Caveat Emptor translated from Latin means “let the buyer beware”, the saying typically afforded to buyers of residential property in the UK on the basis that they buy at their own risk, with potential buyers warned at the outset to do their research on the property and ask questions of the seller. For US individuals buying UK residential property, this phrase should resonate even more due to the disconnect between how the UK and US tax systems treat property ownership; because of this, the need to seek professional tax advice in both jurisdictions is critical.
UK resident owners of UK residential property have the benefit of Principal Private Residence (“PPR“) relief from Capital Gains Tax (“CGT“) on any gain calculated to arise on the sale of a property that is their principal residence worldwide. Although US persons (whether UK resident or not) can also avail themselves of PPR relief for UK tax purposes, the position is rather different for US tax purposes. Instead, relief from US tax on any gain realised on the sale of a primary residence is currently limited to the first USD250,000 of profit for an individual, with the balance subject to US federal income tax. Currency gains, as well as gains in real terms, will be in scope.
The situation is made even more challenging for married couples, particularly where one spouse is a US person and the other is not. Spouses need to be aware that owning their UK property as joint tenants (a typical arrangement between spouses to ensure that on the death of one the legal title to the property passes automatically to the survivor, avoiding the need for probate) may not be the right approach from a tax-efficiency perspective in the circumstances and unless the tax position is considered from the outset, there may be little scope to do anything about it when it comes to selling the property.
The situation is also more complicated on death for US spouses. For UK inheritance tax (“IHT“) purposes, assets that pass to a surviving spouse are typically fully exempt from IHT. This can be the case even in a mixed UK and US domiciled couple, with the surviving spouse having the option to elect to be treated as being UK domiciled. No such exemption exists for US federal estate tax in the case of a mixed US and non-US person couples and, consequently, a US spouse’s share of the UK property could be subject to a US federal estate tax charge on the first death, unless suitable Will planning is put in place.
We regularly advise buyers in these situations and can help them navigate the tax complexities involved with the assistance of US attorneys, as well as acting on their behalf in relation to the property purchase and later sale, to ensure they enter into UK property ownership fully aware of the associated legal and tax risks.