The fact that all American citizens resident in Britain must pay capital gains tax to the U.S. when they sell their "primary residence" in the U.K. is better known among American expats than it was some years back, when the current British prime minister and then-dual U.S./British citizen, Boris Johnson, was hit with such a tax after he and his wife sold their London townhouse in 2009.
But as Liz Zitzow, a U.S. tax expert and London-based tax practitioner explains here (with a bit of input from Edinburgh-based (UK) tax consultant Gerry Brown), there have been some recent changes to the regulations which can affect American expats selling their UK homes that they also need to be aware of. ..
We’re all familiar with the fact that many countries don’t tax the sale of a primary residence. Some do, but typically it’s when special circumstances apply, such as if they rented it out, or if it was a summer home.
For example, in the UK, if it’s your vacation home, if it’s part rental, or if you’ve been gone from your primary residence for more than nine months, you're obliged to pay capital gains tax.
In the U.S., it’s taxed if you’ve been gone from the primary residence for two or more years, or if the gain is over US$250,000 (US$500,000 for married filing jointly).
Simples, right? Oh, ho, ho ho! Not anymore.
Because in the UK, things got extra complicated last year, when new regulations came into force.
As of April 6, 2020, new regulations took effect that set out how those who are UK tax-resident – including American expats and dual citizens – are expected to report the sale of their “residential property” in the UK, whenever there is any UK taxable gain.
The key aspect of the new regime is that gains must be reported, and any relevant tax paid, within 30 days of the “disposal”. In general a “disposal” is deemed to have taken place at the point when contracts are exchanged.
When to report capital gains
on a UK residential property sale
The first thing to know is that the seller of the property doesn’t need to report a capital gain if there’s no tax to pay. (Thank goodness!)
Say that the gain is less than the capital gains tax annual exemption, which is £12,300 (US$17,083 for 2020/21, and 2021/22).
Or that, say, a relief – such as “main residence relief” – is available.
If there is taxable gain in excess of £12,300, tax will be levied by HMRC at:
• 18% for basic rate taxpayers, or
• 28% for higher or additional rate taxpayers.
The reporting requirement applies only to UK properties, so if you’re selling a property outside the UK, such as your US former primary residence, the 30-day rule doesn’t apply. It’s just UK property sales that leave you scurrying about like a chicken with your head cut off, to get it done within 30 days.
Don’t forget the ‘30-day time limit for reporting’
Another timing issue to bear in mind: If an American expat fails to report to HMRC a gain on the sale of a UK property for which they do owe tax, for any reason, and to pay the capital gains tax they owe within 30 days of that sale, they could find themselves liable to a penalty, and charged interest from when the payment was due.
The initial penalty for such a failure to file a “30-day report” within the 30-day time period is £100. However, continuing failure to report and pay will incur further penalties.
How to report capital gains realized
on a UK residential property sale
Those who have to report the capital gain on the sale of a UK residential property to HM Revenue & Customs must do so by using a specific online format, which employs a “capital gains tax on UK property account” under a Government Gateway user ID.
HMRC will then send the client a letter or email, giving a payment reference number, and instructions as to how any required payment should be made.
Of course, in the UK, the sale of an individual’s “primary residence” does not incur a tax requirement for them if it is sold within nine months of moving out (or 36 months, if the person in question is disabled), even if a capital gain is made. (Thus, as noted above, there’d be no need to report the capital gain.)
Now, though, such a gain would be deemed to be taxable if the person has been living elsewhere for longer than those time periods.
In other words, basically, any U.S. expats who haven’t yet set up a Government Gateway user ID (or GGUID, as some call it), and who own a house in Britain, should sign up for a GGUID now, to ensure they’re not caught out by this timing rule when the time comes to sell.
We particularly advise this right now, given the possibility of delays in getting a GGUID, owing to the pandemic situation (no matter what the Government Gateway website says about the time it’s supposed to take).
It has taken some of my clients six months or more to get it set up… and six months means a lot of interest and penalties for late filing.
You can’t rely on your accountant to do this for you, by the way, as it is linked to your GGUID, not theirs. They need your GGUID to file to pay the tax.
Further, given there’s just thirty days, if you tell them a week or two after the sale, they could be on holiday, or working on another case. They might do it for you, but you don’t want to take any chances.
Definitely apply for your GGUID now, well before you move back to the U.S., because it’s almost impossible to get one if you’re not in the UK.
Too often, I find Americans selling their UK primary residences sell after they've already left the country, and for this reason, can’t get the GGUID.
Part of the GGUID application procedure is the waiting for, and looking out for, a letter stating that you’ve been given a GGUID…. and that is the reason why you have to apply now, while you're still here in the UK, and nowhere near to the point of actually selling your home.
It’s sent Royal Mail second class, and has to be acted on within two weeks of posting it to you, so if you’ve left the country, there’s no way in heck of your getting it on time. Better to rely on email for this, (and check your spam filter every day that you’re waiting for it).
To get started on signing up for a GGUID:
Go to the HMRC Services sign in or register page on the www.gov.uk website.
