Howard and Monique Rawlings jointly bought a dwelling in Switzerland in August 2006 for CHF563,000. The purchase was partly funded by way of a Swiss franc mortgage secured on the property, which was let as a holiday let.
The property was subsequently sold in December 2016 for CHF730,000.
In their tax returns, which were filed in April 2018, the Rawlings each declared 50% of a total capital gain calculated as £39,433.
HMRC opened an in-time enquiry into the husband’s return in November 2018 and requested further information as to how the gain had been calculated.
After review, HMRC removed any deductions that had been made in connection with the mortgage, leading to an adjusted total gain of £267,207, to be allocated 50:50 between husband and wife. HMRC subsequently issued a discovery assessment under s29 TMA 1970 for Mrs Rawlings.
As a result of the adjustments, Mr Rawlings was charged with an additional £28,849.84 in income tax, while Mrs Rawlings’ return saw an additional £29,110.84 of income tax.
Neither fair nor reasonable
HMRC also issued penalties for careless behaviour under Schedule 24 FA 2007 against the Rawlings of around £4,000 each, based on 15% of the tax charged.
Although the Rawlings accepted their returns did not fully account for their capital gains, and they accepted the penalties levied by HMRC, they did not consider that the additional charge to income tax arising from the capital gain was calculated in line with the relevant legislative provisions. They also felt that the amount arising was neither fair nor reasonable.
The Rawlings’ fundamental objection to HMRC’s calculation of the gain was that it gave rise to an absurd charge to tax in light of the true economics of the transactions [TC08384].
Although the Rawlings did not challenge the removal of the mortgage costs per se, their argument was that the gain they made was not the sterling equivalent of the difference between the price received on sale and the price paid. This was because, unlike a domestic sterling mortgage, the GBP-CHF exchange rate fluctuation caused both the value of the property and the Swiss franc mortgage to increase in line with one another. In other words, their true investment in the Swiss property was not reflected in the tax charge.
Unfair but correct
The first tier tribunal (FTT) was tasked to determine whether the amendments to the Rawlings’ tax returns resulted in an overcharge to tax.
However “unfair” the result may have been, in this instance the FTT found that HMRC’s calculations and assessments were correct.
The FTT noted that the provisions within TCGA 1992 are limited, requiring a comparatively simple calculation: the cost of acquisition and incidental costs incurred wholly and exclusively in connection to both acquisition and disposal are to be deducted from the funds received from the sale, with the appropriate rate of CGT applied to the gain.
Where an element of the CGT calculation is in the form of a foreign currency payment, it should be converted to sterling, using the applicable exchange rate at the time of the giving or receiving of the funds.
Mortgage deductions are also not available when calculating capital gains, as the basis on which a purchase is funded is not taken into account when determining the difference between disposal value and acquisition cost. The fact that the Rawlings’ mortgage was a foreign currency mortgage could not influence the underlying premise that funding decisions carry no consequence in terms of the CGT calculation.
The appeal was dismissed.
Exchange rate fluctuation
This is a predicament that holders of foreign assets could well find themselves in, particularly if foreign exchange movements have not moved in a favourable way between purchase and sale.
As the FTT noted in its decision, the legislation is not predicated on a “fair” or even a “reasonable” basis of taxation.
While the FTT had sympathy for the Rawlings that their tax charge was so significantly influenced by the exchange rate fluctuation, the CGT provisions apply on their terms, meaning little could be done in this instance.
