Buying a residential property in the UK

by Eliza Shaw

Are you a U.S. citizen looking to buy your main residential property in UK ? There are additional mortgage and tax implications you’ll need to consider as an American buying a house in the UK. It’s worth noting up front: this article focuses on buying your primary residence - so we do not cover the tax/mortgage implications of investment or rental properties.

TL:DR

  • Your UK residency status (right to remain) might affect your options for where to obtain a mortgage
  • All UK home buyers have to pay Stamp Duty Land Tax and there will be an extra cost if you own a home already, even if it’s abroad
  • Make sure the source of funds for your down payment are ‘clean’ from HMRC standpoint - and if you’re receiving gifts for the deposit - your lawyers will need to conduct anti money-laundering checks, which can be onerous.
  • You may want to consider a home mortgage interest deduction in the U.S., but this only makes sense when you are in a higher income household.

Your residency status will affect your options for Lenders

UK lenders’ attitudes towards you (as an American citizen) will depend on your visa situation and how long you’ve been in the UK. Some lenders will not work with US clients at all, some might lend as long as you meet certain criteria, and others will require that you have lived in the UK for a certain amount of time.

The general rule of thumb on this is:

  • If you have indefinite right to remain in the UK, you are likely to easily obtain a mortgage with high street lenders.
  • If you reside in the UK on a definite visa of some sort, you’ll have fewer options.
  • If you are paid in a foreign currency - this will make finding a mortgage lender extremely challenging, meaning you might have to seek financing from a private bank (Source: FT).

Expect Stamp Duty Land Tax (SDLT) in the UK

SDLT is a progressive, one-off tax that all residents in England and Northern Ireland must pay (if you’re in Scotland: it’s Land and Buildings Transaction Tax and Wales: Land Transaction Tax).  If you buy a property/land over a certain price (£125k as of 2020), you will pay SDLT and the amount depends on the value of your property. This article from Money Advice Service discusses everything you need to know about SDLT (including the breakdown of costs), and you can use the HMRC Stamp Duty Calculator to understand how much you will need to pay based on your unique situation. It could range from anywhere between 0 - 11.78%.  

Buying your first home (ever)? In the UK, you are generally classified as a first-time buyer if you’re purchasing your main residence and have never owned a freehold property (full ownership of the property and land on which it stands) or a leasehold property (ownership of the property whilst the land is owned by the freeholder) in the UK or abroad. If you’re a first-time buyer in England or Northern Ireland, you will pay no Stamp Duty on properties up to £300,000 (which saves you £5k in tax). For properties costing up to £500,000, you will pay no SDLT on the first £300,000 and pay SDLT on the remaining amount. More on this from the HMRC’s guidance on relief for first time buyers.

Buying an additional home? If you already have another home (even if the property is located in the U.S. or elsewhere),  you will have to pay an additional 3% of SDLT on top of the current rates for each band. This 3% extra rate applies for all existing properties bought for £40,000 or more (which is not hard to do!). If you sell or give away your previous main home within 3 years of buying your new home, you can apply for a refund for this SDLT extra rate (Source: Money Advice Service).

In order to avoid this ‘second home’ tax altogether , some expats might consider ‘gifting’ their house to a family member (but it must be someone who is not involved in their current purchase) before they buy their home in the UK. This requires careful attention - you may be subject to ‘disposing of property’ taxes / gift rules from both US and the UK.

Depending on the nature of the other property that you own, the costs of your first property may be factored into the affordability calculation by your UK lender (Source: FT). On the flip side, when you eventually sell your UK property - remember that SDLT will be considered a cost basis to the IRS - meaning they count it as part of the original cost of property, which will reduce the amount of capital gains tax owed to the IRS. In the UK, you don’t have to worry about capital gains tax on your primary residence.

Make sure your source of funds are ‘clean’

If you transfer funds into the UK from the US - you need to be sure that these will be considered ‘clean’ from HMRC’s perspective or whether there will be a tax charge when you bring this money to the UK. The rules for this will depend on whether you are taxable on an arising or remittance basis.

