Capital Gains Tax
U.S. Tax Help When You’re An Expat In The U.K. ➥Capital Gains & Dividends
As a US citizen or Green Card Holder, your worldwide income is subject to US tax. If you have purchased a home in the UK and sell it on, you will have to report this sale on your US income tax return for the year the sale occurred.
Is selling a home in the UK subject to US taxes?
For US citizens or Green Card holders selling their principal home in the UK, it is tax-free. However, capital gains tax could be enforced on the US side if the gains exceed the exclusion amount.
When selling a house in the UK, for US tax purposes there are two types of properties:
1. Sale of home
2. Sale of rental property (you rent out)
The sale of a home is not taxable in the UK but is in the US. If you meet the requirements (ownership and use test), you will be able to exclude the capital gains on the sale of your home for US tax purposes.
What is the ownership and use test?
If you have owned and used the home as your principal residence in two years out of the past five years, you can exclude the first $250,000 USD of the capital gain you receive for the home. This two-year period does not need to be consecutive.
The calculation of the capital gain takes into account the foreign exchange rate at time of acquisition and sale of the house.
Is there a capital gains exclusion for the sale of a rental property?
When selling a rental property, it is taxed differently to the sale of your principal residence. There is no capital gains exclusion and any profit made on the sale of a rental property is taxable.
You will also need to be aware of and plan for depreciation recapture taxes. If you hold property, you can write off depreciation as an expense. The IRS can collect profit from the sale of a rental property which the taxpayer has previously used to offset their taxable income. So effectively, the IRS is asking for this money back.
What if I’m married to a non-US person?
If you are married to non-US person, you can add them to your US tax return with an eligible ITIN (Individual Taxpayer Identification Number) for the year you are selling the property, and file as married filing jointly. If your spouse also meets the ownership test you will then receive the doubled exclusion amount of $500,000 USD, even if you’ve never had them on a tax return before.
How do I report the sale of a house on my US tax return?
You will have to report the sale of your foreign home on your US income tax return for the year the sale occurred. For example, if you sold your house in 2020, this would need to be reported on your 2020 US tax return.
You need to report the capital gain on Schedule D of Form 1040 on your tax return. In this you will need to include the following information:
– The date of the purchase.
– The date of the sale.
– The purchase price.
– The sale price.
– Any capital losses, such as from home improvements or related fees.
Can I deduct off the amount of capital gain from the sale of a house?
It Is possible to deduct any costs that were made for home improvement to reduce the total capital gains on the sale.
There are two types of deductible expenses available to reduce capital gains:
1. Improvements to the home such as extensions or restorations to damages. There are limitations to this, as these improvements must change the value of the house. You cannot redecorate a perfectly good home to suit personal preferences and deduct this from the capital gains. Get a professional to assess what is deductible.
2. Selling expenses, such as commission fees for the estate agent and legal costs.
Does the capital gain exclusion change if I’m married to a US citizen or Green Card Holder?
If you are married to another US citizen or Green Card Holder, the capital gain exclusion will be doubled to $500,000 USD. So, you will not face capital gains tax on any amount from the sale that is under $500,000.
Can my spouse meet the ownership requirements if their name is not on the mortgage?
If the mortgage is only in the US person’s name, the non-US spouse would still meet the ownership test if their name was only on the title deeds.
Do I have to pay US tax if I’m self-employed in the UK?
For Americans operating as self-employed in the UK, generally they do not have to pay any US tax. There are, however, a few unique situations where you might pay a little bit of US tax.
If you are an American person receiving a £75,000 yearly salary and take an additional £2,000 dividend from shares you own which is tax free in the UK.
You would pay US taxes on the dividend portion as you paid no UK tax so there is no claimable foreign tax credit. With this income level, that dividend will be subject to 15% US tax. Assuming nothing else in the equation, you might have to pay $300 tax on the £2,000 dividend you received.
Capital Gains on Stocks and Shares
If you receive any capital gains from stocks or shares, this income is reportable on your US tax return. For example, if you sold your stock for £50,000 profit while living in the UK the whole time. If you are a long-term UK resident, the same amount will be taxed in the UK to HMRC.
Can I claim US foreign tax credit for UK taxes paid on my capital gains?
This stock capital gain is considered a foreign source, as a UK resident, so you can claim US tax credit.
However, there is a mismatch between the UK and US tax year that will affect when you can claim for and receive this credit. You will have to pay US taxes this year (2020) on the capital gains. Then you pay UK tax in 2021 and can amend your 2020 US tax return, using the tax you have paid to the UK as foreign tax credit, and will get it all back again.
How do dividends work on a US tax return?
As a US citizen or Green Card Holder, receiving dividends in the UK is a unique situation. There is a capital gains tax allowance, that for 2020-21 is £12,300 – an increase from £12,000 in 2019-20. This allowance is the amount before any tax is payable. Any capital gains exceeding this amount will be subject to US tax.
If you’re self-employed under a limited company, you pay yourself the £12,300 tax free salary and then the rest in dividends. This can cause some complications on the US tax side.
How are dividends in the UK generally taxed by the IRS?
Because the UK has a Tax Treaty with the US, UK dividends are subject to preferential tax rates instead of the regular tax rate of up to 39.6%. These UK ‘qualified dividends’ are only subject to 0-20% tax.
The UK assesses higher income tax on dividends than the US, so taxes already paid to the UK HMRC will likely cover dividend tax on the US side.
How are dividends in the UK taxed for self-employed Americans?
It can get complicated once you have paid yourself the £12,300 tax-free and then take the rest in dividends. The basic tax rate in the UK (7.5%) will apply to this dividend, which is lower than the normal tax the US applies to this dividend. So, although you can claim US credit for the portion of UK tax paid to HMRC, you will still have something left over to pay to the US where the tax rate on this is higher.