Mortgage and Tax Liability

I'm hoping some of the experts will be able to advise.

My husband and I are currently purchasing a home together.  We are keeping our existing home and letting it.  This property was purchased by my husband solely before we were married.  On the Buy to Let mortgage, only his name will appear and will not expose us to US taxes.

On the joint property, my name must be on the title as my income is being used to mortgage the property.  We have two options:  joint tenancy or tenancy of unequal shares.

Would it be beneficial for us (for the US tax implications) to select tenancy of unequal shares and give myself a very low share of the ownership?  Or would Uncle Sam see this as us trying to "play the system"?

Also in the (hopefully unlikely) event of a divorce, would I be screwing myself by having a very small claim to the property?  I'm guessing yes.   

Any insight would be greatly appreciated.  Navigating the UK house buying process is mind boggling enough without adding in the US tax side of things!

After all your hard work in the visa section, it seems a shame you haven't had an answer to your question here in the tax section.

This is only my opinion and is without any accurate knowledge of the rules. Be warned,...

Would it be beneficial for us (for the US tax implications) to select tenancy of unequal shares and give myself a very low share of the ownership?  Or would Uncle Sam see this as us trying to "play the system"?

It's the options available in the UK, so I don't see how it could be interpreted as playing the system. All perfectly legal, and the same choices are available in the States (plus others).

Also in the (hopefully unlikely) event of a divorce, would I be screwing myself by having a very small claim to the property?  I'm guessing yes.

IMHO, no.

For UK tax, there's little consequence to the types of ownership. The major point of concern is inheritance in case of death of one partner.

For the US, any point of disposal of the property (sales) or asset valuation (death, renunciation of USC) is of concern. There may be more I'm not aware of (itemised deductions?). The US sees "Joint Tenants" as you owning 100% of the asset on disposal. If it's "Tenants in Common", then you only are responsible for your "share". Not having any share (100% or otherwise) would of course avoid all US tax problems, but it would seem to me to be unfair for you to contribute to a property, and when disposed of, you have nothing. Enjoy the property, and live with the fact that for the UK there's no problems, and the US will always want a slice of the action (if over the thresholds). That's the joy of being a USC.

https://www.gov.uk/joint-property-ownership

Here's hoping other, wiser persons will respond.

 

Very valid points OAP!

I'm very tempted to put myself down as having a very low share of the property.  We have wills that leave all assets to one another.

I went through a divorce when I was young (and we owned a home).  He didn't try to screw me and I know my husband now wouldn't try to screw me (even though you don't divorce the person you marry, if you know what I mean).  We have a child and he's a good man.  He wouldn't leave me stranded with nothing.  That I know.

I do agree about living life and not always trying to avoid the US tax system, as it is a part of our life.  At the same time, if I can prevent Uncle Sam from taking more money from me, I'm a fan!

To be honest, this situation is the prime reason I'm considering renouncing USC. Currently, we have Tenants in Common ownership. If I renounce, it will help with Form 8854. After renunciation, we would then switch to Joint Tenants to ease the inheritance issues with HMRC, and be able to live a normal life in the UK without all the US tax concerns regards inheritance.

Ownership and inheritance is a speciality area which needs greater clarification, and professional advice would seem to be essential if you own a reasonable property in the UK and plan to live here the rest of your life.

I, too, went through a divorce in the US. It was not pleasant during the sale of the house. As soon as it was all settled, I accepted an employment position in Europe. Good riddance to bad vibes.

Excellent points again.

With the two properties, we will be near the £1M mark in terms of paper value (not net assets!!)

I'll contact the solicitor who drew up our wills and see what their advice is.  Currently our wills are written so that if one of us dies, the other gets everything, if we both die, our daughter gets everything (in a trust until 25).

Our wills are drawn up stating the surviving spouse inherits the house. The solicitor also added a clause stating it was to be tax free, even though ownership is Tenants in Common. The wills were made several decades ago. I'm not sure how a modern HMRC would view this, and in my case, if 1/2 the value of the house were added to other assets in my name only (bank accounts), tax would be due.

Of course, there are now new UK inheritance tax rules for the tax free threshold, but does that only apply if there are children? If so, does that mean for childless couples it remains at £325,000?

I believe there is also a specific treaty between the UK and US regards inheritance, aside from the normal tax treaty. How does that work?

The "married to an NRA" also is a question. Normal US estate tax free is $5+ million, but for an NRA, it reduces to $65,000 (?) plus a gift allowance of $120,000+ (?). Is that only on US situ assets, or does that apply to worldwide assets? Does that apply only if the NRA spouse is resident in the US, or anywhere in the world? And does the treaty come into play here? Those married to another USC don't have these immediate problems.

It's not something younger owners think to much about (but maybe they should), but as we get older, it definitely becomes worthy of attention. Yearly gifting to the NRA spouse becomes interesting.

