How To Calculate UK Capital Gains Tax On Overseas Property?
If you own property overseas in addition to your UK home, you may be liable to pay capital gains tax (CGT) to HM Revenue & Customs (HMRC) when you eventually come to sell the property. Unlike other countries, the UK government taxes individuals not just on gains from the sale of UK property, but also on profits derived from overseas property too.
This guide takes you through the key steps you need to take to work out your likely CGT liability from the disposal of foreign property. It also provides some tips on how to maximise your returns and minimise your tax liability when that day comes to sell your overseas asset.
Understanding CGT Basics
Capital gains tax is a tax on the profits that you make when you dispose of assets that have increased in value. It applies to overseas property in the same way that it would apply if you sold a buy-to-let property in the UK. The rate of CGT you would pay depends on the tax band that your total income for the year places you in.
The standard CGT tax rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. However, the property is usually classed as a residential property rather than an investment property for CGT purposes if you have occupied it at some stage yourself. This means that private residence relief should apply in many cases, which eliminates CGT liability in most instances.
Working Out Your Gain
To calculate whether you are likely to face a CGT liability, you first need to work out whether there has been any gain at all between your purchase and sale price:
Gain = Sale Price – Purchase Cost
The purchase cost includes things like solicitors fees, stamp duty and improvement costs. The expenses associated with selling the property can be deducted from the sale proceeds too. This would include estate agent fees and legal fees associated with disposal.
In an ideal scenario, you will have kept meticulous records detailing all the costs you incurred when buying, owning and improving the property over the years. If you don’t have detailed records, you may need to make reasonable estimations to determine the purchase costs and improvement expenditure.
If there has been no uplift between the net purchase costs and sale proceeds, then there will be no capital gain and hence no CGT liability to worry about.
Private Residence Relief
Assuming there has been an uplift in value during your period of ownership, you then need to determine whether private residence relief applies to eliminate the taxable portion of the gain.
For periods when you occupied the property as your main residence, the gain accrued during that period would be exempt from capital gains tax. So no tax would be due on the gain derived in those years that you treated property as your place of abode.
The relief even applies in scenarios when you initially rented out the overseas property for a period before moving into it as your main residence for a period. Under those circumstances, CGT is eliminated on the gain accrued during the years you occupied the property, although the gain derived during the initial rental period may still be taxable.
Complications arise if you used the property as a part-time or holiday home residence during your ownership. In those scenarios, you cannot get full private residence relief over the entire ownership period to eliminate all the taxable gain.
Instead, a time apportionment calculation needs to be undertaken based on how many days per year the property qualified as your place of residence. HMRC have stipulated an exact formula for determining what proportion of the gain is eligible for private residence relief based on the length and pattern of occupation, rental periods and vacancies.
This calculation is complex to undertake without using a capital gains tax calculator UK advisory service or software. They will determine the precise CGT liability based on your profile of usage and periods of occupation over the full ownership term.
Tax Year of Liability
The exact tax year that becomes chargeable will depend on whether you are a UK resident or non-resident in the year that completion takes place. If UK resident at the point of sale, then you would need to report the capital gain and pay any tax due via your self-assessment tax return for the same year.
If non-resident in the UK in the year of disposal, you instead have a 30-day window from completion to report the gain and pay any CGT liability that arises. So even if living overseas at the point of sale, UK tax obligations still apply on profits from the sale of property in Britain or abroad.
Offsetting Any Losses
It may be possible to reduce your tax liability by offsetting any capital losses you have incurred in the year of disposal or recent years. For example, if you previously disposed of some shares at a loss, these capital losses could be used to offset some of the gain made on the property before calculating the final CGT figure due.
Maximising Returns While Minimising Tax
To legally minimise tax due from the profitable disposal of your overseas asset, you should consider the following actions in advance of marketing the property:
- Undertake upgrades or renovations to maximise the eventual sale value and yield higher sale proceeds for reinvestment. Just be sure to keep invoices to evidence improvement expenditure which can offset tax liability.
- Review your wills and estate planning arrangements – gifting the property or assets several years before disposal or death may reduce eventual inheritance tax liability for your beneficiaries.
- Seek specialist tax advice from an accountant or advisory service at least a year before completion – legitimate tax planning measures could help reduce the tax burden.
An overseas property purchase can make a good investment and a secondary home. But when the time eventually comes to sell, the UK tax obligations can be more complicated than disposing purely of UK-based assets.
Seeking specialist tax advice from reputable professionals is highly recommended to ensure you apply for all relevant reliefs and exemptions. With astute preparation and planning, your capital gains tax burden can be minimised to ensure you maximise the returns from your overseas home.