Dual National US UK: Two Homes, Nomination and Section 121

A Dual national US UK owner of two homes faces two unrelated tests. The UK lets you nominate which residence is your main residence within two years; the US has no election and decides principal residence on the facts under section 121. The two countries can therefore exempt different homes, and each sale must be reported accordingly.

That mismatch is where most errors in this area begin. A London house and a home in the United States, or a London flat and a country house, are each examined twice: once by HMRC under private residence relief, in sterling, and once by the IRS under section 121, in dollars. At Jungle Tax we prepare both returns for the same sale, and this guide sets out how each regime works, how the outcome is reported, and how to put matters right where a sale reached only one tax authority.

Why do two homes create a problem for a dual national?

A UK resident is taxed by the UK on worldwide gains. A US citizen is taxed by the United States on worldwide gains wherever they live. A dual national living in Britain is therefore within both systems on every property disposal, and each system has its own definition of the home that qualifies for relief.

• The UK gives private residence relief for periods in which a dwelling was your only or main residence. Where you have two or more residences, statute gives you a right to choose between them by notice.
• The US excludes a capped amount of gain on the sale of your principal residence, provided ownership and use tests are met. There is no notice, no election and no form on which to choose.

Nothing in either system refers to the other. A valid UK nomination is not evidence of anything for IRS purposes, and meeting the US tests does not make a property your main residence for HMRC. Each return must be prepared from first principles.

How does UK private residence relief work when you have two residences?

Private residence relief exempts the gain attributable to periods when the property was your only or main residence, plus certain deemed periods. With a single home the analysis is short. With two, the first question is whether both are actually residences. A property that is let to tenants, or held purely as an investment and never lived in, is not a residence and cannot be nominated. A residence requires some degree of permanence and continuity of occupation as a home.

What is the two-year main residence nomination?

Under TCGA 1992 section 222(5), an individual with two or more residences may give notice to HMRC stating which is to be treated as the main residence. HMRC's own manual confirms that you are not required to nominate the home that is factually your main one; the only condition is that the nominated dwelling is genuinely in use as one of your residences (see HMRC Capital Gains Manual CG64485).

The notice must be given within two years of the date on which you first have a particular combination of residences. Three practical points follow from HMRC's guidance:

• The two-year period runs from when the new property is first used as a residence, which is not necessarily the completion date.
• Every change in the combination of residences opens a fresh two-year period. Acquiring a third residence, or ceasing to use one of them as a residence, restarts the clock.
• When a property stops being a residence, the new period runs from the date use ceased, not from the later date of sale.

If the two years pass without a notice, the right to nominate for that combination is lost until the combination changes again.

How is the nomination made and evidenced?

There is no prescribed form. The notice is a letter to HMRC identifying the residences and stating which is nominated and from what date. It must be signed by the individual personally; HMRC's guidance states that an agent's signature is not sufficient. For return-preparation purposes the file should hold a copy of the signed notice, proof of the date it was sent, any HMRC acknowledgement, and evidence of the date the second property was first occupied as a residence, because the validity of the notice depends on that date.

Can a nomination be varied?

Yes. A valid notice can be varied by a further notice at any time, and the variation can take effect from a date up to two years before it is given. An invalid notice, by contrast, cannot be varied, and once the original time limit has expired it cannot be replaced. When we prepare a computation we therefore check validity first: was the property a residence on the date stated, and was the notice given in time and signed by the right people?

Married couples and civil partners: one main residence between you

Spouses and civil partners who are living together can have only one main residence between them for private residence relief. Where a nomination affects both, it must be signed by both. This matters on marriage in particular: two people who each had a home, and who continue to use both as residences afterwards, have a new combination of residences and a new two-year period from that point.

What is the final-period exemption?

Provided a dwelling has been your only or main residence at some time in your ownership, the final nine months of ownership are treated as a period of main residence whether or not you lived there. For a two-home owner this means that a property which was nominated, or was factually the main residence, for any period will carry at least that final period of relief in the computation.

What is the 90-day test for a home in another country?

