FIRPTA Withholding UK Buyer US Property Tax: Structures
FIRPTA withholding UK buyer US property tax explained: reduce 15% exit withholding, contain 40% US estate tax and choose the right structure. Book a review.
American bricks. Foreign owner. Hidden exposure.
A non-US investor who buys American real estate faces two distinct US taxes that most UK advisers never model together. On exit, FIRPTA requires the buyer to withhold 15% of the gross sale price — not the gain. On death, US estate tax applies to US situs assets above just $60,000, at rates reaching 40%. The holding structure chosen at purchase decides whether both are manageable or ruinous.
Why US real estate is the most badly structured asset in UK portfolios
British buyers approach Manhattan, Miami and Los Angeles with the instincts formed by the UK market. In London, ownership is a conveyancing question: name on the title, stamp duty paid, done. That instinct is exactly wrong in the United States, where the US tax code treats real property as a permanent US connection that follows the owner into death and out through the exit.
The result is a familiar pattern. A UK founder buys a Tribeca apartment in his own name because his US attorney set up an LLC and told him it offered protection. It does — against slip-and-fall claims. It offers nothing whatsoever against the US estate tax that will take 40% of the property's value when he dies. Nobody modelled it, because nobody was asked to look at both sides of the Atlantic at once. That gap is precisely where cross-border tax planning earns its fee.
What is FIRPTA and why does it withhold on the sale price?
The Foreign Investment in Real Property Tax Act of 1980 was enacted for a single purpose: to ensure that foreign persons could not sell US real estate at a gain and simply leave the jurisdiction before the IRS collected. Congress solved the enforcement problem by shifting the burden onto the one party physically present at closing — the buyer.
Under the regime, a foreign person's gain on the disposal of a US real property interest is treated as effectively connected with a US trade or business, and therefore taxable in the United States regardless of any other US connection. The collection mechanism is separate: the transferee must withhold and remit a percentage of the amount realised, file the prescribed forms within 20 days of the transfer, and issue the seller a stamped copy evidencing the credit.
The 15% is not your tax bill
The distinction matters enormously to liquidity. Withholding is computed on the gross consideration — the headline number on the contract — with no deduction for base cost, capital improvements, selling costs or the mortgage being repaid. A UK owner selling a $4m property bought for $3.8m has an economic gain of $200,000 and a withholding obligation of roughly $600,000. The excess is recoverable, but only after a US return is filed for the year of sale and processed. In practice, capital can be trapped with the IRS for twelve to eighteen months.
Worse cases exist. Highly leveraged property sold at a loss still attracts withholding on the full price. Sellers have completed transactions in which the withholding exceeded the net cash proceeds after mortgage redemption, forcing them to fund their own sale.
The reliefs that actually exist
- The residence exemption. No withholding is required where the price is $300,000 or less and the buyer acquires the property as a residence, subject to strict occupancy conditions in each of the first two twelve-month periods after transfer.
- The reduced 10% band. A 10% rate applies to residence purchases where the amount realised exceeds $300,000 but does not exceed $1,000,000, again subject to the buyer's intended personal use.
- The withholding certificate. Form 8288-B allows the seller to apply for withholding limited to the actual maximum tax liability on the disposal. This is the professional route, and it is the reason planning must begin before the property goes on the market — the application must be in by the closing date.
- Non-recognition and treaty positions. Certain transactions where no gain is recognised support a reduced or nil certificate.
None of these are self-executing at the closing table. Title companies withhold by default and ask questions afterwards. If your ITIN is not already in place, the machinery stalls before it starts.
The exposure nobody prices: US estate tax above $60,000
FIRPTA is a cash flow problem with a solution. US estate tax on a non-domiciliary is a wealth problem, and it is the reason this article exists.
A US citizen or US-domiciled individual dies with a lifetime exemption in the multi-millions. A non-US-domiciled individual — the UK investor, the Gulf family office principal, the Hong Kong entrepreneur — receives an exemption of $60,000 against US situs assets. That is not a typographical error and it has not moved in decades. Above it, graduated rates climb to 40%.
