Capital gains tax on overseas property

• Siddharth Agarwal
• 19 Jul,2024
• Tax Planning

Selling an overseas property can be an exciting financial move, but it's important to understand the tax implications, especially when it comes to capital gains tax (CGT). If you're a UK resident and you've made a profit from selling a property abroad, you may be liable for CGT. This blog post will guide you through the essentials of Capital Gains Tax on overseas property, helping you navigate this complex area of taxation.

We'll explore who needs to pay CGT, how it's calculated, and what rates apply in 2024. You'll learn about the annual exempt amount, how to report and pay your tax, and ways to avoid double taxation. We'll also share tips on reducing your tax liability and common mistakes to avoid.

If you're considering selling a holiday home in Spain, an investment property in France, or any other overseas real estate, this guide will provide you with the knowledge you need to make informed decisions and stay compliant with UK tax laws.

What is capital gains tax on overseas property?

Capital gains tax on overseas property is a tax you pay on the profit you make when selling a property abroad. It's not a tax on the total amount you receive from the sale, but on the increase in value since you bought it. For example, if you purchased a villa in Italy for £200,000 and sold it for £300,000, your capital gain would be £100,000. This is the amount subject to tax.

The tax applies to UK residents selling property anywhere in the world. It's important to note that you pay this tax to the UK government, even if you've already paid tax in the country where the property is located. However, there are often agreements in place to prevent double taxation.

The rate you pay depends on your income tax band and the size of your gain.

Who needs to pay capital gains tax on overseas property?

UK residents who sell a property abroad for a profit are generally liable for capital gains tax. This applies to various types of properties, including:

1. Holiday homes

2. Investment properties

3. Rental properties

4. Inherited properties

It's important to note that your residency status, not your citizenship, determines your tax obligations. If you're a UK resident for tax purposes, you're required to pay CGT on worldwide assets, including overseas properties.

Non-UK residents may also need to pay CGT on UK properties, but different rules apply.

Even if you've paid tax on the property sale in the country where it's located, you might still owe CGT in the UK. However, the UK has double taxation agreements with many countries to prevent you from being taxed twice on the same gain.

Calculate capital gains tax on overseas property

Calculating capital gains tax (CGT) on overseas property might seem challenging, but breaking it down into steps makes it more manageable. Here's a simple guide to help you understand the process:

Step 1: Determine the gain

First, calculate the difference between the sale price and the purchase price of your overseas property. This is your basic gain.

  Sale price - Purchase price = Basic gain

Step 2: Deduct allowable expenses

You can reduce your gain by subtracting certain allowable expenses:

1. Legal fees for buying and selling

2. Estate agent fees

3. Costs of improvements to the property (not regular maintenance)

4. Stamp Duty paid when you bought the property

  Basic gain - Allowable expenses = Adjusted gain

Step 3: Apply for private residence relief (if applicable)

If the overseas property was your main home for part of the time you owned it, you might be eligible for Private Residence Relief for those years.

Step 4: Consider the annual exempt amount

As of 2024, the Annual exempt amount is £6,000. Subtract this from your adjusted gain.

  Adjusted gain - Annual exempt amount = Taxable gain

Step 5: Calculate the tax

The CGT rate depends on your income tax band:

1. Basic rate taxpayers: 18% on residential property

2. Higher or additional rate taxpayers: 28% on residential property

  Taxable gain x Applicable tax rate = Capital gains tax due

Example:

Let's say you bought a holiday home in Spain for £200,000 and sold it for £300,000.

  Basic gain: £300,000 - £200,000 = £100,000

  Allowable expenses: £10,000 (legal fees, improvements, etc.)

  Adjusted gain: £100,000 - £10,000 = £90,000

  Annual Exempt Amount: £90,000 - £6,000 = £84,000 taxable gain

If you're a higher rate taxpayer:

  £84,000 x 28% = £23,520 CGT due

It's important to note that exchange rates can affect your calculations. Use the exchange rates published by HMRC for the relevant tax year.

