Capital gains tax on overseas property sale

Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.

Selling an overseas property could have implications for capital gains tax (CGT) liabilities here in the UK for UK residents. You should clearly understand the CGT implications or seek professional advice before you dispose of the overseas property to minimise CGT payments in the UK.

In this blog we’ll look at the implications of Capital Gains Tax on property when you sell and overseas property.

When is CGT applicable?

Capital Gains Tax on property is a tax on the profit when you sell or ‘dispose of’ something an ‘asset’ that’s increased in value and you’ve had a capital gain. If you are a UK resident this relates to all overseas assets as well. Some assets are tax-free. You also do not have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.

Definitions of property for UK tax purposes

Residential property

UK residential property includes:

• A building used or suitable for use as a dwelling
• Properties in the process of being constructed or adapted for use as a dwelling
• The garden or grounds of such a building, including structures on the garden or grounds
• The right to acquire a UK dwelling ‘off plan’

Non-residential property or land

Non-residential property or land includes:

• Commercial property, for example shops or offices
• Agricultural land
• Forests
• Any other land or property which is not suitable for use as a residential property

A ‘mixed use’ property is one that has both residential and non-residential elements. For example, a flat connected to a shop, doctor’s surgery or office.

What are the general rules on when CGT is chargeable on overseas property?

If you are a UK resident, the general principal is that you are obliged to pay Capital Gains tax on the disposal of assets worldwide. This includes any overseas property you own.

Non-residents who sell a UK property may also have to pay CGT. The tax is calculated on taxable gains which are the difference between the purchase price and the selling price, less any allowable expenses.

You may also have to pay tax in the country where the overseas property was located. If you are subject to paying double taxation, there may be reliefs available depending on what tax agreements are in place with the UK and the country where you made the taxable gain. There is also additional guidance available for dual residents.

Credit may be given for overseas taxes against the UK liability, but it’s possible some CGT will be payable in the UK if the overseas tax rate is lower than the UK CGT rates on residential property of 18% and 28%.

There are special rules if you are resident in the UK, but your domicile is abroad. Individuals who are non-domiciled in the UK for tax purposes, and eligible for remittance basis of taxation only have to pay tax on the capital gains if and when they bring (remit) the funds into the UK.

Many UK residents often fail to report the profits made from selling any foreign-based property. Some people are not aware of the requirement to report the disposal to HMRC because they wrongly assume they are only liable to pay tax in the country where the property is located and sold.

Seek advice from a tax professional such as dns accountants.

UK Capital Gains Tax allowance

If you’re an individual (including trustees and executors, or personal representatives of a deceased person) you are entitled to the Capital Gains Tax Annual Exempt Amount. You can only use the Annual Exempt Amount once in a tax year, even if it was a split year.

In 2023-24 you can make tax-free capital gains of up to £6,000. From 2024-25, the allowance is due to be cut further down to just £3,000 tax-free.

Couples who jointly own assets can combine their allowance, allowing a joint gain of £12,000 without paying any tax.

Unused CGT allowances cannot be carried over into the next year. So if you dont use it, youll lose it!

UK Capital Gains Tax rates

If you pay basic rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

• Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.
• Work out your total taxable gains.
• Deduct your tax-free allowance from your total taxable gains.
• Add this amount to your taxable income.
• If this amount is within the basic Income Tax b

If you pay higher rate Income Tax

If you’re a higher or additional rate taxpayer, you’ll pay:

• 28% on your gains from residential property
• 20% on your gains from other chargeable assets

Double taxation agreements

You still need to report your property sale even if the gain is less than the CGT annual exemption and no UK tax is due. This applies if the proceeds exceed the ‘proceeds reporting level’, which is equivalent to four times the annual exemption, so £24,000 in the 2023/4 tax year.

The UK has double taxation treaties with many countries, and this often makes it possible to claim credits in the UK for the taxes paid in the country where the property is situated. It is important that you hold adequate evidence or tax certificate to show the tax deducted in the country of disposal.

Different approaches in different countries

Each country will have its own way of calculating profits on property sales that can lead to complications when working out what tax is due here in the UK. For example, unlike UK, a lot of countries have indexation allowance especially on properties to mitigate the effect of inflation when calculating gains.

There is also a variety of ways that the value allowed as the base cost (the starting point) for gains around the world is calculated. Some countries also have different rules on allowable deductions including main residence relief. This means calculating a property gain is complex and you may find that the gain is exempt overseas but chargeable in the UK, or vice versa. This is because the gains on the overseas property has to be calculated using UK tax rules when UK liability is reported to HMRC.

Therefore, it is imperative to seek professional tax advice from an accountant such as dns accountants before selling the property overseas.

Non-domiciled in the UK

Being non-domiciled in the UK usually means that you were born in another country and intend to return there. If you are non-domiciled in the UK and have claimed the remittance basis of taxation on your foreign income and gains, you will not receive the annual exempt amount. The remittance basis is a way of being taxed on the foreign income and gains that you bring into the UK, rather than on all income and gains that arise.