To report and pay capital gains tax on the sale of a UK property, where this is required, go here:
There is a way to file by paper in an emergency, but HMRC officials are adamant no one will ever need to do so because, even if they are Amish, they can hire someone like me to do it for them. And if you could have done it online but chose not to, woe be unto you. HMRC is so sure you’ll never need to paperfile, they don’t provide any information on how to do so.
Out of the dozens of accountants and tax preparers I know, I'm aware of just two that have managed to figure out how to paper-file.
Explore tax-reducing options
Interestingly, the gain when you sell your primary residence in the UK can be less than what you think it will be. But there are options.
For one thing, you don’t need to subtract the purchase price from the sale price. You can instead subtract the value of the property as it would have been on April 6, 2015 – so someone in the process of selling should definitely get a UK surveyor to provide them with the property's value on that date.
Given that there are a number of other potential options to consider that might also potentially enable a seller of a primary residence in the UK to reduce their taxes, where they are required to pay them, it can often be worth consulting such an expert anyway.
How ‘residential property’ is
defined by HMRC for tax purposes
Residential property means “an interest in land” that, at any time, includes a dwelling.
Typical instances of residential property gain, within the scope of the new reporting rules, would include:
• an investment property – e.g., a buy-to-let property
• a holiday home
• a former primary residence
• a part business, part residential building, such as a high street shop or pub, with apartments above
Disposals of land or commercial buildings fall outside the scope of the new reporting regime. However, those who have had such disposals during a tax year should be sure to report them to HMRC in their self-assessments.
Other situations in which expats
may need to report capital gains
Another thing expats need to be aware of is that gifts of residential property – such as to their children – will be viewed by HMRC as “disposals” for capital gains tax purposes, and so may require a “30-day report,” as mentioned above.
If they normally submit self-assessment tax forms to HMRC each year, details of such a “gain” – even though it isn’t technically a gain, as it’s a gift they’re making – should be included in the tax returns of such property-gifting expats for the year in question.
However, such property-gifting expats don’t need to submit a self-assessment in such a case, if the capital gains has been included in the 30-day report.
However, you should still provide all the details to your accountant who does your self-assessment, as he or she may find loopholes you missed, which would grant you some refund of the tax paid at the 30-day mark.
What to do if there’s a delay
in calculating the capital gain
Not infrequently, delays can occur at any point during a property sale. Such delays can be caused, for example, by a lack of enough detailed information required to complete. A need for a formal valuation may also unexpectedly arise.
In such situations, a “provisional gain calculation” should be made; a report made on that basis; and the expected tax, if any, shown.
As soon as accurate figures are available, the expat and/or his or her tax specialist should make sure an amended calculation is submitted to HMRC ASAP.
What if the property-selling
expat is not ‘UK tax resident’?
From 5 April 2015, those selling UK residential properties who are not UK resident have been required to report, and pay, tax on any capital gains realized.
A report is required even if there is no gain.
Again, they should go to the “Report and pay Capital Gains Tax on UK property” page of the UK government’s website, using the annoying-to-get Government Gateway User ID (GGUID).
The gain is normally seen as the sales proceeds less the cost (and sales expenses), but where a non-UK resident has disposed of a UK residence, these special rules may apply:
• substituting for the actual cost of the property its market value as it stood on 5 April 2015, as described above; and
• working out the gain over the whole period of ownership, and then calculating the proportion of the gain that has accrued since April 5, 2015 (time-apportionment);
• working out the gain over the whole period
The seller of the property can choose which method results in the lowest tax to which s/he’s legally entitled. Method (c) is the easiest and fastest if you know upfront a loss has been suffered.
1. UK-resident American sells UK residential property
• Must notify HMRC, calculate gain, and pay tax within 30 days unless…
• It’s their main residence the whole time (excepting up to 9 months OR
• Their gain is less than the annual exempt amount (currently £12,300)
2. Non-resident American sells UK residential property
• Must notify HMRC, calculate gain, and pay tax within 30 days
• No exceptions. All sales get reported even if they are losses.
In conclusion, any American selling a UK residential property should investigate the availability of tax relief, including on the basis of whether they may have paid tax on the sale already in their "home country."
And because of the potential difference that getting things right can make -- compared with getting them wrong -- we regard the obtaining of qualified, specialist advice in this matter to be essential.
Liz Zitzow is an IRS Enrolled Agent and member of the National Association of Enrolled Agents (U.S.), the Association of Independent Expatriate Tax Practitioners (UK), and the Federation of Small Business (UK). She hails from Camberville, Massachusetts, and has been a tax practitioner for more than 35 years on both sides of The Pond, of which she's spent the last 21 based in the UK, where she founded her own company, London-based British American Tax, in 2005.
This article is a reworking, for American readers, of an article that originally appeared on the website of the London Institute of Banking & Finance, written by Edinburgh-based Gerry Brown, an expert on British taxes who began his working career with what was then the Inland Revenue (now HMRC). For more than twenty years Brown worked in the UK’s life insurance sector, providing technical assistance on a wide variety of issues. An independent consultant since 2016, he’s currently with QB Partners, an independent consultancy to the UK financial advice and insurance and pension industries.