For a UK resident selling the house they live in, the gain is usually free of UK capital gains tax, and many sellers never think about tax at all. A US citizen or green card holder has a second system to satisfy. The US taxes the same sale under its own rules, in dollars, and those rules do not follow the UK result.
The two reliefs look similar and work differently. Understanding where they diverge, and how exchange rates and the mortgage feed into the US figure, is the difference between a sale that is tax-free in both countries and one that produces an unexpected US bill.
How does the UK tax the sale?
UK private residence relief can exempt all or part of the gain on a home that has been the seller's only or main residence. Periods when the property was not the main residence, such as time it was let or the seller lived elsewhere, can reduce the relief, subject to rules that treat certain periods as occupation. Where the whole gain is relieved, there may be nothing to report.
Where some gain remains taxable, UK residents must report and pay within 60 days of completion, using an online property account. The rates are 18% and 24%, and the annual exempt amount of £3,000 is available. A seller who is not UK resident at the time of sale generally has to report the disposal to HMRC even if no tax is due.
An American who has left the UK and kept the old home is in a different position. Gains on UK residential property are within UK tax for non-residents, and private residence relief for years spent abroad depends on meeting an occupation test in each of those years. The US continues to tax the same sale on its own terms, so both countries may have a claim on part of the gain.
How does the US tax the sale?
The US exclusion for the sale of a main home, under section 121, has its own ownership and use tests over a look-back period before the sale. It excludes gain up to a fixed amount, which is higher for qualifying married couples filing jointly. Gain above that amount is taxable, and the sale is reported on Form 8949 and Schedule D.
A US citizen married to a non-US spouse who files separately generally claims only on their own share of a jointly owned home. That can leave a US gain on a sale that is entirely exempt in the UK. Gain that is not excluded is also investment income for the net investment income tax of 3.8%, which foreign credits generally do not offset under domestic law, and treaty-based claims are contested.
How do currency and the mortgage affect the US gain?
The US gain is measured in dollars. The purchase price is converted at the exchange rate when the home was bought and the sale proceeds at the rate when it was sold. If sterling has strengthened against the dollar over the period, a house sold for no sterling gain can show a dollar gain, and a sterling gain can be enlarged.
A sterling mortgage adds a separate calculation. When the loan is repaid, a movement in the exchange rate since it was taken out can produce a foreign currency gain for US purposes, which is taxable. A currency loss on a mortgage over a personal residence is generally not deductible. The result depends on the loan balance and the rates at borrowing and repayment.
- Cost converted to dollars at the rate on the purchase date
- Proceeds converted at the rate on the sale date
- Mortgage repayment tested separately for a currency gain
- Improvement costs converted at the rate when each was paid
How do the two results fit together?
Where UK tax is paid on the gain, it can generally be credited against the US tax on the same gain, subject to the foreign tax credit limitation. Where UK relief removes the UK tax, there is nothing to credit, and any US tax falls due in full. The two countries can also fix the date of disposal differently, which can place the sale in different tax years.
Former homes that were let before sale need particular care. Both systems restrict relief for the letting period, in different ways, and the US also recaptures depreciation that was allowed or allowable during the letting. The combined figure depends on the full history of ownership, occupation and letting, so records from the letting years matter as much as the sale documents.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
