The main impact on a non-UK resident, US citizen, selling a home in the UK comes from Capital Gains Tax. This might be the case where someone owned a home in the UK while they were living here but then moved back to the US. It’s the same for anyone who is a tax resident of another country but owns and sells property in the UK.
Capital Gains Tax regulations are changing
Capital Gains Tax rules are changing, and that the timing of the house sale must be carefully considered. If you’re a US citizen planning to sell a home in the UK, you must take care on the timing of the sale, or you could face a larger tax bill than you should. Even if there is no tax on the sale, you must inform Her Majesty’s Revenue & Customs (HMRC, the British tax authority) about the sale within a strict deadline of 30 days after it is legally complete.
For non-residents selling a home in the UK, tax is only owed on gains made since 6 April 2015. It’s also possible to take advantage of some methods of tax relief to reduce the tax bill. There are different rules to follow if a non-resident company owns the property.
How will the Capital Gains Tax changes affect US citizens selling a UK home?
Here’s how Capital gains Tax affects US citizens selling a home in the UK and how they will change again in 2020.
Over the last decade, HMRC has gradually expanded the taxation of non-UK residents who own property or land in the UK. The last sizeable change came in April 2015, when Capital Gains Tax began to apply to every sale of UK residential property. And while a few of the regulations were altered again in April 2019, the originally scheduled update was eventually delayed. This will now come into play in April 2020.
The changes introduced on 6 April 2019 are as follows:
- Capital Gains Tax was applied to all direct disposals by non-residents of UK properties.
- Non-resident companies had to charge to Corporation tax on any gains, rather than income tax.
- A new rule stating non-residents must inform HMRC about any property sale in the UK within 30 days of completion.
- Even if there is nothing made on the sale or no tax is due, US citizens must file a non-resident Capital Gains Tax return.
It has only been law for non-UK residents to pay Capital Gains Tax on any gain from a residential property sale since 6 April 2015. This means that the expat seller must have a valuation dating back to then to be submitted with any tax filing. This will prove the benchmark value of the property to HMRC for Capital Gains Tax.
Changes to Capital Gains Tax from 6 April 2020
In 2019, non-resident companies owning UK property had to switch from income tax to Corporation Tax on any income from properties. This includes rents collected from the property. This change should have led to reduced tax bills as basic rate income tax is 20%, and higher rate is 40%. Meanwhile, Corporation Tax will be 17% from April 2020 (as at time of writing). Companies will also need to register with HMRC to file annual Corporation Tax returns and accounts.
From April 2020, lettings relief will be abolished. This form of tax relief helped US citizens to reduce bills if they lived in the house that they then went on to sell but there was also a period it was let. It’s been worth up to £40,000 per person and can currently be claimed on each property rather than just once in a tax year. However, from 6 April next year, US citizens will no longer be able to claim this unless they lived in the home with a tenant.
Another form of tax relief called ‘final period relief’ is being reduced from 18 months to nine months from 6 April 2020. The relief works retrospectively from the date of completion on the property’s sale and treats that period as being occupied as your main home.
The UK principal private residence relief for US citizens selling what was their main home may still apply to reduce the chargeable gain. During a non-resident tax year, for a property to qualify as a main home for a tax year it is necessary for the owner to be present in the property for 90 days.
The UK has a double taxation treaty with the US (and approximately 150 other countries) to make sure taxpayers don’t pay twice on the same gains or income. In most cases, the treaty with the US applies to people who have a credit from HMRC. They can then file this with their local tax authority to ensure they are not taxed twice on gains from the property sale.
Don’t overlook the following
Capital Gains Tax, as with all other US and UK tax affairs, is complex. It’s very easy to get caught out if you don’t fully understand the rules and regulations, particularly as they change relatively frequently. The most important claim is private residence relief (PRR). This allows property owners to sell their homes tax-free.
Here are some of the rules governing any Corporate Gains Tax relief, and the most commonly misunderstood or overlooked:
1. Gardens and grounds
Capital Gains Tax relief usually applies to homes that stand within grounds of up to 5,000 square metres in size. If the grounds are bigger than that, they are considered by HMRC as disproportionate to the property itself. This is when HMRC will begin to reduce PRR.
2. Sell before you leave
If you are selling a house and intend to split its title into two or more plots, do it before you go so that PRR will apply to both plots. If you don’t do so, then PRR will only apply to the plot where your actual home stands, and not to the other plot(s).
3. Avoid installing fences
If HMRC find you have fenced off some land because you intend to sell the house but keep the land, HMRC will probably try to claim Capital Gains Tax. This is because they will say the fenced off portion of land is not part of your home any longer.
4. Keep records of your absences from home
Many US expats come in and out of the country. If this applies to you, you must keep an accurate log of when you are not at home and when you are. This is because you must prove to HMRC that this property is your main home. PRR can still be claimed for many reasons even if you did not live in the property.
The log should include the period of time before you moved in. This could be covering a period of redecoration or refurbishment, for example. If you are divorced or separated and have signed over your share of the house to your previous partner, then you could also be eligible for PRR.
If you are renting your home out in a buy-to-let arrangement, you must keep all tenancy agreements. This will allow you to claim lettings relief up until the cut off date of 5 April 2020.
5. Running a business at home
Explain to HMRC that some rooms in your home have shared use as private and business bases. Do not allocated specific rooms as business rooms, as HMRC will say that PRR does not apply to that part of the home. They will split it as a percentage. However, if you report rooms as mixed use then HMRC will accept that PRR can be applied.
For example, say your home office takes up 14.5% of the total floorspace in your property. If you allocate this percentage as solely business use, then you will forfeit the same amount (14.5%) of PRR. However, if you can demonstrate that the room is used as an office in the day but as a private TV room in the weekends and evenings then it is considered shared use. And in these circumstances, it is still eligible for PRR relief.
Get expert help with selling your home in the UK
As the regulations for Capital Gains Tax transition over the next 12 months, working out tax liability will become ever more complicated. It’s important that US citizens actively work out how capital gains from their house sales will be treated in both countries before they sell.
The best way to ensure you’re covering all bases is to get expert tax advice from a firm with experience in US and UK taxes. At Ingleton Partners, we have a strong team of qualified experts in taxes on both sides of the Atlantic. Contact the team here if we can help you sort your Capital Gains Tax.