Britons Face Double Tax Whammy On Holiday Homes

by Robert Lee, Tax-News.com, London

09 January 2009

British holiday home owners looking to sell their properties currently face a tax double whammy due to falling property prices and exchange rate movements, according to accountants and business advisers, PKF.

Matt Coward, Director of Personal Tax at PKF 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. The position could be particularly difficult if owners reinvest all their equity in a new overseas property.

Coward said: “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 EUR250,000 – 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 EUR1.25m (then equal to GBP854,818 in sterling) sells in January 2009 for EUR1m (equal GBP966,744 in sterling). Although there is a loss in euros, there is a profit in sterling of GBP111,926 on which he will need to pay UK CGT of at least GBP18,419 on January 31, 2010.”

Coward continued: “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.”

Coward warned: "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' in terms of not 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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