Property losses prior to UK arrival - what exchange rate to use?

Property losses prior to UK arrival - what...

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My client is required to complete a tax return for the first time, and owns foreign rental property (a furnished apartment) acquired before she arrived in the UK. The property has been running at a loss since 2008, and she has lived in the UK since 2010. The question: should the 2008 and 2009 losses be converted to GBP at the exchange rate applying in the years they occurred, or should the cumulative loss from 2008 and 2009 be converted to GBP at the 2010 exchange rate? In either case a loss is made, but she can declare a larger loss if she uses the 2010 rate.  I could not find rules on the HMRC website covering this case.

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By chicken farmer
10th Oct 2014 07:46

Why?
If she was non resident in 2008 & 2009, why do you think she is entitled to relief for the losses?

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Replying to Matrix:
Portia profile image
By Portia Nina Levin
10th Oct 2014 09:44

Why?

chicken farmer wrote:
If she was non resident in 2008 & 2009, why do you think she is entitled to relief for the losses?

Why do you suggest that she isn't? There's no such restriction in the legislation.

ITTOIA 2005, section 269 says that if she's resident in the UK she's liable to UK income tax on the profits of her overseas property business. ITA 2007, sections 118 and 119 simply says that if a person carries on an overseas property business (which by the definition in ITTOIA 2005, section 265 a non-resident can still do) and makes a loss, that loss can be carried forward and set against future losses.

Where in the legislation does it say that only losses incurred while the person is resident can be so carried forward?

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By User deleted
10th Oct 2014 10:10

On what basis can anyone carry forward a loss that was not assessed to UK tax in accordance with the UK tax laws?? None of his losses (for years when he wasn't a resident) were computed in accordance with the UK tax laws.

On the way so can't look up the legislation now.

 

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By johngroganjga
10th Oct 2014 10:12

I agree with Portia.  I see

I agree with Portia.  I see no logic in, and am aware of no statutory basis for, any suggestion that UK taxpayers who have only recently become resident should pay more UK tax than they would have done had they been UK resident since birth.

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Portia profile image
By Portia Nina Levin
10th Oct 2014 10:13

Since when?

Since when were property losses assessed to UK tax?

Do let me know when somebody has a legislative reference or case law in support of their assertions, rather than just a half-arsed empty assertion.

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By User deleted
10th Oct 2014 12:08

Expanding on the half-arsed

Expanding on the half-arsed empty assertion:

ITA/07:

s.118(1) – Carry forward against subsequent property business profits: relief is given to a person under this if the person ..(b) makes a loss in the business in the tax year

 

ITTOIA/05:

s.272- profits of a property business are calculated the same way as the profits of a trade (and in fact the profits of an overseas property business are calculated same way as the profits from a UK property business are calculated)

s.25 – the profits of a trade must be calculated in accordance with GAAP

s.26 – losses calculated on same basis as profits

 

ITA/07:

s.997 – GAAP means UK GAAP

 

 

So in order for relief to be given under s.118 above the losses must have been computed in accordance with the UK GAAP/laws which was not the case here.

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By chicken farmer
10th Oct 2014 12:50

Portia and John ...


The property is outside the UK and we are told that the client was non-resident for 2008 and 2009. For those years therefore she would not have been chargeable to UK income tax IF she had made a profit instead of a loss (ITTOIA s.269(2)).

As pointed out by taxguru, S.26 (applied by s. 272(2)) says losses are calculated on the same basis as profits. But, as s.269 says she would not be chargeable, no calculation is required of either profit or loss.

I am willing to be convinced otherwise but you will need to set out your arguments in a bit more detail that just slagging off my comments as 'half-arsed'. 

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Portia profile image
By Portia Nina Levin
10th Oct 2014 13:12

Sorry, they are still half-arsed

chickenfarmer wrote:
But, as s.269 says she would not be chargeable, no calculation is required of either profit or loss.

All that section 269 says is that the profits are chargeable to income tax if she's resident. That might implicitly require a calculation of those profits, but it does nothing to prevent the calculation of previous losses.

The only references that have been offered have said what should be done with profits, and how profits and losses are calculated. Nothing has been offered to show that the prior losses cannot be calculated and offset.

