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How to Handle Capital Gains Tax on Foreign Property for UK Residents

Courtney Griffiths

November 11, 2024

Investing in foreign property can be a great way to diversify your portfolio, but if you’re a UK resident, you need to be aware of the tax implications—specifically, Capital Gains Tax (CGT) on foreign property. Navigating the rules surrounding CGT can be complex, but understanding how it works can help you minimize your liability and stay compliant. Here’s a guide to handling Capital Gains Tax on foreign property for UK residents.

What Is Capital Gains Tax?

Capital Gains Tax is a tax on the profit (gain) you make when you sell or dispose of an asset that has increased in value. The tax is only on the gain you make, not the total amount of money you receive. For UK residents, CGT can apply to various assets, including stocks, shares, and property—whether located in the UK or abroad.

Capital Gains Tax

When Does Capital Gains Tax Apply to Foreign Property?

As a UK resident, you are liable to pay CGT on the sale of foreign property in the same way you would be for property located in the UK. The tax becomes applicable when you sell, gift, or otherwise dispose of the property, and there is a gain. It doesn’t matter whether the money from the sale is brought into the UK or kept abroad; you are still required to report the gain and pay the necessary tax.

The non domiciled basis of taxation may be relevant for the 24/25 tax years, but will be abolished from 5th April 2025. Significant changes have been announce for the taxation of individuals who qualify under a ‘foreign income and gain’ ‘(FIG’) regime from UK tax year 25/26.

How to Calculate the Gain on Foreign Property

The gain is calculated as the difference between the property’s selling price (or market value if it was gifted) and its acquisition cost. You can deduct certain allowable expenses from the gain to reduce the tax owed, such as:

  • The original purchase price of the property.
  • Costs associated with buying and selling the property, including legal fees, stamp duty, and estate agent fees.
  • Renovation costs that enhance the property’s value (routine maintenance doesn’t count).


After deducting these expenses, the resulting amount is your capital gain. The gain is then converted into British pounds, using the exchange rate at the time of the sale.

What Are the Capital Gains Tax Rates?

Tax

The CGT rates for UK residents vary depending on your total taxable income. For the 2024/25 tax year, the rates are:

  • 18% on gains from residential property if your total taxable income falls within the basic rate band (up to £37,700).
  • 28% if your total taxable income exceeds the basic rate band.


These rates apply to foreign residential property, while non-residential property gains are taxed at lower rates (10% or 20%, depending on your income bracket).

Reliefs and Allowances

You can reduce your CGT liability by utilizing various reliefs and allowances:

  1. Annual Exempt Amount: Each taxpayer is allowed a tax-free gain limit each year. For the 2024/25 tax year, this amount is £6,000. If your total gains for the year are below this threshold, you will not owe any CGT.
  2. Principal Private Residence Relief (PPRR): If the foreign property was your main residence for some or all of the time you owned it, you might qualify for PPRR, which could reduce the amount of gain subject to tax.
  3. Foreign Tax Credit Relief: If you paid tax on the gain in the country where the property is located, you might be able to claim relief to avoid double taxation. The foreign tax credit can be offset against your UK CGT liability.

Reporting and Paying Capital Gains Tax

You must report and pay any CGT due within specific deadlines:

  • Online CGT Return: Report the gain via the HMRC online service, or by completing a Self Assessment tax return. For foreign property gains, this must be done by 31 January following the end of the tax year in which you sold the property.
  • Payment Deadline: The CGT must also be paid by the 31 January deadline.


Failing to report gains or pay tax on time can result in penalties and interest, so it is essential to adhere to these deadlines.

What About Non-UK Residents Selling UK Property?

If you are a non-UK resident selling UK property, different rules apply. You are still liable to pay CGT, but you need to report the gain within 60 days of the property sale completion. The same tax rates (18% and 28%) apply depending on whether the property is residential or non-residential.

Practical Tips for Handling Capital Gains Tax on Foreign Property

Here are some practical steps you can take to manage your CGT liability on foreign property:

  1. Keep Accurate Records: Document all costs associated with the purchase, improvement, and sale of the property. This will help you calculate the gain accurately and claim any allowable deductions.
  2. Consider the Timing of the Sale: If you’re planning to sell multiple assets, consider the timing to maximize your annual CGT exemption. You might benefit from spreading sales over different tax years.
  3. Seek Professional Advice: Given the complexity of tax rules regarding foreign property, seeking advice from a qualified tax advisor can help you minimize your tax liability and avoid pitfalls.
  4. Understand Double Taxation Agreements (DTAs): The UK has DTAs with many countries, which may influence how foreign income and gains are taxed. If you’re selling property in a country with a DTA, consult the agreement to understand how it affects your CGT liability.

Common Mistakes to Avoid

  1. Ignoring Exchange Rates: You need to convert the purchase and sale prices into British pounds using the correct exchange rates. Using inaccurate rates can lead to incorrect calculations.
  2. Failing to Report Gains: Even if no tax is ultimately due (e.g., if the gain is below the annual exemption), you still need to report the sale.
  3. Overlooking Double Taxation Relief: If you’ve already paid tax in the country where the property is located, you might be able to claim relief to reduce your UK CGT.

 

Final Thoughts

Handling Capital Gains Tax on foreign property for UK residents involves understanding how to calculate the gain, knowing which reliefs apply, and ensuring timely reporting and payment. By being proactive, keeping accurate records, and seeking professional advice when necessary, you can manage your tax obligations efficiently. Investing time into understanding the rules can help you save on taxes and avoid potential pitfalls.

Foreign property ownership brings exciting investment opportunities, but with that comes the responsibility of staying compliant with tax laws. Being informed will help you make the most of your investment while minimizing the tax burden.

Stay Compliant and Save on Capital Gains Tax

With the right guidance, you can reduce your CGT liability and make informed financial decisions.

Schedule a Consultation with a Tax Professional
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