Capital Gains Tax Rules for Overseas Property

For the vast majority of us tax is an inevitability!  However, wouldn’t it be nice if the government could a) reduce taxation, b) stop spending tax income on propping up banks and c) make it simpler to determine how much we have to pay, to whom and when!  When it comes to capital gains tax, the most basic principle of this tax should mean it’s simple – i.e., it is a tax on profit.  However, there are so many exceptions, exemptions and rules that UK CGT is anything but simple!

When it comes to capital gains tax rules for overseas property, everything gets even hazier!  And yet, apparently the government are now actively cracking down on those with property assets abroad because they class them high risk when it comes to taxation avoidance – whether deliberate or accidental.

So, in this guide to the CGT rules for those who own homes abroad, we hope we can bring you some clarity.  However, it is imperative for us to categorically state that you absolutely must seek personal tax advice from a qualified accountant or tax practitioner to be sure you understand your own personal obligations and liabilities.  After all, this article is an informative guide, it does not constitute professional advice.

UK Resident?

If you are resident in the UK for tax purposes and you own a second home abroad – whether that be for personal use or for investment purposes – if you sell that property you are likely to be liable for UK capital gains tax on any profit you reap.  You may also be liable to a form of capital gains tax in the nation in which the property is located.  If that nation has a double taxation agreement in place with the UK, you should be able to offset your UK CGT liability by the amount you have paid abroad.  In which case this would reduce or even negate your liability to UK CGT.

So – assuming at this point that you do indeed live in Great Britain and pay taxes there and that your main residence is in the UK and not the one you are selling abroad – then you will be 100% liable for UK capital gains tax if you sell your home overseas.  In the current tax year we each have an allowance from the government of £9,600 – so, the first £9,600 of your profit from selling your home abroad is tax-free.  Anything above this amount becomes taxable, and the amount you have to pay depends on whether you’re a higher rate taxpayer or not.

Double Taxation Agreements

As mentioned, many nations in the world will also levy a form of capital gains tax against anyone who sells a property for profit within that country.  In some nations you pay more if you are a non-resident home owner, in other countries the rate of this form of speculation tax reduces year on year so that the longer you own the property the less tax you will pay if you’re fortunate enough to profit from it.  You need to look closely at the tax rules for the country in which you own a property – and ideally you were aware of the rules before you bought!  The next thing you need to do is determine whether there is a double tax treaty in place between that country and the UK.  The most popular countries with us Brits for holiday homes abroad all have these agreements in place, which makes life easier and prevents us having to pay tax twice.  Visit HMRC’s website’s Double Taxation Agreements section for more information.

If you own a property abroad and are leaving the UK to live overseas for a while, you do not instantly escape your CGT liabilities in Britain.  Assuming you’re selling up in the UK, the good news is that the sale of your principal residence in the UK is not generally liable to capital gains tax, no matter how much profit you make from it.  However, the subsequent sale of any assets that you have abroad such as real estate could still be liable to UK CGT even after you become non-resident in Britain for tax purposes!

Always Prepare To Return

The basic rule to remember is that if you left the UK on or after the 17th of March 1998 you will need to be not resident and not ordinarily resident in the UK for at least 5 full tax years between the year you left the UK and the year of your return to legitimately avoid having to pay CGT on the profit from the sale or disposal of overseas property for example.  Many people who leave the UK to become expats believe that they will never return and so never really worry about any chargeable gains they may then make, but situations and circumstances change, and some people do return and discover that they have created themselves a taxation headache.

Therefore, we would always advise you to appraise your potential liabilities before you take any action such as selling a property abroad.  That way you can at least ensure you have the money set aside to pay any future tax liability should it transpire that you have an obligation to do so.  And finally, as mentioned at the start of this article, seek qualified and professional taxation advice to help you with your decision-making and to ensure you do not accidentally or even deliberately avoid required tax payments.