Remember that all we are told is that losses are calculated in the same way as profits, and profits are only taxable in the UK if the person is resident. When a loss is made, that is not a negative profit; it is a loss and the amount of profit for the year is nil. In 2008 and 2009 (not sure whether that's 2007/08 and 2008/09 or 2008/09 and 2009/10) the profits were nil, but those nil profits were not chargeable to tax, because she was non-resident. However, nothing in the legislation prevents her calculating her loss for those years and setting them off in 2010.

If you want to be convinced, perhaps the OP will advise where the property is situated and I can point you to a non-discrimination in the relevant tax treaty.

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By chicken farmer
10th Oct 2014 13:19

The treaty is irrelevant

Here we are debating the position of a non-resident letting out non-UK property in 2008 and 2009. There can be no double taxation and therefore the treaty does not kick in.

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By User deleted
10th Oct 2014 13:24

Agree with chickenfarmer. It will be really interesting to see how the non-discrimination clause applies to loss carry forward!

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Portia profile image
By Portia Nina Levin
10th Oct 2014 13:27

No

We are talking about a UK resident that is taxable on profits in 2010 in two countries, and who should be treated in the same way as (usually) a citizen of the UK.

However, you continue to not show where the deduction of the loss is precluded under the UK domestic legislation.

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By Alan Ferris
10th Oct 2014 13:49

Deemed Cessation/Commencement

IIRC - When a individial changes residency to the UK their ongoing business is deemed to have ceased and then commenced either at the start of the tax year, or in certain cases on the date of arrival in the UK.

 

 

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Portia profile image
By Portia Nina Levin
10th Oct 2014 13:59

@ Alan

ITTOIA 2005, section 17 does indeed say that in relation to trades (including professions and vocations).

There is no equivalent for property businessed though.

I do not do recollection. I always look at what the legislation actually says.

All we have is section 265 that says what an overseas property business is in relation to a person (who may or may not be UK resident at any given time) and s. 269 that says that the profits are chargeable to UK tax for a tax year if the person is UK resident.

We have been offered various legislative references that tell us how profit and losses should then be calculated, but there is nothing within ITA 2007, section 118 and 119 that prevents losses incurred in the overseas property business while non-resident from being offset against the profits chargeable while resident.

I pity the clients of those argung to the contrary. It is just not there.

And the one unusual thing about property business losses that are carried forward. There is no need to make a claim in order to have a loss! See the second paragraph of PIM4210.

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By User deleted
10th Oct 2014 14:06

I thought the argument is pretty straightforward - losses computed in accordance with say German tax laws cannot be brought forward and set off against profits computed in accordance with UK tax laws! 

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Portia profile image
By Portia Nina Levin
10th Oct 2014 14:15

So all I have to do

Is go back and calculate them auf Englische? The manner in which they were formerly calculated does not stop them being losses if they are recalculated in the manner prescribed by UK law. That is not an argument, it is just a half-arsed notion.

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By chicken farmer
10th Oct 2014 14:38

Portia, there you go again!

You're clearly in no mood to be convinced. So for the sake of the other contributors let me just say that what is needed here is a purposive approach to the legislation. The purpose is to tax UK residents on worldwide income and non-residents on UK source income. Despite what Portia says above we are looking at 2008 and 2009 when the client was non-resident and the property was outside the UK. She was therefore outside the scope of UK tax. As such she can neither be taxed on a profit nor given relief for a loss.

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Replying to Matrix:
Portia profile image
By Portia Nina Levin
11th Oct 2014 11:01

A purposive approach?

chicken farmer wrote:

So for the sake of the other contributors let me just say that what is needed here is a purposive approach to the legislation. The purpose is to tax UK residents on worldwide income and non-residents on UK source income.

A purposive approach is an approach that is taken when the legislation does not say what somebody wants it to say. In order to do so one must presume the purpose of the law behind that legislation.

I agree that the general purpose of our scheme of taxation is to tax UK residents on their worldwide income and non-UK residents on their UK source income.

Losses are not income, but are, for UK tax purposes, a relief that can be given against taxable income. The manner in which such relief operates ought, equitably, to be provided on a level playing field.

