Introduction: The SALT Cap and Why It Misleads Americans in Britain
The SALT cap rose to $40,400 for 2026, and every American in London seems to have heard about it. Furthermore, most assume the increase finally lets them deduct their council tax. It does not. Council tax remains entirely non-deductible on your federal return, and the cap has nothing to do with why.
The confusion is understandable. Moreover, it costs real money when clients budget for a deduction that never arrives. At TaxYork, we see wealthy clients each year who assumed a £4,000 council tax bill would shelter US income. It never does.
Why the SALT Cap Feels Relevant When It Is Not
Council tax looks like an American property tax. Additionally, it is charged by a local authority, it is banded by property value, and it funds local services. Therefore, the instinct to slot it into the state and local tax line is natural.
That instinct fails on a technicality with enormous consequences. Specifically, foreign real property taxes were removed from the deduction altogether in 2017. Consequently, you never reach the SALT cap at all, because the deduction is denied before any limit applies.
What Actually Governs Your Council Tax
Three separate provisions decide the outcome. Firstly, section 164 governs the deduction and shuts the door. Secondly, section 901 governs the foreign tax credit and also shuts the door. Thirdly, section 911 governs the foreign housing exclusion, and that door stands open.
Most guidance stops after the first two. However, the third provision is where sophisticated filers recover genuine value. We cover all three below, with current 2026 figures throughout.
How the SALT Cap Works in 2026
Understanding the rule properly matters, because a version of it still reaches Americans abroad.
The $40,400 Ceiling and the Phase-Down
The One Big Beautiful Bill Act raised the limit from $10,000. For 2026, section 164(b)(7) sets the applicable limitation amount at $40,400. Married taxpayers filing separately get half that figure.
A phase-down then claws it back. Specifically, once modified adjusted gross income exceeds $505,000, the cap falls by 30 cents for every dollar of excess. Nevertheless, it never drops below $10,000, so the reduction completes at roughly $606,000.
The Trap Hidden in the Definition of Income
Here is the detail that matters for expatriates, and almost nobody writes about it. Modified adjusted gross income for this test is not ordinary adjusted gross income. Instead, the statute increases it by any amount excluded under sections 911, 931 or 933.
The consequence is direct. Furthermore, if you exclude $132,900 of salary under the foreign earned income exclusion, that money is added straight back. Consequently, an American in Britain can be pushed into the SALT cap phase-down by income they never actually reported.
Who the SALT Cap Still Reaches Abroad
Plenty of our clients remain exposed. For example, many still own US rental property and pay genuine state property taxes. Others keep filing California or New York returns because they never properly severed residency.
Those taxes do count within the limit. Meanwhile, a further group holds US brokerage accounts generating state-taxable income. Therefore, the SALT cap remains live for them, even though their British costs never enter the calculation.
The 2030 Reversion Nobody Is Planning For
The generous figure is temporary. Specifically, the increased limit and its phase-down apply only to tax years beginning before 1 January 2030. Afterwards, the ceiling reverts to $10,000, or $5,000 for married filing separately.
That reversion deserves attention now. Accordingly, clients weighing when to sell US property, or when to trigger a large state tax bill, should model both regimes. The Tax Foundation summary of the deduction sets out the wider policy background.
Why Council Tax Fails the Deduction Test Entirely
Three independent obstacles block the deduction. Any one of them would be fatal on its own.
Section 164(b)(6) and Foreign Real Property Taxes
The Tax Cuts and Jobs Act added a blunt sentence to the code. Under section 164(b)(6), foreign real property taxes "shall not be taken into account" under section 164(a)(1). No dollar limit applies, because no deduction exists in the first place.
Critically, the 2025 legislation did not reverse this. Moreover, it left the disallowance untouched while raising the SALT cap for domestic taxes. Therefore, anyone expecting relief from the new rules received none.
Council Tax Is Not a Property Tax Anyway
Even without that bar, council tax would struggle. Specifically, gov.uk describes it as a charge on the occupier of a dwelling, not on the owner. Tenants normally pay it, and the liability follows occupation rather than title.