US real property is US situs. So are shares in US corporations, wherever held, and certain US-issued debt. The practical arithmetic on a $6m unmortgaged Miami property held personally by a UK domiciliary is roughly $2.4m of US federal estate tax, payable in cash within nine months of death, before the estate has sold anything. Several states impose their own estate tax on top.
What domicile means here — and what changed in the UK
US estate tax turns on domicile in the federal common-law sense: physical presence in the US coupled with an intention to remain indefinitely. It is a facts-and-circumstances test, not the green card test used for income tax. A UK resident with a US holiday home is almost never US-domiciled, which is why the $60,000 exemption bites rather than the citizen exemption.
On the UK side, the position shifted materially from 6 April 2025, when the UK replaced domicile with a long-term residence test for inheritance tax purposes. A long-term UK resident is exposed to 40% UK IHT on their worldwide estate — which includes the American property already inside the US net. Our trusts and estate planning team now models these two regimes as a single system, because after April 2025 they overlap far more often than they used to.
Does the US-UK estate tax treaty save you?
Partially, and asymmetrically. The estate and gift tax convention between the two countries confirms that the United States may tax real property situated in its territory. The UK, as the residence or domicile state, gives credit for US estate tax paid against UK inheritance tax on the same asset. So the outcome is 40%, not 80% — genuine relief, but relief from the second charge only. The first charge stands.
The treaty's quieter benefit is more valuable. A UK-domiciled decedent may claim a pro-rated share of the US unified credit — the credit is scaled by the ratio of US situs assets to the worldwide estate, rather than being capped at the $60,000 floor. For an estate with a $2m New York apartment inside a $40m worldwide estate, the proration is thin. For a modest US holding inside a modest estate, it can be transformative. The price of the claim is disclosure of the entire worldwide estate to the IRS on the estate tax return — a trade many high-net-worth families decline once they understand it.
US versus UK: how the same American property is taxed twice over
| Issue | United States (IRS) | United Kingdom (HMRC) |
|---|---|---|
| Rental income — default | 30% withholding on gross rents, no deductions | Taxed on net profit at rates up to 45% for arising-basis residents |
| Rental income — elected | Net taxation at graduated rates after a section 871(d) election | Foreign tax credit for US tax paid under the income tax treaty |
| Interest and depreciation | Depreciation mandatory once net election made; recaptured on sale | No equivalent depreciation; interest relief restricted for residential lets |
| Gain on sale — individual | Federal long-term capital gains rates, plus state tax where applicable | Capital gains tax on the gain, with treaty credit for US federal tax |
| Collection on sale | 15% FIRPTA withholding on gross price, refunded via return | No withholding; self-assessed and reported in the return |
| Tax year | Calendar year to 31 December | 6 April to 5 April |
| Death | Estate tax to 40% above a $60,000 situs exemption | IHT at 40% on worldwide estate of a long-term resident, credit for US tax |
| Gifting the asset | US gift tax on US situs real property, no lifetime exemption for non-domiciliaries | Potentially exempt transfer, seven-year clock |
Two mismatches deserve emphasis. First, the tax years do not align, so US tax paid in one UK year may relieve income assessed in another — credits are lost to timing more often than to law. Second, the US permits and requires depreciation, which the UK does not recognise, so a property that is loss-making for US purposes can be profitable for HMRC. The result is UK tax with no US tax to credit against it.
Which holding structures actually work?
There is no universally correct answer. There is a correct answer for a defined set of facts: whether the asset is investment or personal use, whether income or capital growth dominates, whether the property will be sold or held to death, whether the owner will ever become US resident, and how many generations must be served.
Direct personal ownership
The best income tax answer and the worst estate tax answer. Preferential long-term capital gains rates apply on sale, the section 871(d) election delivers net rental taxation, and the compliance burden is one non-resident return per year. Full US estate exposure above $60,000. Defensible only for genuinely modest holdings, or where the exposure is deliberately funded with life insurance rather than structured away.