Let us take the case of Fred, who has a commercial rental property in Spain. He made losses in 2008/09 and 2009/10 (his first two years of his overseas property business), when he was UK resident, of £20,000 and £10,000 respectively.

In 2010/11 to 2012/13 he was non-Uk resident. He made a profit in 2010/11 (computed under UK GAAP/tax principles) of £50,000 and then made losses (similarly computed) in 2011/12 and 2012/13 of £5,000 and £1,000, respectively.

I am now doing Fred's 2013/14 Tax Returm and he has a profit of £30,000.

You are presuming that the legislation's purpose is to deny the OP the losses that were sustained while she was non-resident and allow Fred to have taxable property income (after loss relief) for 2013/14 of SFA. Your presumption is giving a result that to me seems absurd.

Whilst agreeing with you on the general purpose of the country's scheme of taxation, I make no such presumption and simply observe that what the legislation is saying is that the OP's client can deduct her previous losses and that Fred has taxable property income of £24,000.

He would have been liable to tax on £20,000 in 2010/11, but he was non-resident and it's a non-UK property.

You are presuming a purpose that will have winners and losers. I agree that that gives a level playing field.

The language of the legislation though, without that unnecessary presumption, will also have winners and losers, and provide a level playing field.

I am of the opinion that we should take the legislation at its word, in such circumstances.

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By King_Maker
10th Oct 2014 15:23

I agree with Portia.

Property Losses are automatically carried forward. So they are available to set against future profits. I am not aware of any non-resident restriction.

UK accounts would have to be prepared and time apportioned (assuming the German accounting year ends on 31 December). Unless the entries are few, it is likely the average exchange rate would be acceptable to HMRC, and it would be quicker & easier to do so.

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By joiwomcow
10th Oct 2014 17:37

Further information

Thank you for the answers and discussion so far. Further information:

The relevant tax years are 2008/09 and 2009/10. Client arrived in the UK  mid-2010/11 tax year.  The property is situated in Australia, there is a double taxation treaty.

The losses have been recalculated in 08/09 and 09/10 according to UK law (different tax year, different treatment for repair allowance, furnished lettings allowance).

My understanding is in agreement with Portia's - I see no reason why losses cannot be offset for a non-resident prior to 2010/11.

The property remains in loss for 13/14. Profits/losses from foreign lettings are translated using the average exchange rate for the period, so this is the basis  from 10/11 onwards.

The question is whether the 08/09 and 09/10 losses should also be translated using the 10/11 rate (when the client became resident), or the rates from the respective previous years.

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By King_Maker
10th Oct 2014 18:56

IMHO, it should be the average rates for 2008-09 & 2009-10.

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James Reeves
By James Reeves
10th Oct 2014 21:53

Australian Tax

It has been many years since I had anything to do with Australian Tax but doesn't it work by offsetting, so any losses incurred on the property would have already been used to offset other income for that year and thus reduce net taxable income and therefore reduce the tax owed on previous ATO returns? Any applicable tax loss remaining is then carried forward until it can be utilised in future years.

Surely a loss thus already utilised (whether used already or carried forward in the ATO records) cannot be allowed for further loss relief in the UK, however it is recalculated, since each pound (or dollar) of a loss can only be used once...?

 

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By joiwomcow
10th Oct 2014 23:21

@james, @king_maker

" doesn't it work by offsetting, so any losses incurred on the property would have already been used to offset other income for that year and [...] utilised in future years."

That is what I understand.

"Surely a loss thus already utilised [...] can only be used once"

For the UK income, all losses were calculated from scratch independent of the Australian tax due, to obtain the UK tax due. If there was a taxable profit, and tax was paid in Australia, foreign tax credit relief would be applied. As there is a loss, this is not relevant.

In other words, tax is computed independently under each jurisdiction, but relief from double taxation is given in the UK for tax paid in Australia.

@king_maker  I am inclined to agree, since this gives a loss consistent with that of a UK resident over the period. Do you know if this case is documented on the hmrc website?

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By joiwomcow
11th Oct 2014 13:53

@portia Makes sense

I agree with the points above, i.e. a  £24,000 taxable income for Fred in 13/14. 

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