Sadly, there are very few reliable references to be found anywhere, and those that are found usually relate to estates of 10+ millions. There is really no simple "go to" for information on this issue for answers.



 

 

You are thinking ahead and that makes a lot of sense. Tax in two places is an immediate concern of the US expat, but cross border inheritance issues are probably even more complicated. I think I have my tax situation as a dual US/UK citizen worked out if I ever move to the UK, but the inheritance issues are still murky to me.

Of course, there are now new UK inheritance tax rules for the tax free threshold, but does that only apply if there are children? If so, does that mean for childless couples it remains at £325,000?

There's no tax on inheritance between spouses. The thresholds come into play when others are inheriting.

Okay, so if we put that my husband owns 95% of the house and I own 5% of the house, if he dies, I would NOT have to pay inheritance tax on the "transfer" of his share of the house....

I like to think we are "younger owners"  but I also like to think I'm a young mom....  but as my family kindly pointed out, I am the oldest anyone has been to have a kid in my family.   

I hope to never reach a point that I want to renounce my US citizenship because of taxes.   

Okay, so if we put that my husband owns 95% of the house and I own 5% of the house, if he dies, I would NOT have to pay inheritance tax on the "transfer" of his share of the house....

One of the questions with which I'm still uncertain, and regards only the UK for starters......in the above situation, what is your domicile? Are you still only a US citizen, for example?

It's these sort of details which need to be clarified with a competent solicitor.

There's no tax on inheritance between spouses. The thresholds come into play when others are inheriting.

I agree for the UK when the home/assets are so defined in a will. Even in the worst case scenario, if the spouse who dies leaves everything to the surviving spouse, the assets are free of tax (I think). The conundrum (?) might come if assets are left to a 3rd party, (like a child, for example, in a trust - KFdancer, take note). For the US, we're back into the NRA spouse situation. If the surviving spouse is also a USC, then I agree with your statement regards the US.

The more I read of the situation, the more confused I am right now. More research!

I do know if I talk to a solicitor on this subject (the UK should not be a problem if I leave everything to my spouse), it will be a vetted, competent solicitor with experience in these matters.

You know, I've seen these things happen....

You get hit by a bus (sorry KF), everything goes to your husband....after a while he remarries a lady with three kids....things get complicated for your daughter.

 

One of the questions with which I'm still uncertain, and regards only the UK for starters......in the above situation, what is your domicile? Are you still only a US citizen, for example?

It's these sort of details which need to be clarified with a competent solicitor.

I am only a US citizen.  I will not qualify for UK citizenship for a few more years, but plan to apply as soon as I'm able.

It's hard finding a competent solicitor.  At least one who knows the US tax system in the UK...

You know, I've seen these things happen....

You get hit by a bus (sorry KF), everything goes to your husband....after a while he remarries a lady with three kids....things get complicated for your daughter.

SoS, that's a really good point!  Time to launch into some stories.

My grandmother remarried when she was about 60 after my grandfather passed away.  She married a neighbour.  He sold his home and moved in with her.  The assets from the sale of his home were kept separate, for his children to inherit after he passed.  They had a prenuptial agreement clearly stating many scenarios.  One being that if my grandmother died before him, he could stay in the house until his death.  However, if he remarried, he could not have the new wife move into the home.  He would have to move out and sell.     My grandmother thought of everything.

On the flip side, my husband's grandparents shared a home with his aunt at the time of their passing.  The home was left jointly to their two children (the aunt and my father-in-law).  My aunt-in-law lived in the house for about 10 or 15 years after the parents passed.  My father-in-law does not have much savings towards a pension and REALLY could have used his half of the value of the home to start investing and saving properly for retirement.  Last year, both my parents-in-law and my aunt-in-law sold their respective homes and purchased a big ole house together.  Now my father-in-law finally has received his inheritance and invested it into a bigger home.

Here's the thing.  My parents in law are much older than the aunt.  What happens if they die first?  What if she remarries (she's a widow)?  What happens if she moves him in and she then passes?  They have nothing in place.  We are certainly not ready to grab "the money" the minute the inlaws pass, but these are things that cause friction in families.  I really wish they would put their wishes in writing now to avoid any issues in the future.

I'll see your story, and raise you one.

I had a friend, here in the UK, who was divorced. He was about 60. He worked hard at a good job, and bought a very nice top floor flat using 95% of his own money. Shortly thereafter, he met the "latest" woman of his dreams. They married and moved into her house and he sold his flat for a nice profit. They had her house extended and brought up to the latest spec. It took all his profits from the sale of his flat. About two years later, she was diagnosed with cancer and was dead within a year. She had never changed her will to reflect her new circumstances,....and she had 3 children in their 20's and 30's. The existing will, of course, remained valid. According to her will, the children got the house, my friend got nothing, not even the funds he had put into the house for remodelling. The last I heard, he was living with his sister.

Your turn.