Since 6 April 2015 a residence located in a territory where you are not tax resident is treated as not occupied as a residence for a tax year unless a day-count test is met. Broadly, you (or your spouse or civil partner) must spend at least 90 days in the property, or across your qualifying residences in that territory, during the UK tax year. A day counts if you are present at midnight, or present during the day and staying overnight. The 90 days are reduced proportionately where the property is owned for only part of the year.

For a UK resident dual national with a home in the United States, this is the gateway question. If the test is not met for a tax year, the US home cannot be the nominated main residence for that year, and an existing nomination lapses for it. Whether a US citizen living in London is "resident" in the United States for this specific purpose is a technical point that turns on the individual's facts, so a contemporaneous record of nights spent in the US home should be kept for every tax year in any event. The same rule operates in reverse for a dual national who is resident in the US and keeps a UK home.

What happens on the UK return if no nomination was made?

A nomination is optional. Where there is none, relief goes to the residence that is your main residence as a matter of fact, and you must self-assess that question when the sale is reported. HMRC's guidance (Capital Gains Manual CG64545) makes clear that time spent is usually important but not decisive, and lists the evidence it will look for:

• where the family spent its time, and where children went to school;
• place of work, and registration with a doctor or dentist;
• the electoral roll and the address used for banks, utilities and government correspondence;
• where cars are registered and insured, and how each property is treated for council tax;
• the size, furnishing and utility usage of each property.

The answer can change from year to year, in which case the gain is apportioned on a time basis between main-residence and other periods. The computation, and the evidence behind it, should be retained with the return.

How does the United States decide which home is the principal residence?

Section 121 excludes up to $250,000 of gain on the sale of a principal residence, or up to $500,000 on a joint return where the conditions are met. The property can be anywhere in the world. The core requirements, summarised in IRS Topic 701 and set out in detail in IRS Publication 523, are:

• Ownership test: you owned the home for at least 24 months in the five years ending on the date of sale.
• Use test: you used it as your principal residence for at least 24 months in that same five-year period. The months need not be consecutive, and the two tests can be met in different periods.
• Frequency limit: you generally cannot use the exclusion if you excluded gain on another home sold in the two years before this sale.

No election: facts and circumstances

Where a taxpayer uses more than one property as a residence, the US regulations say that the property used for the majority of the time during the year will ordinarily be the principal residence. Other relevant factors include the place of employment, where family members live, the address shown on tax returns, driving licence and voter registration, the mailing address for bills and correspondence, and the location of the taxpayer's banks and of the clubs or religious organisations they belong to. There is nothing to file in advance. The position is taken on the return for the year of sale and must be supportable if questioned.

Two further US points regularly affect two-home owners:

• Periods of non-qualified use. Where a property was owned but not used as the principal residence for a period after 2008 before becoming the principal residence, the gain is allocated and the part attributable to that earlier period is not excludable. Time after the property last served as the principal residence, within the five-year window, is not counted against you.
• Spouses. The $500,000 limit on a joint return requires both spouses to meet the use test. Where the other spouse is not a US person and no joint return is filed, the US spouse's exclusion is limited to $250,000 on their share of the gain.

US versus UK main home rules: side-by-side

Point	UK (HMRC)	US (IRS)
Relief	Private residence relief, TCGA 1992 s222 onwards	Principal residence exclusion, Internal Revenue Code s121
How the main home is identified	By written nomination within two years of a new combination of residences; otherwise on the facts	Facts and circumstances only; no election exists
Can you choose the lesser-used home?	Yes, provided it is genuinely a residence	No; the home used most of the time ordinarily prevails
Amount relieved	Uncapped, time-apportioned by period of main residence	Capped at $250,000, or $500,000 on a qualifying joint return
Look-back	Whole period of ownership	Five years ending on the sale date (2 of 5 years ownership and use)
Final period	Last nine months treated as main residence if it ever was	Up to three years can pass after moving out, within the 2-of-5 test
Home in another country	90-day test per tax year where not resident in that territory	Location irrelevant
Married couples	One main residence between spouses living together	Each spouse tested; both must meet the use test for $500,000
Currency of computation	Sterling	US dollars at the rate on each transaction date
Mortgage repayment	No separate gain on a sterling loan	Currency gain on a sterling mortgage is a separate item of ordinary income
Reporting	UK property return within 60 days where tax is due, and the Self Assessment capital gains pages	Form 8949 and Schedule D where any gain is taxable or a Form 1099-S was issued