Also, be aware that you may need to pay tax in the country where the property is located. The UK has double taxation agreements with many countries, which can help you avoid paying tax twice on the same gain.

If you're unsure about any aspect of the calculation, it's always best to consult with a tax professional who specialises in overseas property transactions. They can ensure you're calculating your CGT correctly and taking advantage of all available reliefs and exemptions.

Capital gains tax rates for overseas property in 2024

Capital gains tax (CGT) rates for overseas property in 2024 vary depending on your income tax band. Here's a breakdown of the rates:

Basic rate taxpayers:

If your total taxable income and gains fall within the basic rate band (up to £50,270 for 2024/25), you'll pay 18% CGT on your overseas property gains.

Higher rate taxpayers:

For those whose income and gains exceed the basic rate band but are below £150,000, the CGT rate on overseas property is 28%.

Additional rate taxpayers:

If your income is over £150,000, you'll also pay 28% CGT on your overseas property gains.

It's important to note that your capital gain is added to your income for the tax year. This means selling a property could push you into a higher tax bracket, potentially increasing your CGT rate.

For example, if you're normally a basic rate taxpayer, but your property sale gains push your total income above £50,270, you'll pay 18% on the portion within the basic rate band and 28% on the remainder.

What is the annual exempt amount for capital gains tax?

The Annual exempt amount is a tax free allowance that applies to capital gains tax (CGT), including gains from selling overseas property. It's essentially a threshold below which you don't have to pay CGT on your profits.

For the 2023/2024 tax year, the Annual Exempt Amount is £6,000 for individuals. This means you can make gains of up to £6,000 before you start paying CGT. However, it's important to note that this amount has been reduced from previous years and is set to decrease further.

How does the annual exempt amount work?

Let's say you sold an overseas property and made a gain of £10,000. You would only pay CGT on £4,000 (£10,000 - £6,000 Annual Exempt Amount). This can significantly reduce your tax bill.

It's worth noting that the Annual Exempt Amount applies to your total capital gains for the tax year, not just those from overseas property. So if you've made gains from other assets, like stocks or UK property, these will also count towards your allowance.

Can couples benefit from a higher allowance?

If you're married or in a civil partnership, you and your partner each get your own annual exempt amount. This means you could potentially make gains of up to £12,000 as a couple before paying CGT.

Future changes to the Annual Exempt Amount

The UK government has announced plans to further reduce the annual exempt amount. From April 2024, it's set to decrease to £3,000. This means you'll start paying CGT on smaller gains, potentially increasing your tax liability.

Given these changes, it's more important than ever to plan your overseas property sales carefully and consider seeking professional advice to minimize your tax burden.

How do you report and pay capital gains tax on overseas property?

The process is simple but requires attention to detail. When you sell a property abroad, you must report the gain to HMRC within 60 days of the sale completion. This is done through the 'Real Time' Capital Gains Tax service on the UK government website.

To report, you'll need:

1. Details of the property sale

2. Calculation of your gain

3. Your National Insurance Number

If you're already registered for self assessment, you can report the gain on your tax return instead. However, you may still need to make a payment within 60 days if the sale occurred between 6 April and 31 December.

Payment is typically due by 31 January following the tax year of the sale. For example, if you sold a property in August 2024, payment would be due by 31 January 2026.

It's important to keep accurate records of the purchase price, sale price, and any allowable expenses, as HMRC may request these. If you're unsure about any aspect of reporting or paying, it's advisable to consult a tax professional.

Double taxation agreements

Double taxation agreements (DTAs) are essential for property owners selling overseas assets. But what exactly are they, and how do they help you avoid paying tax twice?

DTAs are treaties between the UK and other countries designed to prevent individuals from being taxed on the same income or gains in both countries. When you sell an overseas property, you might face tax obligations in both the country where the property is located and in the UK.

