I am selling my property in London, having been a US resident for more than two decades. I live with my partner in America.
The UK property has been let out during that time, but now that I am coming to sell I am worrying about tax.
I lived in the property for eight years when I bought it, but it has been let out for 29 years.
If I sell, will I be liable to pay capital gains tax in the UK, and how much? The property was purchased for £51,000 and is now valued at about £800,000.
What would be my CGT bill on that basis? And what are the implications of transferring the funds to the US?
CGT: On residential property, capital gains tax is currently charged at 18% for basic rate taxpayers, and 24% for higher rate taxpayers
Ed Magnus of This is Money replies: This is an interesting question, which has thrown up some thought-provoking answers.
Most interesting is that expats seem to have some advantages when it comes to paying capital gains tax here in Britain.
This is because they can calculate their gain compared with the market value in 2015 rather than using the entire time they have owned a property. This could result in huge savings.
If you bought the property before 5 April 2015 you’ll need to establish the value of that property as of 5 April 2015 (known as ‘rebasing’).
You then need to work out the difference between the value on 5 April 2015 and what you sell the property for.
You can also deduct any costs of improving the property incurred after 5 April 2015 and the legal cost of selling the property.
There are also other methods you can use for calculating capital gains tax that can be even more beneficial, depending on your situation.
How are capital gains taxed?
On residential property, capital gains tax is charged at 18 per cent for basic rate taxpayers, and 24 per cent for higher rate taxpayers – but with any significant gain, people are likely to pay most of it at the higher rate.
This is because a capital gain is added to a person’s normal income to decide the tax rate.
When people come to sell their home, they are typically entitled to principal private residence relief (PRR) which should, in most cases, shield them from capital gains tax.
However, if as our reader has done, they let out their property during their ownership, they forfeit their right to full PRR when they sell.
They will lose it for the years the property is let out, so when they sell they’ll need to work out the proportion of time they lived in the home compared to the years it was let out.
PRR also applies in full for the last nine months of ownership, whether or not someone lives at the property – provided the property was their main residence at some point.
So what is it for our reader as a non-UK resident?
Given our reader is now a US resident, the way they will calculate their capital gains tax bill will differ from someone living in the UK.
We decided to seek advice from tax specialists to not only confirm how they will calculate their capital gains but also whether they may be liable to be double-taxed, in both the US and the UK.
For expert advice, we spoke to David Portman, tax partner at the accounting, audit and advisory firm Lubbock Fine and David Denton, head of technical at wealth management firm Quilter Cheviot.
David Portman, tax partner at the accounting, audit and advisory firm Lubbock Fine
David Portman replies: Assuming your reader has non-UK tax resident status, they will be liable to UK non-resident capital gains tax (NR-CGT) on any gain from the sale of the property.
As NR-CGT was only introduced with effect from 6 April 2015, the rules to calculate the gain are complicated. The taxpayer can choose one of three options.
One, the default method. Take the sale proceeds and deduct both the sale costs and market value of the property as at 5 April 2015. A qualified professional surveyor or valuer should provide the valuation.
Two, the straight-line apportionment method. Take the sale proceeds, deduct the sale costs, deduct original cost of the property and costs incurred on purchase.
The gain is then spread across the whole ownership period and only the portion after 5 April 2015 is taxable.
Third, the retrospective method. Take the sale proceeds, deduct costs incurred on sale, deduct original cost of the property and costs incurred on purchase.
An added complication is that Principal Private Residence (PPR) relief will be due for the eight years in which your reader lived in the property, plus the last nine months of ownership.
PPR allows people who are selling their main home, which they live in, to avoid GCT. It is relieved on a proportional basis comparing the PPR relief period to the total ownership period.
If either the first or second option are taken, then in effect they will lose any PPR relief for the eight years, but this needs to be compared to the benefits of these options.
The resulting gain is then taxable (after deduction of the £3,000 annual allowance) at 18 per cent (up to £37,700 of total taxable income/gains) and 24 per cent thereafter.
The numbers will need to be crunched and the most beneficial option chosen. It is advisable that they obtain professional advice.
David Denton, head of technical at wealth management firm Quilter Cheviot
What method should they choose?
David Denton replies: The ‘default’ method looks at the value at April 2015, and gains before can be disregarded.
The ‘time apportionment’ method considers the total period of ownership and the time since 5 April 2015. This means that only the gains attributable to the period of ownership after April 2015 will be taxed, but calculated as a fraction of the ownership period since 2015 to the total ownership period. This is helpful when no value in 2015 was established.
Finally, the ‘straight line’ method looks at the price difference between purchase and disposal so is only normally beneficial for disposals of properties that have made a loss.
In this instance, and not knowing the person’s other financial circumstances, time apportionment is likely to reduce the gain to the lowest amount.
So, the difference in the purchase and sale price, less buying, selling fees and improvement costs is reduced as a proportion of the 29 period of ownership, according to an aggregate of the years occupied as private residence, plus the years owned before April 2015 and nine months to top it off. That value can then be reduced further by the £3,000 annual exempt amount.
However, it’s probable that the individual has US reporting and tax obligations on the same property under US legislation, though the amount paid to His Majesty’s Revenue & Customs reduces the US exposure, according to the UK-US double tax treaty of 2002. Remitting the proceeds to the US should bear no further tax.
Advice from suitably qualified individuals in both locations should be sought.
How soon will they need to pay the tax?
David Portman replies: The NR-CGT return needs to be completed and filed with HMRC within 60 days of the sale. NR-CGT also needs to be paid to HMRC within 60 days.
Could they be double taxed?
David Portman replies: The UK and USA has a double tax treaty, so generally any tax paid in the UK is offset against US taxes.
Obtain specialist US tax advice to confirm the tax position and reporting obligations.
If there is a mortgage on the property, the mortgage repayment itself could also create a taxable event, depending on US dollar movements over the mortgage term.
How can they reduce their CGT bill?
David Denton replies: Private residence relief (PRR) can alleviate the gain, as can ownership up until 5 April 2015.
If the property has been the taxpayer’s main and only residence at any point, they can claim PRR from the date they began occupying the property until the date the property ceased to be their main residence.
And in this case, the final nine months of ownership will qualify for PRR, known as final years relief. Buying and selling fees, plus improvement works, such as for an extension, can reduce the chargeable gain too.
