cash LISA?  If so, easy peasy.  Yes, he can use Free File or for a small amount, Tax Act is a user friendly online software platform.

If it's a stocks and shares LISA...  well, that was a mistake.

Just a side note with regards TaxAct. I tried to log in and it now asks to send a verification code to a U.S cell phone, (my U.S VoIP won't do). I had to recovery my account, using my previous U.S address as you can't list a foreign country. Eventually I was able to change the number to a friend in the U.S and set up Google Authenticator. Going forward, I've had to set that app for verification, which is required every time you log in. I now also find that all previous tax returns have been deleted! Thankfully I had the pdf's backed up.

To complicate maters further you can't change between verification code or phone number at log in.... So if you change device and do not export/import authentications to new device, then you're locked out. Customer services have NO administrator override, meaning that if you can't recover your account, they will not be able to do it for you!

Just a side note with regards TaxAct. I tried to log in and it now asks to send a verification code to a U.S cell phone, (my U.S VoIP won't do). I had to recovery my account, using my previous U.S address as you can't list a foreign country. Eventually I was able to change the number to a friend in the U.S and set up Google Authenticator. Going forward, I've had to set that app for verification, which is required every time you log in. I now also find that all previous tax returns have been deleted! Thankfully I had the pdf's backed up.

To complicate maters further you can't change between verification code or phone number at log in.... So if you change device and do not export/import authentications to new device, then you're locked out. Customer services have NO administrator override, meaning that if you can't recover your account, they will not be able to do it for you!

Sheesh, that doesn’t sound good.

Sheesh, that doesn’t sound good.

Here's more from @Alan and an ingenious workaround.
https://talk.uk-yankee.com/index.php?topic=100459.0