Renting a property in UK whilst Resident in USA ?
If someone is a US Citizen, Greencard holder or US resident, then the rental income earned in the UK will be declarable in the US on their Tax Return.
Under the UK/USA Double Taxation Agreement the rental income is subject to tax in the UK in the first place. This means that tax is paid here first. They then declare the rental income on your US Tax Return, and claim a Foreign Tax Credit on your return for the tax paid in the UK.
Essentially if the tax paid in the UK is the same or more than the tax paid in the USA, no further tax is payable in the USA. If the tax paid in the UK is less than the tax payable in the USA, then they are liable to pay the difference to the IRS.
Selling a UK property whilst in the USA?
As with renting the property, the capital gain will also be liable for tax in the USA.
The amount of gain is calculated in a similar way to the UK, however watch out for exchange rates! You calculate the purchase cost using the exchange rate at purchase, and the sale cost using the exchange rate at sale. If there has been a large movement in rates, then you can end up with a gain in one country and a loss in the other.
The sale would be liable to tax in the UK in the first instance. The taxpayer would then declare the gain in the US and claim Foreign Tax Relief for CGT paid in the UK.
If the property has been owned for over 1 year, the gain will be taxed in the USA as a Long Term Capital gain – this is liable to lower rates of tax (between 0% and 20%). If a property is owned for under 1 year, then the gain is taxed as part of income, meaning that it is subject to tax of between 10% and 39.6%.
If the property being sold was once the main home of the taxpayer then you can end up in the situation where they have little or no UK CGT to pay (due to PPR and Letting Relief), so little or no tax to offset against US tax. There is potentially some relief against US tax for a former main home, however is it nowhere near as generous as our tax relief.
What this means is that, with the exchange rate issue and the reduced deduction, a property sale may attract tax in the USA which is not liable to tax in the UK.
Our team of experienced tax professionals specialise in the preparation and submission of US Tax Returns for non-US resident expatriates and UK investors. Please contact Rachel Finch at firstname.lastname@example.org or by phone on 01934 620011.