CGT: Cross border confusion

property in Switzerland
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Capital gains tax is tricky, and especially so when the property disposed of and the seller are located in different countries.

Property overseas

When the property is located outside the UK, the consideration for the disposal, and possibly the purchase, are likely to have been made in a foreign currency. In that case, you may think the gain should be calculated in the local currency, then translated into sterling at the disposal date, but you would be wrong.

Mr & Mrs Knight [TC05544] fell into this trap when they calculated the gain on the disposal of their property in Switzerland. They purchased the property in 1988 in swiss francs, and sold it in 2010 for consideration received in swiss francs. So the Knights deducted the cost from the proceeds and translated the resulting gain from swiss francs into sterling at the exchange rate applicable on the date of disposal.

Case law

It was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.  

This method pulls into the computation any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-related gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Seller is overseas

When seller is not tax resident in the UK, and they are selling a residential property in the UK, the gain may be wholly or partly subject to non-resident CGT (NRCGT). This a new tax that applies to gains accruing from 6 April 2015 onwards.

Where a UK property has been held for some years and the seller remains non-resident (the temporary non-resident rules do not apply), much of the gain arising will escape this new tax.

Tax payable

NRCGT can apply to companies as well as individuals, and is charged at the rate of CGT or corporation tax which would apply if the taxpayer had been UK resident at the time of the sale.

The shocking thing about this new tax, is that it can be due for payment just 30 days after completion of the property disposal. If the taxpayer is already registered with HMRC for self assessment, (personal or corporate) or ATED, they can elect to pay the NRCGT alongside their self assessed UK taxes.

Tax return

However, every taxpayer subject to NRCGT must make an online report of the disposal to HMRC within 30 days of the completion date. This NRCGT return must be completed whether or not there is any tax to pay, and the same penalties for late reporting apply as for late SA returns.

This very short reporting deadline has caught out a number of taxpayers already, and HMRC has issued penalties for late filing of the NRCGT return. If your client has received a penalty for late filing of the NRCGT return, it is worth appealing against the penalty. The law was changed by FA 2016, s 91 (with retrospective effect), to make the NRCGT return optional in certain circumstances where a gain or loss does not arise. 

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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