us expat tax guide – united kingdom
Is selling a home in the UK subject to US taxes?
Yes, if you are a US citizen or Green Card holder selling your principal home in the UK, you must report it on your US tax return. While the sale of a home is not taxable in the UK, it may be subject to US capital gains tax if the gains exceed the exclusion amount.
What is the ownership and use test?
The ownership and use test allows you to exclude up to US$250,000 of the capital gain from the sale of your home if you have owned and lived in it as your principal residence for at least two of the last five years. These two years do not need to be consecutive.
Is there a capital gains exclusion for the sale of a rental property?
No, there is no capital gains exclusion for the sale of rental property. Any profit from the sale is fully taxable. Additionally, you need to account for depreciation recapture taxes, which means you must pay tax on the depreciation deductions you previously claimed.
What if I’m married to a non-US person?
If you are married to a non-US person, you can file as married filing jointly by obtaining an Individual Taxpayer Identification Number (ITIN) for your spouse. If both of you meet the ownership and use test, you can exclude up to US$500,000 of the capital gain.
How do I report the sale of a house on my US tax return?
Report the sale of your home on Schedule D of Form 1040 for the tax year in which the sale occurred. You will need to provide details such as:
- Date of purchase
- Date of sale
- Purchase price
- Sale price
- Any capital losses from home improvements or related fees
Can I deduct the amount of capital gain from the sale of a house?
Yes, you can deduct certain expenses to reduce the total capital gains, including:
- Improvements: The costs for significant improvements, such as extensions or restorations, that increase the home’s value. Routine maintenance or personal preference redecorations do not qualify.
- Selling Expenses: Costs such as commission fees for the estate agent and legal fees.
Does the capital gain exclusion change if I’m married to a US citizen or a Green Card holder?
If you are married to another US citizen or Green Card holder, the capital gain exclusion doubles to US$500,000. Therefore, you will not owe capital gains tax on amounts up to US$500,000 from the sale of your home.
Understanding these rules can help US citizens and Green Card holders navigate the complexities of selling a home in the UK and managing their US tax obligations.
Can my spouse meet the ownership requirements if their name is not on the mortgage?
Yes, your spouse can meet the ownership test for tax purposes even if their name is not on the mortgage, as long as their name is on the title deeds.
Do I have to pay US tax if I’m self-employed in the UK?
Generally, self-employed Americans in the UK do not have to pay US tax, thanks to tax treaties and credits. However, there are situations where US tax may be due, such as receiving dividends that are tax-free in the UK.
How do capital gains on stocks and shares affect my US tax return?
Any capital gains from stocks or shares must be reported on your US tax return. For example, if you made a £50,000 profit from selling stocks while living in the UK, this gain is taxable in the US. As a UK resident, you can claim a US foreign tax credit for the taxes paid to the UK on these gains.
Can I claim US foreign tax credit for UK taxes paid on my capital gains?
Yes, you can claim a US foreign tax credit for UK taxes paid on capital gains. However, due to the mismatch between the UK and US tax years, you may need to amend your US tax return once the UK taxes are paid.
How do dividends work on a US tax return?
As a US citizen or Green Card holder, dividends received in the UK are subject to US tax. The UK offers a capital gains tax allowance (£12,300 for 2020-21) before any tax is payable. Any amount exceeding this allowance is taxed in the US.
How are dividends in the UK generally taxed by the IRS?
UK dividends are subject to preferential US tax rates due to the tax treaty between the two countries. These “qualified dividends” are taxed at a rate of 0-20%, which is lower than the regular tax rate.
How are dividends in the UK taxed for self-employed Americans?
If you are self-employed and pay yourself dividends, the first £12,300 is tax-free in the UK. Beyond this, dividends are taxed at the UK basic rate of 7.5%. This can lead to additional US tax because the US tax rate on dividends can be higher, even after claiming the foreign tax credit.
