John Havard, a consultant at Blick Rothenberg said: ”President Biden’s new Budget for 2022 only nibbles at a situation which troubles thousands of US Citizens who have purchased homes in the United Kingdom.
“A US individual who borrows for non-business purposes in a currency other than the US dollar may have an unpleasant surprise in the year that the loan is repaid. The US tax accounting must be done in US dollars. Consequently, an exchange rate movement over the life of a loan will translate into a US dollar loss or gain.
“This means that US citizens who have purchased homes in the UK rather than rent because it was cheaper could find that that they will now face a hefty tax bill.US citizens are taxable in the USA on their world-wide income, even if living and working outside the USA.
“An American who is to be based in the UK for the foreseeable future may purchase a home here. Any borrowing connected to such a purchase will usually involve a loan denominated in the UK pound sterling.
“For US tax accounting purposes, the US dollar liability to the lender is determined by the exchange rate at the time of borrowing. If the dollar has strengthened against the foreign currency, it takes ‘less’ dollars to extinguish the liability than the historic dollar debt. This produces US taxable income.
“Similarly, if the dollar has weakened against the other currency, it will take more dollars to settle the debt and there is a loss. However, such personal loss is non-deductible.
“President Biden’s latest Budget proposes to allow individuals to deduct foreign currency losses realized with respect to mortgage debt secured by a personal residence. That relief is restricted to the amount of any gain taken into income on the sale of the residence which is attributable to foreign currency fluctuations.
”Whilst this is a welcome suggestion, it fails to address the more pressing issue when loan repayment results in a taxable gain and the individual taxpayer does not have the necessary funds to pay the tax.
“The relief being suggested is conditional on the loan being repaid at the time that the associated personal residence is sold. However, it is not uncommon for a home loan to be repaid without a simultaneous sale of the personal residence that it was used to finance. For example, an ‘early’ repayment will occur when borrowing is refinanced at more advantageous terms with a new lender.
Would you like to know more?
If you would like to discuss how the above may impact you, please get in touch with your usual Blick Rothenberg contact or John Havard using the details on this page.