Dollar basis, currency movement and the sterling mortgage

The US computation is carried out in dollars. The purchase price and each capital improvement are translated at the exchange rate on the date paid, and the sale proceeds at the rate on the date of sale. A property that has risen modestly in sterling can show a much larger dollar gain if sterling strengthened over the holding period, and a smaller one, or even a loss, if it weakened. The dollar gain, not the sterling gain, is what is measured against the $250,000 or $500,000 cap. The UK computation of a US home works the same way in reverse: each dollar figure is translated to sterling at the rate on its own date.

The mortgage is a separate matter on the US side. If you borrowed in sterling and fewer dollars are needed to repay the loan than the dollar value of what you originally borrowed, the difference is a foreign currency gain. It is ordinary income, it is reported separately from the property sale, and section 121 does not shelter it. A currency loss on a personal mortgage is generally not deductible. The UK has no equivalent charge on a sterling loan, so there is no UK tax to credit against this item.

How is each sale reported?

On the UK side

• A UK resident who sells UK residential property with tax to pay must file a UK property return and pay the tax within 60 days of completion. Where relief covers the whole gain, that return is not required of a UK resident.
• A non-UK resident must report a disposal of UK property within 60 days whether or not tax is due, and a nomination can be made in that return.
• The disposal is then included in the capital gains pages of the Self Assessment return where one is filed, with private residence relief shown in the computation.
• The sale of a US home by a UK resident is reported through Self Assessment, in sterling, with credit claimed for US tax paid on the same gain.

On the US side

• Where part of the gain is taxable, the whole sale goes on Form 8949 with the excluded amount entered as an adjustment, flowing to Schedule D.
• Where the gain is fully excluded, the IRS requires the sale to be reported only if a Form 1099-S was issued. A UK conveyancing transaction does not produce one, so reporting is not strictly mandatory. In practice we recommend recording the sale and the exclusion on Form 8949 regardless: it starts the two-year frequency clock on the record and explains a large sterling receipt that will appear on the year's FBAR.
• The mortgage currency gain is entered as other income on Schedule 1.
• Any gain above the exclusion may also be subject to the 3.8% net investment income tax, and a home located in a US state may carry a state filing as well.
• Sale proceeds sitting in a UK account count towards FBAR and Form 8938 thresholds. Directly owned property is not itself reported on either form.

How does the foreign tax credit work when one country exempts and the other taxes?

A credit is available only for tax actually paid to the other country on the same gain. That produces three patterns:

• UK exempts, US taxes. No UK tax is paid, so there is nothing to credit. The US tax on the gain above any section 121 exclusion is payable in full.
• UK taxes, US excludes. UK capital gains tax is paid. To the extent the US gain is excluded, the UK tax attributable to it cannot be used against that sale; the availability of any excess as a carryover depends on the foreign tax credit limitation rules and should be worked through on Form 1116.
• Both tax. For a UK home, the UK tax is credited on Form 1116 against US tax on the same gain. For a US home owned by a UK resident, the United States has the primary right to tax under the treaty and the UK gives credit for the US tax. The net investment income tax is generally not reduced by foreign tax credits under the Code.

Our cross-border tax preparation work in this area consists largely of matching each country's tax to the right slice of gain, in the right year, at the right exchange rate.

Worked example: each country exempts a different home

The following example is illustrative. Figures are simplified, costs of purchase and sale are ignored, exchange rates are assumed, and the US rates shown are the top federal long-term capital gains rate and the net investment income tax.

Charlotte is a dual national, unmarried, living and working in London. She bought a London flat in March 2010 for £800,000 (assumed rate $1.50, so a dollar basis of $1,200,000) with a £500,000 interest-only sterling mortgage. In June 2016 she bought a country house for £1,500,000 (assumed rate $1.45, a dollar basis of $2,175,000) and began using it as a residence at once. Within two years she gave HMRC a signed notice nominating the country house as her main residence from June 2016. She has continued to spend most of each year in the London flat.

