How the US blocker works
The structure has three levels. You are at the top, below you the UK limited company as the holding, and below that the US C Corporation. The corporation buys, holds, rents out and sells the property. It is the corporation that pays tax in the USA, not you personally.
The name comes from the way the corporation shields the US property from two things: your personal US tax liability from the property and, through the UK holding, US estate tax on your stake.
What is taxed in the USA
Rents and sale gains
The corporation pays 21 % federal tax on its profit. A corporation gets no lower rate for capital gains. Depending on the state where the property is located, state tax comes on top.
FIRPTA
When a foreign person sells US real estate, the buyer must withhold 15 % of the purchase price and pay it to the IRS (IRC § 1445(a)). With the US blocker, the seller is the US corporation, not a foreign person, so this withholding does not apply when the property is sold.
However, the shares in the corporation are themselves US real property interests as long as US real estate makes up at least half of its assets (IRC § 897(c)). So if you sell the shares in the corporation instead of the property, FIRPTA applies too. If, on the other hand, the corporation has sold all of its US real estate in fully taxable transactions and holds none anymore, its shares cease to count as US real property interests, subject to further conditions (IRC § 897(c)(1)(B)).
Distributions to the holding
Under US law, dividends from the corporation to the UK limited company are subject to 30 % withholding tax (IRC § 881). The US-UK tax treaty cuts this to 5 % if the holding owns at least 10 % of the voting rights, and to 0 % under further conditions (Article 10). Whether the holding gets these benefits depends on the treaty's anti-abuse clause (Limitation on Benefits, Article 23). We check this before formation. And before a sale, we plan with you how the proceeds can best flow back to the holding.
Estate tax
For foreigners who do not live in the USA, shares in a US company are part of their US estate (IRC § 2104(a)). Against US estate tax, they only get a tax credit of $13,000 (IRC § 2102(b)). If you hold the property directly or through a US company, that can get expensive.
With the US blocker, what you leave behind are not shares in a US company but shares in the UK limited company. Under § 2104(a), only shares in US companies count as US assets.
What we handle for you
First we form the UK limited company, then, with it as the shareholder, the US C Corporation in one of the states where we form companies. The corporation's bylaws are tailored to buying real estate. The services of our formation package for the corporation are included as well.
- Formation of the UK limited company as the holding
- Formation of the US C Corporation with bylaws for buying real estate
- EIN and tax registration of the corporation
- Documents for the purchase, such as the Certificate of Good Standing
- Follow-up with the authorities in both countries until the structure is in place
- Coordination with your accountant at home
What it costs
The price is a minimum fee. In the normal case, it covers the full implementation. If the actual work exceeds the minimum fee, we bill the additional work once it is complete. If we see that coming, we tell you in good time. US and UK state fees are added at cost.
From the second year
The corporation's annual package in the chosen state on the "part of a group of companies" route, in Texas for example $2,900 per year, plus state fees at cost. You book the corporation's tax return each year as Corporation Tax Return. The UK holding files its accounts and a confirmation statement with Companies House every year; these UK costs are not included in the annual package.
Important notes
- The US blocker is not a zero-tax solution. The corporation pays US tax on rents and sale gains.
- What the UK holding's distributions trigger in your country of residence, we work out with your accountant before the structure is in place.
- Whether the blocker structure is right for you depends on your plans. To learn how you can take profits out of a US corporation, read our article on taking profits out of a US corporation.
Next steps
FAQ about the US blocker
What does the US blocker cost?
The minimum fee is $6,000. In the normal case, it covers the full implementation. If the actual work exceeds the minimum fee, we bill the additional work once it is complete. If we see that coming, we tell you in good time. US and UK state fees are added at cost.
What does the structure cost from year two?
The corporation's annual package in the chosen state on the "part of a group of companies" route, in Texas for example $2,900 per year, plus state fees at cost. You book the corporation's tax return each year as Corporation Tax Return. The UK holding files its accounts and a confirmation statement with Companies House every year; these UK costs are not included in the annual package.
How much US tax is due when the property is sold?
The corporation pays 21 % federal tax on the capital gain (IRC § 11(b)), plus state tax depending on the state. If it distributes the gain to the UK holding, dividend withholding tax comes on top: 30 % under US law, or 5 % or 0 % under the UK treaty if the holding meets the conditions.
Do I avoid FIRPTA if I sell the shares instead of the property?
No. Shares in a corporation whose assets consist at least half of US real estate are themselves US real property interests (IRC § 897(c)). Selling them falls under FIRPTA too.
Does the US blocker mean no estate tax?
In which state do you form the corporation?
In one of the six states where we form companies: Delaware, Florida, California, New York, Texas or Wyoming. Rents and gains are also taxed where the property is located.
