updated 5:15 PM CEST, Oct 18, 2018

Get professional advice to avoid risk of a ‘Boris’, U.S. expats in U.K. warned

Boris Johnson, the New York-born former mayor of London who recently resigned as U.K. foreign secretary, is well known to Londoners for having unofficially lent his name to a bicycle-sharing scheme (“Boris bikes”) that was launched in 2010, and with which he, a keen cyclist himself, was associated.

Less well known is that his seemly ill-advised sale of his home in north London four years ago, which saw him hit with a significant (said to be in the tens of thousands of pounds) capital gains tax payable to the U.S. government on his half of the profit from the sale, has become the textbook example of what other, newbie expat Americans married to British nationals are warned to try to avoid in structuring their  ownership of a U.K. residential property that they intend to declare as their primary residence.

It has also become an oft-referenced reminder to those long-established American dual citizens resident in Britain – as well as to UK-based “accidental Americans”, as those born in the US who have spent their lives elsewhere have taken to calling themselves – of the importance of getting good tax advice before putting their homes on the market.

Indeed, “we would normally say that people should get tax advice before buying a property as well as when they come to sell, as by that point it’s often too late” to correct a poorly-thought-out ownership structure, Coutts head of Americas clients Andrew Grimes says.

Johnson came a cropper in 2014 because, although a British citizen and long-time resident of the UK, like all Americans living outside the U.S. who have not formally renounced their citizenship, he continued to be regarded by the US as an American citizen for tax purposes.

In addition to being legally required to file a tax return every year, American expats are also technically required to pay US tax on certain financial gains – including on any gains from the sale of a primary residence – that are normally taxed by the U.S., but not by the country in which they are living.

Although he initially vowed not to pay the 20% capital gains tax when he was informed that he owed it, after the house sale had gone through, Johnson eventually did, in 2015.

He quietly renounced his US citizenship the following year.

In the meantime, particularly when either the husband or wife of a couple is American but the other isn’t, the “Boris case” is now apparently often referenced, industry sources report, particularly by American tax specialists keen to see their American clients avoid following in the British politician’s footsteps with respect to the way they structure the ownership of their UK residence.

That said, though, David Treitel, managing director of Wimbledon-based American Tax Returns points out, “the ‘Boris lesson’ is less important than it used to be” as a result of UK property prices not climbing at present and, in some areas such as certain parts of London, actually falling off their recent highs.

With the UK pound having slumped in the wake of Brexit as well, Treitel points out, the difference between what people buying houses now, or recently, paid or are paying, compared to what they will probably sell them for in the foreseeable future, won’t likely be anything like the £730,000 gain press reports at the time said Boris Johnson and his wife realised.

In the case of those who took out a pound sterling mortgage when the exchange rate was 1.8 dollars to the pound, the gain, as seen by the US tax authorities, is typically magnified, since it will treat the difference between the dollar amount borrowed and that (lower) amount when paid off in full as taxable income.

That said, the first US$250,000 of the gain on the sale of a house is exempt from the US capital gains tax under a tax break (“Primary Residence Exclusion”) for homeowners introduced by President Clinton in 1997, Treitel points out, which again he says should minimise the potential damage for today’s buyers, at least while house prices aren’t growing rapidly.  (Couples can exclude US$500,000 under this exclusion.)

Another scenario sees an American using his currently-strong US dollar to buy a UK property at what appears to be a bargain price; the property loses, say, 20% of its value, but the pound regains its strength and when he sells the house at a loss in sterling terms, the US tax authorities see only the gain, on paper, in dollars. 

For this reason, American expats and their advisers “need to be aware of this issues” they potentially face when buying UK properties, Treitel says, “especially with Brexit [coming], because the pound could fall further still”.

Treitel and other tax experts say that the usual recommendation for people in Johnson’s situation here in the UK is to place the ownership of their property “mostly if not entirely” in the name of the non-American spouse.

In Johnson’s case, some experts have speculated that he might have taken a conscious decision not to place ownership of his house entirely in his British wife’s name in order to avoid the risk of being seen by media commentators as “avoiding” tax.

Others, though, have questioned whether Johnson, of all people, would not have willingly avoided a U.S. tax that, at least after the fact of being informed he had to pay it, he referred to as “absolutely outrageous”. 

Last week, the Johnsons were in the news again, after they confirmed that they had separated and were in the process of divorcing, after 25 years of marriage.

The fact that American citizens can find themselves owing money to the IRS on the sale of a U.K. primary residence appeared to come as a surprise to Boris Johnson, as noted above. To read about seven other things Americans buying properties in the U.K. have also found surprising, according to mortgage experts, see Eight things that surprise Americans about U.K. mortgages, house-buying.