For non-domiciled individual claiming remittance basis, there is a charge to claim the remittance basis after 7 UK tax years. The charge depends on the number of years you have been resident:

• £30,000 if resident for at least 7 years out of the previous 9 tax years
• £60,000 if resident for at least 12 years out of the previous 14 tax years

The remittance basis is not automatic and a claim is required to be made in the self-assessment tax return. A claim is not required if the total unremitted overseas income and gains are under £2,000.

When do the temporary non-residence rules apply?

Different rules apply if you are temporarily non-resident and make disposals during a tax year when you were either:

• Not resident in the UK
• Overseas as part of a split year

The temporary non residence are anti-avoidance rules to stop someone who used to live in the UK from using a short time away from the UK, to make non-taxable income or gains. This way, they cant avoid paying taxes in the UK on what they earned.

If you meet the temporary non-resident rules then the portion of gains not charged to Capital Gains Tax on the disposal of the overseas property will come within the scope of UK Capital Gains Tax for the year, or period of return to the UK.

If you do not meet the temporary non-resident rules, there will not be an additional UK Capital Gains Tax charge for the earlier disposal of the overseas property when you return to the UK.

What can I deduct from my taxable gain on property?

Certain costs can be deduced from your gain when buying and selling a property. Here in the UK these include:

• Solicitor and estate agent fees
• Stamp duty land tax or similar when buying the property.

Costs involved with improving the property, such as building an extension, can also be considered when working out your taxable gain.

However, you cannot deduct costs involved with the upkeep of a property and you cannot deduct mortgage interest from the gain either.

However, these rules may differ in the country in which you are selling your overseas property, so seek advice.

Exchange Rate fluctuations

The exchange rate fluctuations can have a impact on the disposal of the property, as all gains reported to HMRC are in Pound Sterling.

For the purposes of calculations, you need to look at what you paid in foreign money when you bought the property and change it to Pound Sterling at that time, this is your purchase price for the property. The same thing is done when you dispose it. The foreign money received on disposal is converted to equivalent Pound Sterling based on the exchange rate on the disposal date.

HMRC publishes yearly average and spot rates, which can be used to calculate the pound sterling equivalent of the foreign currency for Capital Gains tax computation and can be accessed here - HMRC Yearly Average and Spot Rates

Can you claim losses on disposal of overseas properties?

Any capital losses on an overseas property can be offset against any other chargeable assets in the same tax year or carried forward to set against gains on future disposals for UK tax purposes. However, the losses cannot be claimed if you are claiming remittance basis for the tax year.

Further, the losses have to be reported to HMRC or in your tax returns within 4 years from the end of the tax year you incurred the losses, or otherwise they are lost permanently and cannot be offset against future gains.

Capital gains tax declarations when selling property as a non-resident

The gains from the disposal of overseas properties must be reported as normal in your self-assessment tax returns if you file one. For disposals taking place in 2022/23 and later years, the gains can be reported using HMRCs "real time Capital Gains Tax service". This should be done via the HMRC website.

Timing your property sale

When you sell your property can make a huge difference to the tax youll pay, particularly if the disposal is eligible for Private Residence Relief (PRR) relief against CGT in the UK. Private residence relief can be claimed on the disposal of an overseas property providing the individual was resident in that country or spent at least 90 nights in the property in the period it is being claimed for. If you have both a UK home and overseas home, you can make an election to nominate the overseas property as your main home, provided the 90 nights condition is met.

Where a property has been an individual’s only or main residence for part of the time they owned it, only a proportion of the gain is CGT exempt.

There are also split year’ rules on CGT to consider. These affect individuals who leave or return to the UK part of the way through the tax year the property sale is made in. Under these rules, CGT only applies to gains arising in the part of the year where the resident is designated as being in the UK for tax purposes.

The rules, exemptions, tax reliefs and timing can hugely affect the tax youll pay in the UK, so seek professional tax advice from an accountant such as dns accountants.

Can I avoid capital gains tax on overseas property?

Whilst it may not be possible to avoid paying CGT on a buy-to-let or second property overseas, there are potentially ways to minimise the CGT bill. This includes:

• Move into the property
• Deduct costs from your capital gain
• Hold investment properties within a limited company
• Look at alternative ways to invest in property.

Find out more about whether you can avoid capital gains tax on buy-to-let or second properties here.

How to pay Capital Gains Tax

You’ll need your 14-character Capital Gains payment reference number starting with ‘X’ to pay.

If you reported your capital gains in a Self Assessment tax return, you’ll need to pay your tax as part of your Self Assessment tax bill.

You can pay your CGT bill online with HMRC, via bank transfer or cheque.

How to calculate UK Capital Gains Tax on overseas property

As you can see from the information above, there are many factors that will affect if and how much Capital Gains Tax you pay when you sell your property abroad. This includes things like residency, the country the property is in, whether you qualify for any allowances and reliefs, timing of the sale and whether youve ever lived in the property.

To ensure your Capital Gains Tax calculation is correct, contact dns accountants to seek professional advice, otherwise you may not pay the right amount and have issues in the future with HMRC.

How can dns accountants assist you with UK Capital Gains Tax on overseas property?

Here at dns accountants, we have a fully qualified tax team who team with tax challenges such as Capital Gains Tax across the globe. If you would like to know more about how we can help with the CGT on overseas property sales, contact dns accountants on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.