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The strengthening euro and the reduced price of property could combine to create a capital gains tax headache for British taxpayers who own foreign property, PKF has warned.
The company of accountants has also noted that people wanting to sell their overseas holiday homes and then reinvest the equity may find their situation to be especially problematic.
PKF director of personal tax Matt Coward explained that recent movement in sterling against the euro means that vendors might be forced to take ‘dramatic currency risks’.
He said that Britons ‘could face an unexpected capital gains tax liability if they sell an overseas property that they have owned for a couple of years’.
Even a euro-denominated loss due to a fall in property prices might give rise to a UK capital gains tax liability.
To illustrate his example, Mr Coward explained how a UK national who bought a Spanish property in January 2007 for €1.25m (then equal to £854,818) might sell this month for €1m (equal £966,744 in sterling).
Although there is a loss in euros, there is a profit in sterling of £111,926 on which the vendor will have to pay UK CGT of at least £18,419.
The position could be ‘particularly difficult’ if the vendor then reinvested all resulting equity in a new overseas property, because as he or she may then have difficulty finding the money to pay the British tax liability when it becomes payable in January 2010.
‘Even those who are aware they have a UK tax problem will often realise a smaller amount of post-tax equity from their properties than they may have expected,’ said Matt.
If the vendor were to leave the equity in a foreign currency bank account, he or she could face a ‘double hit’ if the value of sterling recovers before the UK tax is payable on any gain.
‘Unwitting failure by holiday home owners to report such gains will not be met with a sympathetic approach from HMRC,’ added Matt.
