Intro to Buying a House in the UK

This post is a quick guide on purchasing a primary residence in the UK, focusing on the issues that are specific to US citizens living in the UK. I’m not going to cover second homes, buy-to-let, US properties, etc., nor will I go through the details of the UK homebuying process that aren’t unique to Americans. A few good places to start understanding that basic process (which is somewhat different from the US system!):

To me, there are four key areas where Americans need to be aware of specific considerations when buying their home in the UK – I’ll cover each in turn:

  • Getting a Mortgage – Credit History
  • Getting a Mortgage – Immigration Status
  • Tax Implications – Capital Gains
  • Tax Implications – Foreign Currency Gains

Getting a Mortgage – Credit History

The US and UK credit history & scoring systems are essentially completely separate. No matter how good (or bad!) your credit was in the US, when you move to the UK you’re starting over from scratch. MoneySavingExpert has a good guide on UK credit scoring to get you started – it can even be difficult to check your UK credit report at all without three years of address history, because you won’t pass the automated ID checks!

That doesn’t mean you can’t get a mortgage until you’ve been in the UK 3 years, though. I got my first mortgage after a year of renting, and I know there are people who have bought upon arrival, including a mortgage. I do usually recommend renting for a year for most people, to give you time to get to know the area, establish your UK finances, and deal with all the homebuying stuff while actually in the country (it’s enough of a faff when you’re here; doing it from abroad is possible, but adding that stress to an already stressful transatlantic move doesn’t sound like fun to me).

There are a lot of things you can do to start building credit once you’re in the UK. This is not an exhaustive list, and in no particular order – you don’t have to do everything here, but doing several should start to get your credit building:

  • Pay all your bills on time
  • Try to get some credit, even if it’s just a small amount like a mobile phone contract
  • If you have an American Express credit card in the US, they will take this into account an help you open a UK Amex. You might not get the same credit limit (I only got £1,000 when I first arrived), but its much better than nothing.
  • If you can’t get an Amex, try to get a credit card for building credit. You’ll get a very low limit (often a few hundred pounds), but it starts building history. You may find that you can’t even get through the application screens without 3 years of UK address history, but try a few different options. MoneySavingExpert has a good list to start with.
  • You can register to get your rent payments applied to your credit history, through Experian or Credit Ladder
  • LoqBox is a product specifically designed to build credit. Basically, you take out a small 0% interest loan but they keep the money, so they aren’t worried about whether you’ll pay it back. As you pay it back, you build up a savings account, and the loan repayments get reported to the credit companies.
    • Quick example: you take out a 12 month loan for £600 at 0%, but you don’t actually get any money – LoqBox keeps the £600. You pay back the loan at £50 per month, which builds up as savings.
    • Once the loan is repaid, you transfer the money out. You can either open a banking account with one of LoqBox’s partners (they get a fee from this, but if you don’t like the account you could just transfer from the new account and close it), or you can pay £30 to transfer the savings to one of your existing accounts.
  • It’s commonly recommended to get on the “electoral roll” to help your credit. However, you can’t do this unless you’re eligible to vote. A few options:
    • You might actually be eligible to register to vote. In Scotland & Wales, if you have an appropriate visa you should be able to register. In England & Northern Ireland, you’re usually only eligible if you’re a UK, EU, or Commonwealth citizen.
    • You can send the credit reporting agencies proof of residency, instead of registering to vote. I’ve seen this recommended, but also seen anecdotes of it backfiring and somehow making it harder to get credit.

Personally, I did a combination – I used my US Amex to get a UK Amex, I used a rent payment reporting service (for a little while, then it broke – it’s been replaced by the ones listed above), I used LoqBox, and I paid all my bills on time. I can’t say which one, or which combination, was effective, but I didn’t have any challenges getting a mortgage because of my credit history. I may also have been helped because my wife/co-applicant was an EU citizen with a very old and fairly small UK credit history from before she moved to the US.

Getting a Mortgage – Immigration Status

Some UK lenders are less willing to work with immigrants, compared to UK citizens, and the specifics of your immigration status can matter (visa type, leave to remain, etc.). Basically, they’re concerned about your ability to stay in the UK and keep paying the mortgage, and maybe about the possibility of you skipping the country and abandoning the mortgage.