The single-member US LLC — the false comfort
Recommended constantly by US real estate attorneys, and almost never for tax reasons. A disregarded single-member LLC is invisible to the IRS: the member is treated as owning the property directly. Every FIRPTA and estate tax consequence of personal ownership survives intact. The LLC is a liability shield, and it should be described as nothing more.
The US corporation as blocker
It solves nothing on its own. Shares in a US corporation are themselves US situs property for estate tax, so the exposure moves from the bricks to the share certificate without shrinking. Add corporate-level tax on the gain, withholding on dividends paid out, and the loss of preferential capital gains rates, and single-tier US incorporation is usually the worst of every world.
The non-US corporation
Shares in a foreign corporation are not US situs. This is the structural core of most serious planning: the estate tax exposure is eliminated because the asset in the estate is a non-US intangible, not American land. The price is paid in income tax — corporate rates on the gain rather than individual capital gains rates, a branch-level tax on repatriated profits, and no step-up mechanics. For a UK-resident shareholder, the UK anti-avoidance code must be run in full: attribution of company gains, the transfer of assets abroad rules, and a benefit-in-kind charge if the family occupies the property rent-free. That last point quietly destroys more offshore structures than the IRS ever will.
The two-tier structure
A non-US holding company owning a US corporation which owns the property. The foreign top company blocks estate tax; the US company manages the operating and withholding position and can, in the right circumstances, be liquidated after a taxable sale of the property so that proceeds are extracted without a second FIRPTA charge on the shares. It is the classic institutional answer for pure investment property. It is over-engineered for a family that simply wants a place in Aspen.
Trusts and leverage
An irrevocable non-US trust, correctly settled before any US connection arises and genuinely divested of settlor control, can hold the structure and solve both the estate tax and the succession question in one instrument. It demands real discipline: US throwback rules punish accumulated income distributed to US beneficiaries brutally, and the UK relevant property regime and post-April-2025 long-term residence rules must be modelled at settlement. Separately, genuine third-party non-recourse debt secured on the property reduces the US situs value directly, while recourse debt is deductible only in the proportion that US assets bear to the worldwide estate — which again forces worldwide disclosure. Leverage is a structuring tool, not merely a financing one. See our private client tax services for how these are sequenced.
What should a UK buyer do before exchange?
- Decide the exit before the entry. Hold-to-death and sell-in-seven-years point to different structures. The question cannot be deferred.
- Obtain the ITIN early. Nothing — no election, no withholding certificate, no return — functions without one.
- Model the state, not just the federal. State income tax, state estate tax, transfer taxes and mansion taxes vary enormously and can invert a conclusion.
- Make the section 871(d) election in the first year. Retrospective repair is possible but ugly.
- Run the UK anti-avoidance analysis before incorporating anything offshore. A structure that works flawlessly for the IRS and fails for HMRC is not a structure.
- Check for US-person contamination. A US-citizen spouse, or children who may study and settle in America, changes every recommendation. Where an existing US filing history is incomplete, our US tax services team addresses that first.
The cost of getting it wrong is not the tax — it is the irreversibility
Almost every other cross-border error can be remediated. Missed filings can be brought current. Misreported income can be amended. A badly held US property is different, because the act of correcting it is itself a taxable event: moving the asset into a blocker is a disposal, triggering FIRPTA withholding, gain recognition and transfer taxes, and gifting US situs real property engages US gift tax with no meaningful lifetime exemption for a non-domiciliary. The window in which the structure is free to choose closes at completion, and it does not reopen.
That is the real message of this regime. The 15% is recoverable. The 40% is not. And the difference between the two outcomes was decided, silently, on the day the contract was signed.
Speak to us before you sign
Jungle Tax advises UK and international families, founders and family offices on the acquisition, holding and disposal of US real estate — structuring at purchase, FIRPTA withholding certificates at exit, US estate tax containment, and the HMRC analysis that must run alongside all of it. If you are considering an American property, already hold one in your own name, or have inherited a structure you did not design, we will tell you plainly what you have and what it will cost. Arrange a confidential consultation with our cross-border team — ideally before exchange, and certainly before you go to market.