A deductible real property tax must be levied on the value of property and imposed on the owner. Consequently, council tax fails that description on two counts. It is a local occupancy and services levy, which is precisely how the code treats it later.
Why the Foreign Tax Credit Also Fails
Clients then ask about the credit instead. Unfortunately, the foreign tax credit covers income, war profits and excess profits taxes only. Council tax is none of those things.
The test is substantive rather than cosmetic. Additionally, a levy must operate on net gain to qualify. Council tax operates on a property band, so it never reaches Form 1116. Neither route works, and no amount of aggressive positioning changes that.
The Foreign Housing Exclusion: Where Council Tax Finally Counts
This is the section our competitors omit, and it is worth thousands.
Occupancy Taxes Are Qualified Housing Expenses
Section 911 permits a foreign housing exclusion for reasonable housing costs. Importantly, Publication 54 lists qualifying expenses to include rent, utilities other than telephone, residential parking, insurance and repairs.
The list also includes occupancy taxes that are not deductible under section 164. Read that again. Specifically, the very feature that kills your Schedule A deduction is the feature that qualifies council tax as a housing expense.
The London Limit of $68,600 for 2026
The arithmetic is generous in London. For 2026, the foreign earned income exclusion is $132,900. Housing costs count only above a base amount of $21,264, which is 16% of that figure.
A general ceiling of $39,870 then applies. However, Notice 2026-25 raises that ceiling for high-cost locations. London sits at $68,600, Surrey at $48,402 and Bath at $41,000. Therefore, a London household can shelter housing costs far above the standard limit.
How the Numbers Actually Work
Suppose your London housing costs reach $80,000, including a £4,200 council tax bill. Firstly, subtract the base amount of $21,264. Secondly, apply the London ceiling of $68,600 to the gross figure.
The excluded housing amount becomes $47,336. Consequently, the council tax has produced real federal benefit, despite the SALT cap and section 164 both denying it. You claim the result on Form 2555.
Who Cannot Use This Route
The exclusion has genuine limits. Specifically, it requires foreign earned income and either bona fide residence or physical presence. Investment income does not qualify, and neither does pension income.
That excludes several of our client groups. Meanwhile, self-employed clients claim a housing deduction rather than an exclusion, which reduces taxable income instead. Furthermore, anyone claiming the foreign tax credit on the same income must model both routes carefully, because the two interact.
Rental Property: The Schedule E Route
The second workable route applies when your British property earns money.
When the Landlord Pays the Council Tax
Tenants usually pay council tax, so this route often looks irrelevant. Nevertheless, landlords pay it more often than they expect. Empty periods between tenancies fall to the owner, as do most houses in multiple occupation.
Those payments are ordinary and necessary expenses of the letting activity. Therefore, they belong on Schedule E as rental expenses. They are not itemised deductions, so Schedule A and its restrictions never enter the picture.
The Trade or Business Carve-Out in Section 164
The statute itself confirms the distinction. Specifically, the limitation sentence does not apply to taxes "paid or accrued in carrying on a trade or business or an activity described in section 212". Business and investment property sits outside the personal restriction.
The practical effect is significant. Additionally, this treatment survives the 2030 reversion, because it never depended on the SALT cap at all. Consequently, a genuinely let property gives relief that a second home never will.
Coordinating With the Non-Resident Landlord Scheme
British compliance runs alongside. Specifically, the non-resident landlord scheme requires agents or tenants to deduct basic rate tax unless HMRC approves gross payment. Most sophisticated landlords obtain that approval.
Council tax paid by the landlord also reduces UK rental profits. Therefore, both returns should show the same expense. Meanwhile, mismatched figures across the two systems attract questions from HMRC and the IRS alike.
What British Council Tax Actually Costs You in 2026/27
The sums involved justify the planning, particularly at the top of the banding scale.
Average Bills and the 4.9% Rise
Average Band D council tax in England reaches £2,392 for 2026/27. Furthermore, that represents an increase of £111, or 4.9%, on the previous year. Government figures appear in the council tax statistics collection.