For UK residents taxed on an arising basis:

  • Your foreign income is taxed on an arising basis, which means you should already be submitting self-assessment tax returns to HMRC. If you need to pull money out of any U.S. investments to pay for your home, be sure to think carefully about how the IRS and the HMRC will tax any gains you have made on your capital.
  • You will likely be taxed by HMRC on gains, but you will also be able to claim a tax credit for any taxes paid in the U.S.
  • Since you are taxable on an arising basis, you will also be entitled to HMRC’s annual capital gains allowance as well.

For UK residents taxed on a remittance basis:

  • If your offshore money has never been invested, or was invested before you became a resident in the UK - it is considered ‘clean’ and can be brought or ‘remitted’ to the UK without a tax charge (Source: FT).
  • Any gains or income held offshore and not brought to the UK are ignored by HMRC - until you have been a UK resident more than 7 out of 9 years. At this point, your foreign income is taxed on arising basis of your worldwide income and gains (Source: FT).

Expect Anti-Money Laundering checks on any gifts

If you are receiving financial gifts to help you with your deposit, be aware that your conveyor (i.e. the lawyer responsible for transferring the legal title of property from one person to another) will have to perform anti-money laundering checks, which is a standard UK procedure. You can read more about AML at the UK Law Society). Some Conveyors do not provide this service for gift transfers from overseas, so be sure to check this upfront with your Conveyors.

To provide evidence of where the gift has come from, you will likely need to show:

  • Bank statements from your account which show where the money was transferred to
  • Bank / transfer statements from the giftor
  • Proof of your giftor’s identification (e.g. copies of passports and Utility bills).

You won’t normally have to report your Mortgage to the IRS

You don’t have to report your mortgages (and other loans) to the IRS or via FBAR or FATCA forms, because mortgages do not have a cash balance. The only exception is if you obtain an Offset Mortgage. An offset mortgage is where you have a savings account and a mortgage with the same lender, and you use your cash savings to reduce – or 'offset' – the amount of mortgage interest you're charged.

If you choose the offset route - make sure you report this account within the FBAR and FATCA. Additionally, the IRS will consider any interest made on this account taxable - whether you keep the money in the account, transfer it to another, or withdraw it. You’ll therefore need to report this interest  income to the IRS, even if it’s just a few dollars (source: Investopedia).

In the UK - You have a ‘personal savings allowance’ - meaning a certain amount of your interest is tax-free, depending on your income rate. So you’ll need to consider this as well if you choose the ‘Offset route’. Here’s the breakdown of HMRC’s personal allowance:

  • £1k if you’re in the basic income rate
  • £500 in higher rate
  • £0 in additional rate

If you are over your personal savings allowance you will pay your usual rate of income tax on the interest (read on: UK income on savings).

U.S. Home Mortgage Interest Deduction

In the US you can offset your mortgage interest using a home mortgage interest deduction. This means you can lower your taxable income by subtracting the interest you are paying on a mortgage each year from your income, which means you will be taxed less overall. You can only do this on your primary residence or second home, and can only deduct the first $750,000 of debt used for acquiring / constructing / substantially improving your residence (source: Investopedia).

Itemising doesn’t necessarily make sense for everyone. Since it only makes sense if your itemized deductions total more than the standard deduction (which is $12,400 for individuals in 2020). Read this investopedia article to read more about whether it makes sense for you.

You may also be able to deduct your moving expenses, and you can use this IRS moving calculator.

Buying a UK property: what we would do

  • Take extra care to ensure our funds for the house are clean
  • We would pay close attention to Stamp Duty Land Tax - particularly if we already own another property that we are holding onto. Getting this right can bring big savings.
  • We probably would not consider itemising our mortgage interest - just because we aren’t massive earners.
  • We would keep a detailed record of all transactions related to the purchase of the house, as well as other major renovation expenditures. This will be useful down the road when we are looking to sell - because they will form the ‘cost base’ to IRS and HMRC.