A taxable gain on a property that has gone down in value?

Capital Gains Tax » March 11, 2022

Due to the way Capital Gains Tax (CGT) is calculated on overseas properties, there are times when a property which has decreased in value is actually subject to tax in the UK.  For example, if a property was purchased for CHF 600,000 and is sold for CHF 550,000, it may assumed that there is no gain and, therefore, no capital gains tax payable. However, this is not always the case.

When calculating a gain on an overseas property, you must take the purchase price and convert it to GBP on the date of purchase. You then deduct this from the market value/sale price which is also converted to GBP using the exchange rate on the relevant date.

In the recent case of Rawlings v HMRC, the question of how to calculate gains on an overseas property was before the Court.  

Mr and Mrs Rawlings claimed that undertaking the calculation that way ‘gives rise to an absurd charge to tax when the true economics of the transactions giving rise to the gain are taken into consideration. They consider that the charge is both unfair and unreasonable in all the circumstances.’

Due to the foreign exchange rates at the times of purchase and sale, the Rawlings had a gain of £267,207 rather than the £39,433 gain they had calculated.

However, the judges noted:

‘the legislation is not predicated on a “fair” or even a “reasonable” basis of taxation. Capital gains are calculated in a mechanistic way by reference to actual consideration received and given at its sterling equivalent in respect of assets however the acquisition of those assets are funded’.  Therefore, the gain per HMRC’s calculation was correct and the Rawlings would be liable to tax on the significantly increased gain.

The judges then considered whether the Rawlings in fact had a gain on the currency rather than a gain on residential property. This is relevant as the CGT rates for gains on residential property are 8% higher than for gains on non-residential property.  The Judges found that the Rawlings did not own a foreign currency asset, ‘the only asset they held was a Swiss residential property and the gain is therefore all to be taxed at the residential property rate’.

Key takeaways

  • In cases where it appears the value of an overseas property has decreased, if the parties are UK resident, a CGT computation should still be undertaken to ensure that the potential tax liability has been captured.
  • When instructing a tax expert, they will need to know not only the purchase price and current market value, but also the date the property was purchased and the dates of any enhancement expenditure.

Full case ref: [2022] UKFTT 32 (TC)

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