Wealthy households pay considerably more. Specifically, banding runs from A to H in England, and Band H attracts twice the Band D charge. A prime central London or Home Counties property therefore approaches £5,000 annually.
The 100% Second Home Premium
The real damage falls on second properties. Since April 2025, English councils may charge a 100% premium on furnished second homes under the Levelling-up and Regeneration Act 2023. Most authorities have adopted it.
That doubles a bill you cannot deduct. Consequently, a Cotswolds cottage in Band G can cost close to £8,000 a year in council tax alone. Neither the SALT cap nor any credit softens that figure.
Empty Property Premiums and the Devolved Rules
Empty homes face escalating charges. Specifically, premiums on empty and second properties can reach 100% after one year, rising further over longer vacancies. Renovation projects frequently trigger them.
The devolved nations differ sharply. Meanwhile, Scottish councils apply their own second home rules, and Welsh authorities may charge substantially more. Therefore, clients with property across borders need each authority checked individually.
State Residency: The SALT Cap Problem You Can Actually Solve
British council tax is beyond rescue. However, the American half of your SALT cap position is often fixable.
Why Sticky States Keep Charging You
Several states refuse to let residents go quietly. Specifically, California, New York, Virginia, New Mexico and South Carolina apply domicile tests rather than simple day counts. Consequently, moving to London does not end the filing obligation by itself.
Domicile turns on intent and connections. Furthermore, a retained home, a driving licence, voter registration or a local bank account all point back toward the state. Therefore, clients who leave loose ends keep paying state tax for years after departure.
The Credit That Never Arrives
State taxes create a particular problem for Americans in Britain. Notably, California grants no foreign tax credit, no foreign earned income exclusion and no treaty relief whatsoever. Consequently, UK tax paid on the same income buys nothing at state level.
The result is genuine double taxation. Meanwhile, those state taxes do count within your SALT cap, which is the one place the limit actually bites. Accordingly, treaty and credit planning should always run alongside a residency review.
Severing Cleanly Before It Compounds
Severance works best when documented contemporaneously. Firstly, file a part-year return in the departure year and state the position explicitly. Secondly, close or repoint the connections that evidence domicile.
Thirdly, keep the evidence for as long as the state can assess. Additionally, some states run open-ended periods where no return was filed. Therefore, the SALT cap conversation frequently ends with a residency clean-up rather than a deduction.
Northern Ireland: The Charge That Looks Deductible and Is Not
One part of the United Kingdom runs an entirely different system, and it produces the sharpest illustration of the rule.
Domestic Rates Are Not Council Tax
Northern Ireland has no council tax at all. Instead, domestic rating charges each property a rate calculated on its capital value. That value reflects open market worth as at 1 January 2005, rather than a broad band.
The bill combines two elements. Specifically, a regional rate set by the Executive is added to a district rate set by each of the eleven councils. Consequently, the charge scales continuously with property value, exactly as an American property tax does.
Why It Still Fails the SALT Cap Test
Domestic rates look far more like a genuine ad valorem property tax than council tax does. Furthermore, they are payable on empty homes as well as occupied ones, so liability follows ownership rather than occupation. On substance, they would qualify.
None of that helps. Specifically, section 164(b)(6) bars foreign real property taxes as a category, without asking whether the charge is well designed. Therefore, the SALT cap never engages, and a Belfast rate bill is treated exactly like a London council tax bill.
Where Northern Ireland Owners Do Better
The compensation lies elsewhere. Notably, because owners are liable more often in Northern Ireland, the rental route opens up more readily. Landlords frequently pay rates directly, particularly where the rent is quoted inclusive.
Those payments then belong on Schedule E as ordinary letting expenses. Additionally, the same treatment applies to vacant periods during refurbishment. Consequently, an investor with Northern Irish property often recovers more than a homeowner in England ever will, despite the identical SALT cap outcome.
Case Study: A Private Equity Partner With Two British Homes
Consider an illustrative scenario drawn from work we see regularly.
The Facts
A US citizen partner at a London fund earns $610,000 of salary and carried interest. She rents a Kensington flat for £96,000 a year and pays £3,900 of council tax on it. Additionally, she owns a Cotswolds cottage in Band G, where the council applies the full second home premium.