Sale 1: the country house, May 2026, £2,100,000 (assumed rate $1.30)

• UK: gain £600,000. The house was the nominated main residence throughout ownership, so private residence relief covers the whole gain. No UK tax, and no 60-day return.
• US: proceeds $2,730,000 less basis $2,175,000 gives a gain of $555,000. On the facts the London flat is her principal residence, so section 121 does not apply. Federal tax at 20% is $111,000 and net investment income tax at 3.8% is $21,090. There is no UK tax to credit. The sale is reported on Form 8949.

Sale 2: the London flat, March 2027, £1,400,000 (assumed rate $1.30)

• UK: gain £600,000 over 204 months of ownership. The flat was her only residence for the 75 months to June 2016, and the final nine months are added, giving 84 months of relief. The exempt gain is £247,059 and the chargeable gain £352,941. After the £3,000 annual exempt amount, tax at 24% is approximately £83,986, reported and paid within 60 days and included in her Self Assessment return.
• US: proceeds $1,820,000 less basis $1,200,000 gives a gain of $620,000. The flat is her principal residence and the 2-of-5-year tests are met, so $250,000 is excluded and $370,000 is taxable. Federal tax at 20% is $74,000, which is covered by a foreign tax credit for the UK tax (about $109,000 at the assumed rate) subject to the limitation calculation. Net investment income tax of $14,060 remains payable.
• Mortgage: the £500,000 loan represented $750,000 when drawn and costs $650,000 to repay. The $100,000 difference is ordinary income on the US return, outside section 121, with no UK tax to set against it.

The UK relieved the country house in full and the flat in part. The US relieved the flat in part and the country house not at all. Neither result is an error; each follows from that country's own test, and each return must show it.

What if the sale was reported in only one country?

This is the most common position we are asked to correct. Typical cases are a UK home sold free of UK tax and never mentioned on a US return, a US home sold with section 121 claimed and never reported to HMRC, and a mortgage currency gain that was never computed at all.

• US side. Where US returns were filed but the sale was omitted, the correction is usually an amended return for the year of sale with Form 8949, the dollar computation and any Form 1116. Where returns or FBARs were not filed at all and the failure was non-wilful, the IRS streamlined filing procedures allow three years of returns and six years of FBARs to be brought up to date, with no penalty under the foreign offshore procedure for those who meet its non-residency test.
• UK side. A Self Assessment return can generally be amended within twelve months of its filing deadline. Outside that window, the omission is disclosed to HMRC, with a late UK property return where one was due. Interest runs on late tax, and penalties depend on behaviour and on whether the disclosure was unprompted.
• Evidence. In both cases the file needs completion statements for purchase and sale, improvement invoices, mortgage drawdown and redemption statements, the nomination and its acknowledgement where one exists, and a record of occupation. Exchange rates must be sourced for each date.

Where both countries are affected, the two corrections should be prepared together so that the credit claimed in one matches the tax paid in the other. Our US-UK tax accountants prepare both sets of filings from a single reconciled computation.

Records a two-home owner should hold

• The signed nomination, any variations, and proof of the dates they were given.
• The date each property was first, and last, used as a residence.
• A night count for any home outside the country of tax residence, for each UK tax year.
• Evidence of where life was actually centred each year, for both the UK factual test and the US principal residence test.
• Purchase, improvement and sale figures with dates, so that sterling and dollar computations can both be produced.
• Mortgage statements showing each drawdown and repayment of principal.

Preparing both returns correctly

For a dual national with two homes, the UK and US answers will often differ, and that is the expected result of two differently constructed rules. What matters is that each sale is computed in the right currency, the right home is relieved under each system, the mortgage and currency items are picked up, and credits are claimed only where tax was genuinely paid. If you have sold, or are about to report the sale of, one of two homes, or if an earlier sale reached only HMRC or only the IRS, please contact our cross-border team to arrange a confidential consultation. We will prepare the UK and US filings together and bring any earlier years into line.