Here's how DTAs work to your advantage:

1. They determine which country has the primary right to tax your gains.

2. They often provide tax credits, allowing you to offset tax paid in one country against tax due in another.

3. Some DTAs may exempt certain types of income or gains from tax in one of the countries.

To benefit from a DTA:

1. Check if the UK has a DTA with the country where your property is located.

2. Understand the specific terms of the agreement related to property sales.

3. Keep records of any tax paid overseas.

4. Declare the sale and any foreign tax paid on your UK tax return.

By understanding and utilising DTAs, you can avoid the burden of double taxation and ensure you're only paying what's necessary when selling your overseas property.

How HMRC tracks foreign property ownership

How does HMRC track foreign property ownership?

The UK's tax authority, HMRC, has several methods to keep tabs on overseas property owned by UK residents.

1. HMRC participates in international information exchange agreements. These allow tax authorities from different countries to share data about property ownership and transactions. So, if you buy or sell a property in Spain, for example, the Spanish tax authorities may inform HMRC.

2. HMRC uses sophisticated data analysis tools to cross-reference information from various sources. This might include bank transfers, credit card transactions, or even social media posts that suggest property ownership abroad.

3. HMRC also relies on self-reporting. UK residents are required to declare their overseas income and gains on their tax returns. Failure to do so can result in penalties.

4. HMRC sometimes conducts targeted campaigns focusing on specific countries or types of overseas assets. They may send letters to individuals they suspect of owning foreign property, asking for more information.

5. HMRC can receive tip-offs from the public or other government agencies about undeclared overseas assets.

Given these tracking methods, it's always best to be transparent about your foreign property ownership and ensure you're meeting your UK tax obligations.

Recent updates to capital gains tax rules

Have there been any changes to capital gains tax rules for overseas property? Yes, and here are the key updates you need to know:

1. Reporting deadline: Since April 2020, UK residents must report and pay any CGT on UK residential property sales within 60 days of completion.

2. Non-UK residents: The 60-day reporting rule now applies to non-UK residents selling any UK property, not just residential.

3. Principal private residence relief: The final period exemption has been reduced from 18 months to 9 months.

4. Lettings relief: Now only available to landlords who share occupancy with their tenants.

5. Spousal transfers: The period for transferring assets between separating spouses has been extended from the end of the tax year of separation to three years after the tax year of separation.

6. Annual exempt amount: For the 2023/24 tax year, this has been reduced to £6,000, and will further decrease to £3,000 in 2024/25.

7. Digital reporting: HMRC is moving towards fully digital CGT reporting, making it easier to declare gains online.

These updates aim to streamline the CGT process and close potential loopholes. Stay informed about these changes to ensure you're compliant when selling your overseas property.

Common mistakes to avoid when dealing with overseas property tax

When dealing with overseas property tax, it's easy to make mistakes that can cost you time and money. Here are some common errors to avoid:

1. Failing to report the sale to HMRC within the required timeframe

2. Incorrectly calculating the gain by not considering all allowable expenses

3. Forgetting to claim foreign tax credit if you've paid tax in the country where the property is located

4. Overlooking potential relief options, such as Private Residence Relief

5. Not keeping accurate records of property improvements and selling costs

6. Assuming that paying tax in a foreign country exempts you from UK tax obligations

7. Neglecting to seek professional advice for complex situations

8. Misunderstanding the impact of exchange rates on your capital gain

9. Failing to consider the tax implications before making the sale

By being aware of these mistakes, you can better navigate the complexities of overseas property taxation.

If you have questions about capital gains tax on overseas property or need more information, don't hesitate to get professional help. Navigating overseas property tax can be complex, and it's essential to get accurate advice tailored to your situation.

We at dns tax are here to assist you with our capital gain tax services. Our expert team of tax advisors specialises in handling overseas property tax matters, ensuring you comply with UK tax laws while maximizing your tax efficiency.

Whether you're planning to sell a foreign property, need help calculating your capital gains, or want to explore tax saving strategies, we're here to guide you every step of the way.

Contact us today at 0333 2422 572, email dnstax@dnsaccountants.co.uk, or book a free consultation. Our friendly experts will be happy to discuss your specific requirements and provide services to meet your overseas property tax needs.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.