Selling a property overseas can have unexpected implications for UK residents in terms of capital gains tax (CGT) liabilities. One common mistake made by UK residents is failing to report the profits generated from selling a foreign-based property. Many individuals are either unaware of the requirement to report the sale to HMRC or mistakenly believe that they are only obligated to pay taxes in the country where the property is situated. While it is true that the primary taxation rights usually lie with the country where the property is physically located, gains from the sale are still reportable in the UK for individuals filing on a worldwide basis, which applies to most people.
What is capital gains tax?
Capital gains tax is a tax imposed on the profit made from the sale of an asset, such as real estate, stocks, or other investments. It is based on the difference between the purchase price of the asset and its selling price. When the selling price exceeds the purchase price, this is known as a capital gain.
In the context of overseas property, capital gains tax applies to the sale of a property located outside the taxpayer’s home country. The tax liability arises when the property is sold and a profit (capital gain) is generated from the transaction.
How is capital gains relevant to property sales?
The concept of capital gains is relevant to property sales because it recognizes that the value of a property can increase over time. When an individual purchases a property and later sells it for a higher price, they have made a capital gain. This gain is considered taxable income, subject to capital gains tax.
What are the new capital gains tax rules for 2023?
In October 2022, as part of the government’s budget, a significant change was made to the capital gains tax allowance. It has been reduced by 50%, implying that individuals will have a lower tax-free allowance for capital gains going forward.
It’s worth noting that the specific rules and regulations related to capital gains tax on overseas property vary between countries. Each jurisdiction may have its own tax laws, rates, and exemptions. It is essential for individuals to consult the tax regulations of the specific country where the property is located and seek professional advice to ensure compliance with the applicable laws.
How to calculate capital gains tax
- Determine the cost basis
- Calculate the capital gain
- Determine the holding period
- Identify the applicable tax rate
- Multiple the capital gain by the tax rate to calculate the capital gains tax
- Remember to consider any deductions or exemptions that may apply
There are a few things to bear in mind before calculating capital gains which we’ve outlined below:
Acquisition and disposal dates
To calculate capital gains tax, the date of acquisition (when the property was purchased) and the date of disposal (when it was sold) must be taken into consideration. This is due to the holding period between these dates affecting the tax calculation.
Currency conversion
If the property has been bought and sold in a different currency than the country’s tax jurisdiction, these amounts will need to be converted to the local currency using the right exchange rate. This is to ensure the tax can be calculated in accordance with the local country’s laws.
Original purchase price
It is important to calculate the original purchase price of the property when it comes to finding out the capital gain. The original purchase price of a property is the price the current or initial owner bought the property for, along with transaction fees, legal costs, and any other expenses directly related to the acquisition.
Allowable deductions
Many jurisdictions allow certain deductions or allowances that can be subtracted from the capital gains. Explain common deductions, such as property improvement costs, maintenance expenses, and fees associated with the sale.
Calculate the capital gains
To find out the tax incurred on the purchase, the capital gains must now be identified. This is done by subtracting the original purchase price and allowable deductions from the selling price. It is important to account for transaction fees and taxes related to the sale at this point also.
Capital gains tax rate
Now that the capital gains are calculated, the tax rates and exemptions can be worked out. The tax rate on the capital gains depends on your income level and the type of property this is. The specific tax rates vary by country and sometimes even within different tax brackets.
Once you have your capital gain and the applicable tax rate, you’ll be able to work out the capital gains tax. The capital gains tax is the capital gain multiplied by the applicable tax rate.
It’s important to note that tax laws and regulations can vary between countries and may change over time. Additionally, certain assets or specific circumstances might have unique tax rules or exemptions. It’s advisable to consult a tax professional or refer to the tax authority in your jurisdiction for accurate and up-to-date information regarding capital gains tax calculations.
