Tax alert for overseas property owners

April 30th 2009

UK tax laws stipulate any gains on overseas assets are calculated using the spot exchange rates on the given day assets are bought and sold.

In a recent case study, a UK national bought a Spanish property in January 2007 for €1.25m (£854,818) and sold in January 2009 for €1m (£966,744). Although there is a loss in euros, there is a profit in sterling of £111,926 on which he will need to pay UK Capital Gains Tax of at least £18,419 on 31 January 2010.

The position could be particularly difficult if owners reinvest all their equity in a new overseas property as they may then have difficulty finding the cash to pay the UK tax liability when it becomes payable in January 2010.

Those who are aware they have a UK tax problem will often realise a smaller amount of post-tax equity from their properties than they may have expected.
Worse still, if owners simply sell an overseas holiday home and leave their equity from it in a foreign currency bank account, they could face a double hit if the value of sterling recovers before the UK tax is payable on any gain.

If they cannot pay the UK tax from UK funds, they would have to convert some of the original sale proceeds back to sterling at a disadvantageous rate. Of course, the value of sterling may yet fall further, which shows just how difficult these decisions can be.

Homeowners should be aware of these issues while undertaking a possible property sale, to best prepare for potential future tax payments.