US Capital Gains Tax for Expats in the UK: A Complete 2026 Guide for London-Based Americans

For US citizens living in London and across the United Kingdom, capital gains taxation is often misunderstood. Many assume that paying UK Capital Gains Tax (CGT) satisfies all obligations. It does not.

The United States taxes its citizens on worldwide income — including capital gains — regardless of where they reside. That means a property sale in Harrow, an investment portfolio disposal in Canary Wharf, or the sale of shares in a UK company can all trigger US reporting requirements.

This guide explains how US capital gains tax applies to Americans living in the UK, how the UK–US Double Tax Treaty operates, and where hidden risks commonly arise.

The Core Principle: Citizenship-Based Taxation

Unlike the UK, which taxes based primarily on residence status, the US taxes based on citizenship.

If you are:

• A US citizen
• A Green Card holder
• Or a dual US/UK national

You must report worldwide gains to the IRS.

Even if you have lived in London for decades.

What Counts as a Capital Gain?

Capital gains arise when you sell an asset for more than its purchase price.

Common examples for US expats in London include:

• Selling a UK residential property
• Disposing of buy-to-let investments
• Selling UK shares or ETFs
• Selling an interest in a UK limited company
• Cryptocurrency disposals

The gain is generally calculated as:

Sale proceeds – Cost basis = Capital gain

However, currency exchange fluctuations complicate this significantly.

Currency Conversion Complications

One of the most overlooked risks for London-based US citizens is exchange rate impact.

Example:

You purchased a London property for £300,000 when GBP/USD was 1.50.
You sell it for £300,000 when GBP/USD is 1.25.

In GBP, no gain exists.
In USD terms, there may be a gain — or loss — purely due to currency movements.

The IRS requires USD-based calculation at both purchase and sale dates.

This creates phantom gains or losses.

Selling Your London Home: Is It Tax-Free?

In the UK, your primary residence is generally exempt from Capital Gains Tax.

In the US, the rules differ.

US citizens may claim a Section 121 exclusion:

• Up to $250,000 gain (single)
• Up to $500,000 gain (married filing jointly)

But conditions apply:

• You must have owned and used the property as your primary residence for at least 2 of the last 5 years
• Gain must be calculated in USD

High-value London properties can easily exceed the exclusion threshold.

UK Capital Gains Tax vs US Capital Gains Tax

UK CGT:

• Rates generally 18% or 24% for residential property
• Lower rates for other assets
• Annual CGT allowance (subject to changes)

US CGT:

• Short-term gains taxed as ordinary income
• Long-term gains typically 0%, 15% or 20%
• Additional Net Investment Income Tax (3.8%) may apply

Differences in rate structure and calculation timing create complexity.

Avoiding Double Taxation: Foreign Tax Credits

The UK–US Double Tax Treaty helps prevent double taxation through Foreign Tax Credits (FTC).

If you pay UK CGT first, you may claim credit against US liability.

However:

• Timing differences can create temporary mismatches
• Currency conversion affects credit calculations
• Not all taxes are fully creditable

Professional coordination is essential.

Investment Portfolios & UK ISAs

Many US expats in London hold:

• Stocks and shares ISAs
• Unit trusts
• UK mutual funds

These often trigger PFIC (Passive Foreign Investment Company) rules under US law.

PFIC taxation can be punitive:

• Complex annual reporting (Form 8621)
• Unfavourable tax treatment
• Interest charges on deferred gains

ISAs are tax-free in the UK — but not recognised as tax-free by the IRS.

Sale of a UK Limited Company

If you own shares in a UK Ltd company and sell them:

• UK Entrepreneurs’ Relief (Business Asset Disposal Relief) may reduce UK CGT
• The US may tax the gain differently

In addition, US shareholders may face:

• GILTI implications
• Form 5471 reporting
• Subpart F exposure

This is particularly relevant for London-based entrepreneurs.

Timing Matters: Tax Year Differences

UK tax year ends 5 April.

US tax year ends 31 December.

A disposal in March 2026:

• Falls into UK tax year 2025/26
• Falls into US tax year 2026

Foreign tax credit timing must be carefully aligned.

Capital Gains and Divorce or Estate Planning

Asset division during divorce or inheritance can trigger reporting consequences.

For high-net-worth individuals in London:

• Trust structures
• Offshore holdings
• Multi-jurisdictional estates

require coordinated advice.

Common Mistakes Made by US Expats in London

1. Not converting purchase price correctly
2. Assuming UK exemption equals US exemption
3. Ignoring PFIC reporting
4. Misapplying foreign tax credits
5. Forgetting to report cryptocurrency gains

These errors can lead to IRS notices and penalties.

Strategic Planning Before Disposal

Before selling property or investments, US expats should consider:

• Whether to accelerate or defer disposal
• Section 121 eligibility
• Foreign tax credit optimisation
• Currency movement implications
• Corporate restructuring

Planning before sale can materially reduce overall tax exposure.

Why Specialist Advice Is Essential

Cross-border capital gains planning requires:

• Dual understanding of UK and US law
• Currency-aware calculations
• Treaty interpretation
• IRS reporting expertise

General accountants rarely manage these issues comprehensively.

How Xerxes Associates LLP Supports US Expats in London

Xerxes Associates LLP advises:

• US professionals in Canary Wharf
• Entrepreneurs across Greater London
• Dual nationals
• Property investors

Services include:

• US tax return preparation
• Capital gains planning
• Foreign tax credit optimisation
• PFIC reporting
• Corporate structuring advice

Clients across London and the wider UK receive structured, compliance-focused guidance.

Frequently Asked Questions

If I sell my UK home, will I owe US tax?

Possibly. The Section 121 exclusion may apply, but USD calculation matters.

Can UK CGT fully offset US tax?

Often, but not always. Timing and rate differences apply.

Are ISAs reportable to the IRS?

Yes, and they may trigger PFIC rules.

One Last Thing

Capital gains taxation for US citizens living in London is rarely straightforward. Currency movements, treaty rules and reporting requirements combine to create significant complexity.

Before disposing of property, shares or business interests in 2026, proactive cross-border advice can prevent avoidable tax exposure.