Because of this, it’s probably best to use a mortgage broker to help search the breadth of the UK mortgage marketplace, narrowing down to lenders that will work with you. MoneySavingExpert has a list of recommended brokers. Personally, I used London & Country for my first mortgage and Habito for a recent remortgage, and have no problem recommending either of them, I’d used them both again (I checked with both of them and they came up with the exact same recommendations, so it was basically a coin toss as to who to actually use).

Mortgage brokers get paid by the bank issuing the mortgage, no direct cost to you, although I’m sure their fees are baked into the mortgage.

Tax Implications – Capital Gains

Easy part first – the UK generally does not impost capital gains tax on the sale of your home (there are a few exceptions, if you rent it out, bought it just as an investment, it’s really big, etc.).

The US makes things more complicated – capital gains on the sale of a primary residence are taxable in the US, but with a significant exclusion of $250,000 ($500,000 for married filing jointly). This applies only to the gains – if you bought for $600,000 and sold for $700,000, the gain is only $100,000, so it’s under the exclusion. There are some conditions for the exclusion as well – mostly, you need to have owned it and lived in it for at least 2 of the last 5 years, although it can get more complicated.

For many people, that will reduce the tax to zero, but if you’ve lived in a house for a long time and/or house prices have gone up significantly, you could be above this and liable to pay capital gains tax.

Big caveat: the US tax calculations will be done in US dollars, at the exchange rate at the time of purchase and the time of sale. Therefore, it’s possible to have a gain in dollars that is larger than in pounds, or even a dollar gain but a pound loss. As a hypothetical example:

  • Buy a house for £500,o00 while the exchange rate is $1.25 to the pound – to the IRS, you bought the house for $625,000
  • Sell the same house 5 years later for £500,000 while the exchange rate has gone up to $1.50 to the pound – to the IRS, you’ve now sold the house for $750,000
  • The IRS sees a $125,000 gain, even though you didn’t make any money in pounds and will have lost some through stamp duty, legal fees, etc. (some of these expenses you may be able to include in your basis, see the IRS link above).
  • This example is under the $250,000/$500,000 exemption, but with an increase in house prices or bigger changes in the exchange rate, you could exceed the exemption.

There’s not really a way around this – all your US taxes are done in US dollars. You could sell your house whenever you get close to the $250,000/$500,000 exclusion, but that has plenty of other costs. You can try to time buying and selling with highs and lows in the exchange rate, but you still need somewhere to live!

Tax Implications – Foreign Currency Gains

This one only applies to US taxes, nothing to think about for UK taxes.

To the IRS, every transaction you make is made in US dollars, regardless of the currency that it is actually used. So for the purchase of a house using a mortgage, the IRS actually sees two separate transactions:

  1. Exchanging USD for a real asset (the house)
  2. Receiving USD in exchange for a promise to pay the money back, with interest (the mortgage)

We talked about #1 above, but #2 can have it’s own pitfalls – you can have a taxable USD gain on the mortgage, regardless of what happens to the value of the house. This is best explained in a couple of examples:

Example 1 – Mortgage Refinancing

UK mortgages are frequently on a 2 or 5 year fixed rate, after which they change to a “standard variable rate”, which is typically much higher. So it’s completely normal to get a new mortgage in the UK every 2 or 5 years.

You take out a mortgage for £100,000 while the exchange rate is $1.50 to the pound. Let’s call it an interest only mortgage just for the sake of simple calculations – the principle still applies if it’s also repaying principal.

  • The IRS sees this as you receiving $150,000 in exchange for a promise to pay it back plus interest.

You then refinance that mortgage 2 years later, for another £100,000. But, the exchange rate has dropped to $1.25 to the pound (a dramatic drop, but actually happened after the Brexit vote).

  • The IRS sees this as you having exchanged a debt of $150,000 for a debt of $125,000 – you’ve made $25,000 on the exchange! That’s taxable income to the IRS, even though your financial situation in GBP hasn’t changed at all.
  • That income is foreign passive income, typically taxed at income rates (not lower capital gains rates). It can be offset by the Foreign Tax Credit, but only if you have excess FTCs in your “passive” category bucket that covers UK tax on interest, dividends, & capital gains, not the “general” one for UK income tax on salary. You might or might not have enough passive FTCs to cover it, in which case you’re paying real $$$ to the IRS.

