 Holiday home owners face UK tax on overseas losses
09 January 2009: Overseas holiday home owners looking to sell their properties currently face a tax double whammy due to falling property prices and exchange rate movements, says Matt Coward, Director of Personal Tax at PKF Accountants & business advisers. The position could be particularly difficult if owners reinvest all their equity in a new overseas property.
Matt explains that the movement in sterling against the Euro in the last couple of months means a return to the sort of dramatic currency risks that many holiday home owners will never have experienced.
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 | He says, “For UK tax purposes, gains on overseas assets are calculated using spot exchange rates on the dates the assets are bought and sold. This means that overseas owners could face an unexpected UK capital gains tax (CGT) liability if they now sell an overseas property that they have owned for a couple of years.
“A straightforward example illustrates how even a Euro-denominated loss of €250,000 – due to a fall in property prices – can give rise to a UK capital gains tax liability.
“In our case study, a UK national buying a Spanish property in January 2007 for €1.25m (then equal to £854,818 in sterling) sells in January 2009 for €1m (equal £966,744 in sterling). Although there is a loss in Euros, there is a profit in sterling of £111,926 on which he will need to pay UK CGT of at least £18,419 on 31 January 2010.” |
Matt continues, “The position could be particularly difficult if owners now 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. Even 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.”
Matt warns, "Unwitting failure by holiday home owners to report such gains will not be met with a sympathetic approach from HMRC: the Revenue already regards individuals with overseas assets as 'high risk' it terms paying the right amount of tax.
“While selling an overseas property may be the right thing to do in order to balance your books as the economy falters, it is very important to take account of both the overseas and UK tax implications of selling up.”
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For further information please contact:
Jane Murray, PR Executive, 020 7065 0135, jane.murray@uk.pkf.com
For general enquiries please contact our switchboard on 0207 065 0000
Notes to Editors:
- PKF is a leading firm of accountants and business advisers with more than 1,800 partners and staff operating in 23 offices in the UK mainland firm, a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk.
- PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited. PKF (Isle of Man) LLC is a limited liability company registered in the Isle of Man. PKF (Guernsey) Limited is incorporated in Guernsey.
- PKF (UK) LLP is a member firm of PKF International Limited, a network of legally independent member firms with more than 14,650 people operating in 119 countries around the world.
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