Capital Gains Tax and Exchange Rate Double Whammy for British Overseas Investors

PKF Accountants have ussued a warning to British overseas property investors regarding the current capital gains tax rules in the UK. Falling property prices in the eurozone plus a worsening UK economy and a substantial fall in the value of the pound is prompting many ex-pats to sell up and move home, but UK tax laws stipulate that any gains on overseas assets are calculated using the spot exchange rates on the given day assets are bought and sold.

Matt Coward, director of personal tax said, "In our case study, a UK national buying a Spanish property in January 2007 for €1.25m (£854,818) sells in January 2009 for €1m (£966,744). Although there is a loss in euros, there is a profit in sterling of £111,926 on which he will need to pay UK CGT of at least £18,419 on 31 January 2010."

Coward warns this predicament could worsen whether homeowners decide to invest in a new overseas property with the profits, or leave the money in a foreign bank account.

Take Tax Advice when selling holiday homes

"The position could be particularly difficult if owners now reinvest all their equity in a new overseas property as they may then have difficulty finding the cash to pay the UK tax liability when it becomes payable in January 2010. Even those who are aware they have a UK tax problem will often realise a smaller amount of post-tax equity from their properties than they may have expected.

"Worse still, if owners simply sell an overseas holiday home and leave their equity from it in a foreign currency bank account, they could face a double hit if the value of sterling recovers before the UK tax is payable on any gain. If they cannot pay the UK tax from UK funds, they would have to convert some of the original sale proceeds back to sterling at a disadvantageous rate. Of course, the value of sterling may yet fall further, which shows just how difficult these decisions can be."

Matt warns, "Unwitting failure by holiday home owners to report such gains will not be met with a sympathetic approach from HMRC: the Revenue already regards individuals with overseas assets as 'high risk' it terms paying the right amount of tax.

“While selling an overseas property may be the right thing to do in order to balance your books as the economy falters, it is very important to take account of both the overseas and UK tax implications of selling up.”

PKF article