Selling Stock in the UK: Impact on US and UK Taxes
Any time you sell stock and realize a gain, there will be tax implications. There are many questions to answer before deciding to sell: Which stocks should I sell to minimize my expat tax liability? When should I sell? What are the tax implications of doing so, both in the U.K. and the U.S.?
To answer the questions, here is one reader's story.
Mary, a U.S. citizen, wants to sell some of her stock in order to put a down payment on a residential property in the U.K. The stocks are primarily U.K. stocks but there are a few U.S. stocks in her portfolio as well. The stocks vary in age, as some she has held longer than others. She wonders what the implications will be on her U.S. and U.K. taxes if she sells, if there are any guidelines on which stocks she should sell, and if there is a time of year that would be more advantageous than another in order to minimize the expat tax liability. U.S. Tax Implications
On the U.S. side, it doesn't matter whether the stocks were purchased in the U.S. or U.K. As a U.S. citizen, any gains received from the sale of investments must be reported to the U.S. and will be taxed appropriately. Any stocks held for greater than one year are eligible for a reduced capital gains tax of 15 percent, so it would certainly be in one's best interest to sell those 'older' stocks. Stocks held for less than a year will be subject to ordinary tax rates (dependent on the taxpayer's income), ranging from 0 percent to 39.6 percent. Unfortunately the U.S. has no provisions regarding stock sales and investment for the purposes of purchasing residential property, so there are no tax breaks there. But any mortgage interest or property taxes (council taxes) will become an itemized deduction on your tax return which can help reduce overall tax liability.
So, any stocks you sell will be subject to capital gains in the U.S. However, any U.K. taxes paid on the sale can be used as a foreign tax credit, which is a dollar for dollar reduction on U.S. expat taxes. Ultimately, your U.S. capital gains tax is figured by taking your total sales price minus the original purchase price.
For example, if you purchase a stock in 2008 for $500 and sell it in 2013 for $800, you have $300 in capital gains, taxed at 15 percent brings your tax to $45. U.K. Tax Implications
From the U.K. side, it's a bit more complicated. If your stocks are held by a U.K. fund manager, you will be subject to rates of either 18 percent or 28 percent (or a mix) depending on your other earnings in the year. In 2013-14, the thresholds are £32,010 of income if you do not qualify for personal allowances, or £41,450 if you do (generally the latter). So, if you qualify for allowances, and you earn more than £41,450 (excluding gains), you will be taxed wholly at 28 percent on gains. If you earn £10,000 ex gains, then the first £31,450 will be at 18 percent and the remainder at 28 percent. Note, however, that the first £10,600 of gains is a tax-free annual exemption so any gains under this level are not taxed at all. So, in an ideal situation you should spread the gains over 2 years - for example, sell some stock prior to April 5 and some immediately after April 5 in order to double your annual exemption and potentially have more gains taxed at 18 percent.
In deciding which stocks to sell, you will want to consider the length of time the stock has been held, as mentioned above in the U.S. section. If you have stocks that will incur a loss or have no promising long-term value, it makes sense to sell those (as this would allow you to generate more gains from your other stock sales). If the U.S. rates on short-term holds are 28 percent or less, then you are free to sell at will. You may pay 28 percent in the U.K., but will pay nothing in the U.S. due to the availability of foreign tax credits.
In summary, the ideal answer is to straddle your stock sales over two tax years to spread the taxable gain out as much as possible, and use the sales to weed out your non-performing stocks and ensure your portfolio is nicely balanced for your needs. David McKeegan is the co-founder of Greenback Expat Tax Services, a firm specializing in preparation of U.S. expat taxes for Americans living abroad.