I am an American living in London and my Australian fiancé also lives in London. We are getting married next month in the US and would like to buy a property in London next year. Are there are any tax implications for us buying a property in the UK? We are both non-doms but we have been living in the UK for almost 10 years and are both in full-time employment here.
Christopher Groves, partner at solicitors Withers, says that while there are UK tax considerations that will arise following the purchase of a property, as an American you are also subject to US taxation wherever you are resident – and this will need to be taken into account.
Although you are non-doms and can therefore take advantage of the remittance basis of taxation – meaning you are only taxed on income and gains arising in or remitted to the UK – because the property will be in London, while resident here you may be taxable on any profit when you sell it.
However, provided you both occupy the property as your main residence throughout your period of ownership (with absences of up to three years being allowed), you should benefit from the principal private residence exemption from UK capital gains tax (CGT). So there will be no charge to CGT if you sell the property at a profit.
As a US citizen, though, you are only exempt from US taxation on the first $250,000 of any profit (calculated in dollars not sterling) on your share of the property, so there may be US tax on a sale, even if there is no UK tax.
As a result, you may think that you should allow your fiancé to purchase the property and give him or her the funds to pay the deposit and any mortgage. But while such gifts would have no tax consequences in the UK once you are married, as transfers between spouses are exempt, your fiancé is not a US citizen, meaning a transfer could give immediate rise to US gift tax.
It is usually preferable to own the property as tenants in common in the shares to which you contribute to it financially. On your deaths, your shares will be subject to UK inheritance tax (IHT). Once you are married, any assets that pass between you on death will be exempt from UK IHT as long as you are either both non-UK domiciled or both UK domiciled. You will be deemed to be domiciled in the UK for IHT purposes once you have been resident here in 17 out of the previous 20 tax years.
With this in mind, if you did not move to the UK at the same time, there may be a period of time when only one of you is deemed domiciled and transfers between you are not exempt. You may also be subject to a US Estate Tax charge on your death as transfers at death to a non-US spouse do not qualify for the US marital deduction for Estate Tax.
However, after you are married, by correctly structuring your will, any charge can be deferred until your spouse’s death.
Keep records of minor’s account
At my request, my daughter has opened a sharedealing account with Selftrade in her own name, designated in the name of my seven year-old grand-daughter. I intend the account to attract the child’s own income tax and capital gains tax (CGT) allowances and it will be funded by me, relatives and friends.
However, Selftrade insists that the account be linked to my daughter’s bank account and that all cheques paid in are drawn from there. I am concerned that the taxman may, at some stage, query the fact that my daughter’s own money is finding its way into the share account too. Would you please confirm that it will be sufficient for me to keep records of every cheque I write in my daughter’s name and for her to photocopy the corresponding cheque she forwards to Selftrade?
I also have a five-year-old grandson and would like to follow the same procedure for him.
Patricia Mock, a director in the private client practice at Deloitte, says that your arrangement appears to be a bare trust or nominee for your grand-daughter – and you are correct to assume that, provided no funds are paid in from your daughter or son-in-law (the child’s parents), the income and gains are taxable on the child.
It would be a good deal more straightforward if the account could be linked to an account other than one in your daughter’s name, as the requirements may, as you suggest, give rise to questions from HM Revenue & Customs (HMRC). Have you thought of setting up the arrangement in your own name, designated in the name of your grand-daughter? This may alleviate the problems.
Assuming this is not possible, then I agree that you should keep records of the transactions in the way you suggest, so that you can rebut any HMRC suggestions that the funds came from your daughter.
The income/gains from the shares are taxable on your grand-daughter as if the shares were owned directly by her. She will have her own personal allowance, tax bands and capital gains tax annual exemption. If there is tax to pay, a tax return will need to be filed for her, signed by one of her parents while she is a minor.