Capital Gains tax on property sold overseas

If you own properties outside of the UK, you may have to pay UK Capital Gains Tax (CGT) when the property is disposed of. However, if you believe HM Revenue & Customs (HMRC) has no authority over your assets in foreign countries, such as shares, property or savings accounts, you should reconsider.

If you live in the UK and own a second home abroad, such as a sun-drenched flat in Spain or a farmhouse in rural France, you might be in for a tax shock unless you understand the tax laws. If you are earning income or gains through renting out property to tourists or long term tenants abroad, you could be liable to pay capital gains tax on disposal of the property.

You may also have to meet the foreign tax obligations when you sell or dispose of your property overseas.

The below article considers the Capital gains tax implications of property overseas.

1. Impact of Residence and Domicile status
2. Check your Residence status
3. Domicile status
4. Remittance basis
5. Capital Gains tax on foreign property
6. Double Taxation Agreement relief
7. Penalties
8. Offshore Disclosure Facility

Impact of Residence and Domicile Status

Your residence and domicile status affects your Income tax and Capital Gains Tax liabilities in the UK. It is critical to understand whether you are a UK resident or not, which may have an impact on:

1. Your tax liability in the UK
2. Your eligibility for income tax allowances and exemptions.

Also See: Tax Rates and Allowances for 2020/21

Check your Residence status

When determining your tax status, the key test to look at is the ‘residency test’. If you are a tax resident in the UK, you must declare any “foreign” assets and income in the “foreign section” of your self-assessment tax return.

Any country other than England, Scotland, Wales, and Northern Ireland is considered foreign.The number of days you spend in the UK each tax year usually determines your residency. If you spend 183 days or more in the UK between April 6 and April 5 of each tax year, you will be automatically considered as a resident.

If you spend fewer than 16 days in the UK, you will be automatically classed as a non-resident, increasing to 46 if you were nota UK resident in the previous three tax years.

There are several other rules that need to be considered when determining your UK residence, and we recommend you seek expert advice. Read here for more details

Also See: Capital Gains Tax Calculator – How to calculate?

Domicile status

Your domicile status is determined by general law, which means it must be interpreted in accordance with previous court rulings. There are numerous factors that influence your domicile; some of the key points are as follows:

1. You must have a domicile
2. You can only have one domicile at a time, and
3. You are normally considered to be domiciled in the country where you have your permanent residence
4. Your existing domicile will remain in effect until you acquire a new one.
5. Your domicile is distinct from your nationality, citizenship, and residency status, though all these factors can influence your domicile.

If you are not considered domiciled in the UK under English common law, you will be considered deemed domicile if you either meet condition A or condition B:

Condition A – ‘returning domiciles’

To meet this condition, you must:

• be born in the UK
• have the UK as your domicile of origin
• be resident in the UK for 2017 to 2018, or later years

Condition B – ‘long-term residents’

To meet this condition, you should have been resident in the UK for at least 15 of the prior 20 tax years.

Domiciled and resident in the UK – tax liability

When you’re a resident and domiciled in the UK, you’re generally taxed on the arising basis of taxation. This means that in the UK, you will be taxed on all your worldwide income and gains. As a result, even if your foreign income and gains have already been taxed in another country, you must declare all your foreign income and gains on your tax return in the UK.

UK resident but not domiciled – tax liability

If you are a UK resident but not domiciled in the UK, you may be subject to special rules regarding your foreign income and gains. In these cases, you can choose between the arising basis of taxation and the remittance basis of taxation.

Remittance basis

Under the remittance basis of taxation, you only pay tax in the UK on foreign income and gains that are remitted (i.e. brought) to the UK. If you decide to use the remittance basis of taxation for a tax year, you must pay UK tax on the following items:

1. Any of your income and gains that arise/accrue in the United Kingdom
2. Any of your foreign income and gains brought (or remitted) to the UK by you or another relevant person, even if the remittance occurs in a later tax year

If you are a long-term UK resident and elect to be taxed on a remittance basis, you may be subject to the Remittance Basis charge.

If you are deemed domiciled in the UK because you meet either of the two conditions - Condition A or Condition B, you will be taxed on the arising basis of taxation rather than the remittance basis.

You should carefully consider whether you should use the remittance basis of taxation. This is because it comes at a cost, as you will lose your annual allowance for capital gains.

Also See: Capital Gains Tax – How to Avoid Paying Tax on Property

Capital gains tax on selling overseas property/selling property abroad

When you "dispose" of your property, you may be subject to capital gains tax on property in both the UK and the country where the gain was made. Again, if you are taxed twice, you should be able to claim the foreign tax credit. If you own more than one foreign property, any losses can be offset against your other overseas properties and even carried forward to future years if you make an over all loss.

However, you cannot offset losses on a UK property because you must keep domestic tax issues separate.

Double Taxation Agreement (DTA) relief

In many cases, the UK provides relief for foreign tax paid on foreign income and gains under the provisions of relevant Double Taxation Agreements (DTAs) or through unilateral relief. Because of the complexities, there is always the possibility that you will be taxed both abroad and in the UK. Fortunately, the United Kingdom has signed double taxation treaties with several countries, which should prevent you from paying double tax and allow you to claim any double payments. Unfortunately, you cannot claim a rebate solely because the local jurisdiction levies a higher tax rate than the UK. What you can do is reduce your UK tax liability to zero, if possible.

Penalties

If you are a UK resident, you may be required to report foreign income on your Self-Assessment tax return. If you do not report it, you may be required to pay both:

1. The undeclared tax
2. A penalty of up to double the amount of tax owed.

When you provide false information about the amount of tax you owe, you may face prosecution. However, if you notify HMRC as soon as possible, they may be more likely to consider your case favourably.

Offshore disclosure facility

You could tell HMRC about your undisclosed income with the use of an offshore disclosure facility if –

1. You have undeclared income
2. You’ve not paid the correct amount of tax
3. You’ve earlier made a wrong claim
4. You’re behind with your tax

In case you are not eligible to use this facility but still have undeclared tax, contact HMRCs Offshore Co-ordination Unit.

HMRC Offshore Co-ordination Unit

ocu.hmrc@hmrc.gov.uk
Telephone: 03000 530 310
Monday to Friday, 9am to 4pm

Conclusion

To summarise, this is a complicated area of law that may involve several different UK taxes, foreign taxes, and reliefs. It is highly recommended that you seek specialist tax advice to ensure that the correct tax is paid (and not overpaid). dns accountants has extensive experience in advising clients over the capital gains tax on property sold overseas. Please contact us if you require property tax accountants advice on your overseas property.

In case you are having any query or want specialist advice on "Capital gains tax on property sold overseas”, kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

“This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”.

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.