To highlight how these rules can be easily overcome, we’ve shared Jane’s story who bought a house in the UK. She subsequently moved to Hong Kong with her husband becoming non-UK resident before selling her property. As a Buzzacott client, our advice helped Jane benefit from:
- Saving a potential US tax bill of USD23,000
- Saving USD4,400 of Net Investment Income Tax
- Paying no UK tax on the sale of the property
Does that sound interesting?
If you’d like us to help you too, call Ishali Patel, Associate Director on our Expatriate Tax Services team on +852 3752 8885 or email us at email@example.com.
Case Study: How to reduce the US tax bill on the sale of property.
Jane, a US citizen moved to the UK for a few years, bought and occupied a property in London in December 2006 before meeting her British husband and relocating to Hong Kong in July 2013. The property had appreciated significantly in the meantime and Jane wanted to sell. She found herself with a potentially unmanageable US tax bill. In addition, she had already moved out of the property and was in danger of losing part of her Principal Private Residence Relief for UK tax purposes.
Capital gains tax: US vs UK
On the US side, as Jane had owned her home and used it as her main residence for a least two out of the five-year period ending on the date of sale, Jane can claim a capital gains exclusion in the US of up to USD250,000. Any taxable gain is then taxed at a rate of 20% In the UK, there is a relief from capital gains tax called Principal Private Residence (PPR) relief which applies to the full gain where you have lived in the property from date of purchase to date of sale. Jane had lived in the property until she left the UK in July 2013 but it had been rented out since then. Jane had a potential US tax bill of USD23,000 as well some additional UK tax to pay.
Net Investment Income Tax (NIIT)
This is an additional tax of 3.8% imposed on investment income and capital gains where the taxpayer’s income is over certain threshholds. For Jane, who files as “Married Filing Separate”, she will suffer this tax on all her gains over a modified adjusted gross income threshold of USD125,000, which initially would have left her with an additional bill of circa USD4,400.
All in all Jane’s US tax bill was expected to be USD27,400.
Since Jane is taxable in the US on the gain in excess of USD250,000, the best solution was to decrease Jane’s holding in the property ahead of it being sold. Following our advice, Jane changed the property ownership from her sole name to tenancy in common. By utilizing the US annual gift allowance of USD148,000 per year and the lifetime gift allowance of USD5,450,000, Jane was able to reduce her holding in the property down to 68.49% This left her with a US taxable gain of USD250,000 which was covered by the US exemption. Great news for Jane as it removed her US capital gains tax liability entirely, and reduced her NIIT to a more manageable USD335.
So what about the UK tax? Due to new legislation effective 6th April 2015, Jane as a non-resident of the UK, would be entitled to claim full PPR relief on the sale of her UK property providing she sold it by 5th October 2016. We were able to advise Jane well ahead of time on this and she was able to execute the sale to meet this deadline, thereby allowing her to claim full relief from UK tax on the sale, even though she had moved out in July 2013.
Read the full Stepping Stones Hong Kong series here.