Selling a property – currency and mortgage considerations

With ongoing interest-rate volatility and significant currency fluctuations, many homeowners are taking the opportunity to reassess their UK property position. For US citizens living in the UK, this review is particularly important, as property decisions often carry unexpected cross-border tax consequences.

Ed Johnson and Tahir Mahmood explore some of the key considerations for US citizens who are thinking about selling a UK property.

Mortgage rates

In response to persistent inflationary pressures, the Bank of England has increased interest rates materially over recent years. As a result, borrowing costs have risen, particularly affecting those on variable-rate mortgages or whose fixed-rate deals are coming to an end.

Individuals on long-term fixed rates may not feel an immediate impact. However, for others—especially those with larger mortgage balances—higher interest rates can place pressure on household cash flow. This often prompts a broader review of whether a property remains sustainable, or whether alternatives such as refinancing, downsizing, or selling should be considered.

For US citizens, this decision should never be made based on UK considerations alone.

Selling a property in the UK

UK rules

In the UK, individuals benefit from Principal Private Residence (PPR) relief. This allows individuals to sell their main home and pay no capital gains tax, assuming all the necessary conditions are met.

US rules

US citizens, however, are subject to US tax on their worldwide income and gains, regardless of where they live. As a result, the sale of a UK main residence may still give rise to a US capital gains tax liability.

Currently, up to $250,000 of gain per individual (or $500,000 for married couples filing jointly) may be excluded from US taxation, again provided certain basic tests are met. Any gain more than this threshold is taxable in the US.

Crucially, the US tax calculation must be performed in US dollars, which introduces a further layer of complexity.

Currency effect

With the recent swings in currency, it is imperative that you understand the implications to you.

UK Property

By way of a high-level example, let's assume a US individual and taxpayer owns a house in the UK purchased for £2,000,000:

Although the GBP has depreciated against the USD in the above scenario, due to the UK’s Private Residence Relief, no capital gains will be due from HMRC’s perspective. Whilst there has been some depreciation in the currency from 1.55 to 1.35, there is still a USD capital gain of $900,000. After deducting the $250,000 primary residency exclusion, there is still a taxable long-term capital gain of $650,000 for US purposes.

Phantom mortgage gain - What is it?

Mortgage gain

Quite surprisingly, the potential pitfalls don’t stop there. If a mortgage is held, you might naturally assume that the debt is deducted from the asset value to reduce the potential gain. However, the mortgage is in fact considered separately to property.

The IRS, interested only in USD equivalent values, will view the above scenario as an individual having taken out a mortgage of $1,700,000 only to have repaid $1,150,000 at a later date and thus benefitting from repaying a lower amount (in USD terms) than initially having taken out and this will be subject to US tax at ordinary income rates.

Mortgage loss

Unfortunately, the bad news doesn’t end there.

If the above scenario is reversed, i.e., initial mortgage of £1m was taken out at a GBP/USD rate of 1.15 and later repaid at 1.70, the $550,000 ‘phantom loss’ in this instance, is viewed by the IRS as a ‘personal loss’ and as such, not deductible.

Clearly, careful attention and planning needs to be paid when considering capital repayments of outstanding debt.

Key takeways

Before selling a UK property, US citizens should carefully consider:

1. The timing of a sale in light of exchange rate movements
2. Whether mortgage debt could give rise to a phantom FX gain
3. How gains will be calculated in both GBP and USD
4. Whether both spouses’ US capital gains exclusions can be utilised
5. The importance of pre-sale tax modelling before exchange of contracts

What appears to be a straightforward UK property transaction can carry complex and costly US tax consequences. Obtaining coordinated UK and US tax advice before acting can help avoid unexpected outcomes and ensure decisions are made with full visibility of the cross-border implications.