It seems like we are always writing about taxes here. Whether it be new tax rules in far-flung countries or the need to file a return in your home nation, tax truly can be taxing for expats.
Having a foot in two cultures is never easy, especially if you have to manage assets and income in both. This will mean you have to follow the tax legislation for both countries and probably report everything twice.You might think that permanently settling overseas would solve the problem, simplifying life immeasurably. Sadly, this is not the case. The process of selling off your assets at home can be complex and incur a hefty round of taxes too.
The trouble comes from capital gains tax. Simply put, the UK government charges a rate when you sell any asset that has gained value since you bought it. This applies to business assets and shares, but also to personal possessions worth over GBP£6,000. Although cars are excluded from this last category, property is not, which is what catches out a lot of Brits overseas.
Capital gains tax is a bit mystifying for many as it’s not something most of us have to deal with until it pops up at already busy, complicated times. It is not payable on winnings, gifts or prizes; for example, a big lottery win is tax-free. However, if you buy a mansion with your millions and then sell it on a few years later, the taxman will expect 28 percent of the profit.
This can be a sizable chunk of change, especially if you are then looking to transfer any remaining money overseas, which will incur further costs and charges. Selling a UK property when living abroad can severely limit the money you walk away with.
The really mean part of capital gains tax is that it also applies to inherited property. If you are left a property in someone’s will, the sale of that property could incur charges based on the increase in value from when the deceased bought it. This is on top of any inheritance tax paid on other assets.
Once upon a more reasonable time, expats didn’t have to pay capital gains tax on properties sold in the UK if they weren’t living in the country. But since 2015, this has changed. Expats must now report the sale of any property to the taxman unless they have been away for five full UK tax years. This report must happen within 30 days of conveyancing, or hefty fines will be incurred. The report must be submitted, even if your circumstances make you exempt from paying the tax at all.
The most likely route to be exempt from capital gains tax is if a property is your main residence. The idea is to make second homes a little less attractive and prevent tax avoiders changing the status of a property from residential to business. You are liable to pay capital gains tax on any property unless you are actually living in it the majority of the time. However, if you choose to let out a part of that property, the taxman will expect a cut of those earnings at a lower rate than usual.
In terms of rates, capital gains tax is charged at two levels. The standard 28 percent is charged on sums above a set amount. Currently this threshold sits at GBP£11,850, so anyone earning less than that is looking at a rate of 18 percent.
There are a number of ways you can get ‘relief’ on the taxable amount, most of which only apply to businesses. When capital gains is applied to business shares, the amount payable can be reduced. You can apply for business incorporation relief if you have transformed a business into a limited company in exchange for shares. Entrepreneurs’ relief allows owners of start-ups to sell off part of the business at a capital gains rate of 10 percent on amounts up to GBP£10million.
For most expats, the sale of private property is the most likely route for encountering capital gains tax. Expats with dual citizenships may need to wade through the taxation rules for both countries. In most cases, the UK and the second nation will have a dual taxation agreement, stipulating what taxes should be paid to which country. The idea is to avoid having to pay twice, but the agreement may also stipulate that moving the remaining money between the two countries will incur charges.
These agreements become especially important for any property that was bought in the UK by expats who were legally resident overseas.
As with anything related to tax, it’s advisable to keep detailed records of any asset that you think may one day be liable for capital gains tax. The calculations are made on the difference between the sale price and the amount you originally paid, minus any expenditures. Keeping a record of that original figure and getting an official valuation of the property will give you a ballpark figure, but knowing how much that extension cost will give you a more precise figure.
If you have an armful of records and a long list of questions, it’s advisable to seek out expert help. There are plenty of accountants and tax advisors out there who can get to grips with the circumstances of any expat, offering the best advice on how to manage capital gains tax.
Ultimately, the easiest way to avoid capital gains tax is to stay out of the UK for more than five years, but this won’t suit everyone. If this doesn’t work for you, and you must sell that property, seek out expert advice.