When selling an investment property in USA what are the tax implications re double taxation relief on a UK resident?
DP
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From a UK perspective Liz overlooked residential lettings exemption. We also need to know where the owner(s) are domiciled.
The US will also need to know if the property was owned jointly and may impose tax at the State level too. There may also be suspended losses that can be deducted in the year of sale.
Once you get into DTR the solution is a tad more complex than Liz suggests.
Where gains are chargeable to UK capital gains tax, credit for foreign tax suffered on a gain is set against the capital gains tax chargeable in respect of the double-taxed gain. [ICTA 1988, s 790(4), s 793].
But the relief is limited to the difference between the capital gains tax (before double tax relief) which would be payable by the claimant
(i) if he were charged on his total capital gains (as computed under (a) above), and
(ii) if he were charged on those gains excluding the gains in respect of which the credit is to be allowed.
As Liz observes, total double tax credits cannot exceed the total capital gains tax payable by the claimant for the year of assessment. [ICTA 1988, s 796(3)].
HMRC take the view that if the UK chargeable gain (before deducting any losses and taper relief) is less than the sterling equivalent of the gain chargeable in the overseas territory, the foreign tax eligible for relief must be proportionately restricted.
They are also of the view that where the gain chargeable abroad has accrued over a longer period than the UK chargeable gain, the foreign tax must again be proportionately restricted. See HMRC Helpsheet IR 261.
You may want advice on both sides of the pond from someone who has handled both sets of calculations in the past.
Double Tax Fun
Assuming the person is UK res/dom...
Was the property rented or just held (used personally) or a mix?
How long was the property held for?
The answers to these questions affect the US tax (and UK too).
The UK will tax the sale as follows:
Sale price x exchange rate on date of sale
-costs of sale x exchange rate on date of sale
-purchase price x exchange rate on date of purchase
-costs of purchase x exchange rate on date of purchase
-capital improvements x exchange rate on date of improvement.
less taper relief and indexation (if owned for sufficiently long period of time)
less £8800 (or whatever the relief is in the year of sale)
less prorata US tax on the sale.
This is how the prorata adjustment for US tax is made: If the post-taper-and-indexation-relief gain is £17,600, then subtracting the £8800 gives you a 50% ratio. If the US tax were £1000, you could take up to £500; but if the US tax were £10,000, you could only take £3520 (40% of total taxable sale).
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The US will tax the sale in a complex arcane bizarre planet ten way that is entirely dependant on the answers to the qs above. It is usually less than the UK tax, but sometimes it is higher.
The US rates are graduated up to 35% on sales of property held for less than a year; 15% on normal capital gains, and 25% on recapture of depreciation (yes, in the US they can depreciate the property, but then they pay tax on it when they sell it).
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