Sadly, the reverse example doesn’t help you – if the exchange rates were swapped and you “lost” $25,000, you can’t deduct that from your US taxes.

This example could just as easily be on the sale of the house, rather than a remortage – if you only pay back $125,000 when you sell the house after taking out a $150,000 mortgage (both of which are actually £100,000), you still get this gain, and it’s not excluded as part of the $250,000/$500,000 exclusion – the mortgage transactions are separate from the purchase and sale of the house.

There isn’t a ton you can do to mitigate this, either. If you have a non-US spouse who doesn’t file US taxes, you only need to report your half of the gain, which helps. And when you buy the house, you may be able to structure it so the non-US spouse owns most or all of it – this can get complicated, and is probably worth seeking professional advice if you want to pursue.

You could get a longer fixed mortgage (there are now options up to 40 years, more like the traditional US 30 year mortgage) – this mostly delays the pain, but could avoid it if you happen to be due for a remortgage at the time of a temporary exchange rate swing. But you’ll typically pay a higher interest rate for a longer fixed term, all else equal.

Other than that, if the exchange rate has moved in the “wrong” direction while you have your mortgage, you may be stuck between paying the higher “standard variable rate” to the mortgage company or paying income tax to the IRS 😦

Example 2 – Mortgage Payments

This foreign currency gain tax could even apply on your normal monthly payments. There’s an exception of $200 per transaction that can help avoid this on smaller mortgages, but with big exchange rate changes and/or large mortgages, each mortgage payment could exceed the $200 limit.

For example, you’re repaying a mortgage where your monthly payments are £1,000 of interest and £1,000 of principal. You started the mortgage with an exchange rate of $1.50 to the pound, so each month you’re paying off $1,500 of principal (there’s nothing to worry about for the interest).

However, the exchange rate now drops to $1.25 to the pound – you’re now repaying $1,500 of principal but only spending $1,250 a month to do it. To you, this looks like paying £1,000 a month, exactly what you agreed to in the mortgage. But to the IRS, it looks like you’re getting a $250 gain every month due to your clever foreign exchange trading.

This is something you should be tracking and reporting on your US income taxes – I’d be curious how any of you are actually doing this tracking. I haven’t done it for my own mortgage, just because the exchange rate has been going up, not down (I took out my mortgage near the depths of the post-Brexit exchange rate drop), and the principal part of my mortgage is small enough that the exchange rate would have to drop below parity before I’d be above the $200 limit – this could happen, but we’re nowhere close to it.

2 thoughts on “Intro to Buying a House in the UK

  1. We thankfully no longer have a mortgage, but when we did, we had no idea about the phantom currency gain issues. We paid off the mortgage in 2018. We always had a standard variable rate repayment mortgage, but for a while our monthly payments were quite large and a while back we made some one off large lump sum payments. I have no idea what effect the exchange rate changes would have had over the period. The value of the house in GBP has gone almost nowhere, but that doesn’t necessarily mean anything in USD. I’m burying my head in sand over this one and hope it’s water under the bridge now. I think this one is pretty far off the radar of most US tax residents in the UK, but that’s obviously no protection from the IRS. I hope never to have to take out a mortgage again, but I’m sure my kids someday will. In which case, I’ll keep track of these mortgage payments and build some sort of spreadsheet to track it – hopefully taking advantage of the $200 per transaction exemption. Quite frankly, I’ll be encouraging them to rent until they are very certain they are not going to be moving anywhere soon… I’m not generally keen on personal property as a form of investment (or buy-to-let unless you really plan to operate it as a business)

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    1. Agree – this is one of those that if you don’t know about it, you’ll never find out about it unless the IRS asks, or you happen to come across it. Wouldn’t realize it just from doing a normal tax return or anything like that.

      I’m hoping I’m close to my last mortgage – probably finish my current remortgage for 5 years, and either remortgage or move elsewhere when the fix expires in 5 years, depending where we are in life. That ought to be the last one, I think.

      Completely agree on renting making sense unless/until you’re ready to put down roots – there are too many hassles and financial drawbacks of buying houses in rapid succession. Through sheer dumb luck, my first house in Boston was a very successful financial investment – combination of buying in the right place at the right time, plus a buyer who was willing to pay way over the odds. I can’t expect to replicate that unless through good luck again, although COVID and the move to hybrid working arrangements might play into my favor with my UK house.

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