The cottage council tax reaches £7,800 for 2026/27. Her total British council tax therefore exceeds £11,700. She had assumed the higher SALT cap would shelter most of it.
The SALT Cap Analysis
Nothing sheltered it. Firstly, her modified adjusted gross income exceeds $505,000, so her cap had already phased down toward the $10,000 floor. Secondly, and decisively, section 164(b)(6) denied both council tax bills entirely.
The SALT cap was therefore irrelevant twice over. Furthermore, her state tax exposure was nil, because she had cleanly severed her Illinois residency years earlier. Her Schedule A showed no property tax at all.
What Actually Saved Tax
Two routes delivered value. Firstly, the Kensington council tax joined her qualified housing expenses on Form 2555. With London costs near $130,000, she reached the $68,600 ceiling comfortably and excluded $47,336 after the base amount.
Secondly, she let the cottage commercially for nine months of the year. Consequently, the council tax on it moved to Schedule E, the second home premium fell away under British rules, and the expense became genuinely deductible. The combined federal saving exceeded $19,000.
Common Mistakes That Cost Our Clients Money
Certain errors recur constantly, and each one carries a measurable price.
Claiming Council Tax on Schedule A Anyway
Some filers simply enter council tax as a foreign property tax. Unfortunately, older forum answers still recommend exactly that, because they predate the 2018 change. Consequently, the advice circulating online is not merely unhelpful but actively wrong.
An incorrect deduction creates exposure. Furthermore, it understates tax in every open year it appears. Therefore, we usually recommend correcting the position through amended returns, or through a formal catch-up filing where several years are affected.
Missing the High-Cost Locality Table
Many preparers apply the general housing limit of $39,870 to London clients. However, that error costs $28,730 of shelter in 2026, because London carries a limit of $68,600. The figure changes annually and by location.
Checking the current notice takes minutes. Additionally, taxpayers may apply the 2026 limits to their 2025 year where the newer figures are higher. Consequently, a review of prior returns frequently produces a refund.
Forgetting the Add-Back and the Cliff
Two timing traps close this list. Firstly, clients model their SALT cap using adjusted gross income and forget that excluded foreign earnings return to the calculation. Secondly, they assume $40,400 is permanent.
Neither assumption survives contact with the statute. Moreover, the reversion to $10,000 arrives in 2030, which is inside the planning horizon for any property sale. Therefore, model the SALT cap across both regimes before you fix a completion date.
How TaxYork Can Help
We prepare US and UK returns for partners, executives and investors with substantial British property interests. Furthermore, we model the SALT cap, the housing exclusion and rental treatment together, rather than in isolation.
Our work covers Form 2555 optimisation against the foreign tax credit, high-cost locality claims, rental structuring across both systems, and state residency severance for clients still filing needlessly. Additionally, we handle catch-up filings through the IRS Streamlined Filing Compliance Procedures where returns have fallen behind. Our team follows technical guidance from bodies including the ICAEW Tax Faculty.
Above all, we correct the assumption early. Clients who model the position before signing a lease consistently pay less than those who discover the rules in April.
Conclusion
The SALT cap simply does not govern your council tax, and the 2026 increase to $40,400 changes nothing for British households. Moreover, section 164(b)(6) denies foreign real property taxes outright, while the foreign tax credit rejects council tax because it is not an income tax. Consequently, the deduction people expect never existed.
Two genuine routes remain. Specifically, occupancy taxes count as qualified housing expenses under section 911, and council tax on a let property belongs on Schedule E. Therefore, review your position against both before you accept that the money is simply lost. Consider cross-border planning if you hold more than one British property.
Contact Us
Speak to a specialist about how the SALT cap, the housing exclusion and your council tax interact. To review your position confidentially, book a consultation with our cross-border team.
Email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information only and does not constitute tax advice. Tax rules change, and their application depends on your specific circumstances. Furthermore, no reader should act on the basis of this content alone. Obtain professional advice tailored to your situation. TaxYork accepts no liability for any loss arising from reliance on this material.