Sterling has depreciated considerably against the Euro in the last year. Whilst this is of great interest to other Euro zone residents, who can buy property in the UK at much lower Euro cost, the opposite applies to UK residents who have purchased property elsewhere in the Euro zone.
For instance a property in Spain costing 1.5m Euros purchased early 2007 would have required an investment of £1m sterling.
A similar property may currently be worth 1.1m Euros. This is a loss on your investment of 400,000 Euros. Common sense might argue that if you disposed of the property now, you would merely multiply the loss by the exchange rate prevailing when the sale completed? Unfortunately this is not the case!
Capital gains tax legislation dictates that you compare the sterling value of the purchase at the date of purchase, with the sterling value of the disposal at the date of disposal. In our example a property disposal today of 1.1m Euros converts to say £1.1m sterling.
Despite the property dropping dramatically in price – you have made a taxable gain of almost £100,000.
Fine you may say but what if you want to reinvest the proceeds in another property in the Euro zone? The sterling gain of £100,000 will cost you possibly £18,000 in UK taxes; that’s £18,000 less to invest!
So be wary. A loss on sale in a local currency can produce unwelcome tax liabilities when converted to sterling.