Selling property abroad

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.

Owning an overseas property through a company

To accommodate non-UK tax considerations, a growing number of UK taxpayers have been advised to purchase property abroad by using a company to make the purchase. Potentially this created a risk that owners who were directors or shadow directors of the company, would be assessed on their private use of the property as a benefit in kind.

The Finance Bill 2008 now includes legislation that exempts most owners from this potential benefit in kind charge.

To qualify for the exemption the following conditions must be met:

  1. The property is owned by a company owned by individuals. If the shares in the company are owned by a family trust the exemption will not apply.
  2. The property is the company’s only or main asset.
  3. The company’s only activities are those that are incidental to its ownership of the property, and
  4. The property is not funded directly or indirectly by a connected company.

The Finance Bill 2008 has clarified that exemption is extended to include ownership by certain groups of companies, and that letting of the property to third parties will not disqualify application of the exemption.

Please note that this exemption only applies to overseas properties. If you own a UK property through a company a potential benefit in kind charge will still apply.