Unless you sell an overseas property that is situated in a tax haven the chances are you'll have to pay some form of overseas tax on any profit you make on the disposal.
If you're also UK resident and domiciled you'll also have to pay UK Capital Gains Tax on any gain made on the property disposal.
Being charged to both UK and overseas tax on the same gain is clearly not equitable and therefore the UK has 'double tax relief' rules to prevent the same gain being taxed twice.
There are basically two forms of relief:
- Credit relief, or
- Expense relief
Credit relief allows you to offset overseas tax directly against your UK CGT liability. By contrast Expense relief just gives the overseas tax as a deduction when computing your capital gain. Clearly credit relief is a much better bet as you're offsetting against tax rather than the gain.
Expense relief would usually be used where there is no UK capital gain. In this case credit relief would be no good (as there's no tax to offset the overseas tax against). Using expense relief though can still give you relief for the overseas tax.
When looking at credit relief there are a couple of key considerations:
- Firstly is the UK tax more or less than the overseas tax, and
- Secondly is the overseas and UK gain both calculated on the same period of ownership.
Where you have a case of the period of ownership being the same but the UK tax is less than the overseas tax you'll just offset the overseas tax to reduce the UK tax charge to nil. Any excess overseas tax would be lost.
Where you have a case where the period of ownership on which the gain is based is different in the UK from overseas you'll need to restrict the overseas tax based on the UK period of ownership. So if you had overseas tax of £20,000 and a UK period of ownership of 5 years but an overseas period of ownership of 10 years you'd reduce the tax eligible for double tax relief to £5,000.
The main case where you'd be looking to do this restriction for the overseas tax would be where the overseas property was purchased before March 1982. For UK tax purposes you'd rebase the asset at March 1982 but the overseas tax may well be based on the original purchase date and cost.
Given that the UK rate of CGT is now 18% or 28% you'll find that overseas tax credits will eliminate or at least substantially reduce the UK tax liability in many cases. Unless you're investing in an offshore tax haven, many countries will have rates of CGT on local property at rates higher than 18%/28% which would therefore fully cover your UK CGT liability.
Remember to convert the foreign tax to sterling at the date of disposal.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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