Dreaming of an Overseas Holiday Home? Consider UK Tax Implications…
When summer fades into a distant memory and winter is on the horizon, many of us dream of the sand, sea, and sunshine an overseas holiday home can bring, without much thought to the UK tax implications of owning such assets.
Whether it be a villa overlooking a Tuscan sunset or an Alpine lodge perched above mounds of pristine snow, many individuals assume that as their holiday home is located overseas it is sheltered from UK tax: this is not the case!
Worldwide Income and Gains: UK Tax Residency
All UK tax residents are subject to tax on their worldwide income and gains. Even though a property may be located overseas, in many circumstances it will be subject to UK tax, although credit is given for the overseas tax suffered on the transaction.
Capital Gains Tax on Properties
Sales of residential properties are subject to Capital Gains Tax (CGT) at rates of 18% and 24%, depending on your marginal rate of tax. CGT is levied on
the chargeable gain which is broadly calculated as the difference between the sales proceeds received and the ori
ginal acquisition costs: i.e. what you sold it for less what you paid for it.
The usual CGT computation rules apply and costs of sale/acquisition and expenditure incurred improving the property are all allowable. Care must be taken to ensure a consistent approach is taken to converting foreign currency into GBP.
Private Residence Relief (PRR) on Overseas Holiday Homes
As per homes situated in the UK, in some circumstances, Private Residence Relief (PRR) relief may be available to exempt some or all of the gain from CGT. The complexity of the rules means that PRR is unlikely to be available on the sale of an overseas holiday home but if you ever lived in the property as your main home during a period of non-UK residence, for example, then it may be available. Expert advice must be sought to ensure the relief is claimed correctly.
When dealing with assets located outside of the United Kingdom, the first step is to consider the Double Tax Treaty between the UK and the country within which the property is located, if indeed there is any. The Double Tax Treaty identifies which country has primary taxing rights on the sale of the property, however, in most cases, primary taxing rights will rest with the country within which the asset is situated.
Double Tax Relief: Mitigating Tax Liabilities
Once overseas tax on the sale of the property has been established, Double Tax Relief may be claimed on your UK tax return to establish the UK tax liability.
Please note, Double Tax Relief is designed to mitigate the overseas tax but will not necessarily reduce the UK liability to nil. The sale of the property overseas may be exempt from foreign taxes or subject to a more favourable tax regime meaning UK CGT is still due.
Whereas sales of UK residential property must be reported to H M Revenue and Customs (HMRC) on a UK Property Disposal return within 60 days of sale completion date, happily, sales of overseas properties are not subject to this rule. The sale of the property and payment of CGT must be reported on a UK tax return via self-assessment and follows the normal tax deadlines: therefore if a sale of a Spanish villa takes place in the 2023/24 tax year, the sale will be reportable by 31 January 2025.
Additional complexity may arise due to the fact that most overseas tax regime work to a calendar 31 December year end.
Timing the Sale of Overseas Property to Reduce UK Tax
If your ultimate aim is to depart the UK to live and work abroad or perhaps enjoy your retirement in sunnier climes, then you may wish to delay sales of any foreign property until you are officially non-UK resident and sales of overseas assets are no longer subject to UK tax.
The Statutory Residency Test and Non-Residence Tax Planning
UK residence for tax purposes is determined via the Statutory Residency Test which is, once again, complex, and specialist tax advice must be taken before relying on non-residence as a tax planning strategy.
Furthermore, there are anti-avoidance rules relating to periods of temporary non-residence to consider, therefore it is important to obtain qualified tax advice before this approach is undertaken.
The Importance of Specialist Tax Advice for Overseas Asset Sales
Before any tax planning or transactions are due to take place on sales of overseas assets it is essential both UK and foreign specialist tax advice is obtained to ensure any tax traps or pitfalls may be mitigated prior to disposal.
Whilst unfortunately the sale of overseas holiday homes may be caught by UK taxation, hopefully, you can relax, safe in the knowledge that Robson Laidler’s expert tax advice is available to guide you through the process of a disposal.
You can contact our tax team here.
…And for the time being, at least, you may sit back and continue to enjoy your overseas holiday home, perhaps with sand tickling your toes and the sound of soft waves lapping to the shore…