Tax and overseas property: UK liabilities
5 July 2016
UK residents disposing of overseas property often receive local advice on their tax position, but they should not forget about their UK liabilities, advises Robert Walker
UK residents are generally subject to domestic tax in respect of their worldwide income and gains; hence, UK income tax will be due on rental income from overseas property, and the property will be part of an individual’s estate for inheritance tax purposes. In addition, capital gains tax (CGT) will apply to disposals, whether the property has been owned for personal purposes or as an investment.
Where an overseas property was acquired by a UK individual for a trading purpose, for example for development or short-term resale, the disposal profit is liable to UK income tax rather than CGT.
If the gain is subject to tax in the UK and overseas, double tax relief is usually possible
There are also special CGT rules for UK residents that defer the tax until the proceeds of sale are remitted to the UK, though these do not apply for UK-domiciled individuals whose permanent home is elsewhere. The disposal of trading properties and these remittance rules are outside the scope of this feature, however.
Capital gains tax
Where UK CGT does apply, the gain arising on disposal is charged after deducting acquisition costs, estate agents’ and solicitors’ fees, improvement costs and (if available) the annual capital gains exempt amount, which is currently £11,100. CGT is currently charged at 28% for higher-rate income tax payers.
It is also worth noting that the gain is calculated in sterling, which can have unexpected consequences if the exchange rate has fluctuated significantly between acquisition and disposal. The taxpayer may have made little or no gain in the local currency, but it may be significant in terms of CGT once the initial acquisition costs and sale proceeds are translated into sterling, at the exchange rates prevailing for those points in time.
If the gain is subject to tax both in the UK and overseas, it is usually possible to claim double tax relief. This way, the amount of overseas tax incurred can offset the domestic liability, preventing UK residents from being taxed twice. How this relief works depends on whether the UK has a double tax treaty with the relevant country, but the general rule is that relief for the overseas tax can only ever reduce the UK liability to nil. If the overseas tax is higher, there will be no refund of the excess.
If there is a loss on disposal of the property, no UK CGT will be due, and the loss will be available to offset capital gains in the current year or in subsequent years.
The gain or loss should be reported in the self-assessment return, and the usual deadline of 31 January following the relevant tax year applies for completing this and paying tax.
Before settling the bill, however, it is worth giving consideration to whether the gain could benefit from a relief from CGT.
Where the overseas property has been the owner’s home then principal private residence (PPR) relief may be available from UK CGT. PPR relief exempts all or part of the gain from the disposal of an individual’s main residence. Where an individual owns more than one residence, they can nominate which should be treated as their PPR, subject to certain conditions.
Periods in which the property has been let may also qualify for an equivalent lettings relief
The key condition, recently introduced with the non-resident capital gains rules, is that the taxpayer should have spent at least 90 days per tax year in the relevant overseas country. It is also worth noting that periods in which the property has been let may also qualify for an equivalent lettings relief.
Where the taxpayer has not used the overseas property as their home but the property is in the European Economic Area and qualifies as a 'furnished holiday let' or has been used for another trading purpose, CGT rollover or holdover relief may be available to defer the gain when the proceeds from disposal are reinvested in another trading asset. A furnished holiday let can also be eligible for entrepreneurs’ relief, which reduces the rate of CGT to 10%.
It is easy, and indeed not uncommon, for UK residents selling overseas property to focus simply on the local issues. However, as this feature makes clear, the domestic position also needs to be taken into account and any relevant obligations must be settled.
Robert J Walker is Partner and Real Estate Tax UK Network Leader at PwC
This feature is taken from the RICS Property journal (May/June 2016)