Capital Gains Tax on property abroad

kelfish

Hi,

Thanks in advance for any posts.

About 10 years ago I bought a property in USA. I sold the property in 2012. When selling the property I made a small gain in US$ terms but after paying realtors fees and closing costs it turned into a loss of about $9000. Due to foreign investment regulations in the USA the IRS withheld 10% of the proceeds pending any tax that was payable on any profit and I had to get a US accountant to prepare simple accounts in relation to the sale of the house. The accounts confirmed that we made a loss but it took over 1 year before the monies that had been held by the IRS were released.

Due to this and other issues I left the proceeds of the sale in a US bank account. As I had made a loss I did not include it in my tax return and planned to include it when bringing the money back to the UK which I did in 2016 after Brexit and the huge change in the US$ rate.

I am in the process of filling in my tax return and reached the 'date of disposal' question and have now noticed that although I made a loss in dollar terms I made a gain when I sold the house in UK£ terms and believe that I should have included the sale in the return for the year 2012/13. I have not tried to avoid tax as in 2012/13 I have no capital gains and had I reported the sale in my 2012/13 return the gain would have been under the capital gain limit and no tax would have been payable whilst in reporting the gain now I am actually paying capital gains at the higher rate on the gain!! I have, of course, included the gain from the foreign exchange gain.

At this moment I am planning of writing to HMRC to explain the position but wonder if that would just compound the problem and even wonder if I did explain the position would I have to pay capital gains tax on the gain made on the property.

Any advice would be appreciated.

GDB2222

I think you have two separate transactions. The house sale, which went through as a loss, and the gain on the US$ account. It's not entirely obvious whether the currency gain is taxable. It's complicated. See for example https://www.taxation.co.uk/articles/2010/10/27/21191/currency-gains

If the currency gain is subject to CGT, you may be able to offset part of the gain with the loss on the house. Depending on the size of the figures involved, you may be best off getting professional advice. The trouble is that the advice may cost more than the tax!

kelfish

Thanks for the reply.

The problem is that the loss on the property in US$ was in fact a gain when converting to UK£ due to the change in the exchange rate between the date the property was bought and the date it was sold. I just did not realise that that was the way it should be looked at when reporting tax. Hence, I am reporting the gain 4 years late! As I said it is a little strange in that if I had reported it in 2012 the gain was below the limit and would not have been taxed.

I am not sure how HMRC will view it. They have not suffered a loss in tax recovery (in fact it is a gain if it goes through this tax year) but it is 4 years late.

Cook_County

Your assumption about UK tax was incorrect based on UK case law. HMRC would like you to use their worldwide disclosure facility.


Any currency gain or loss on the cash has no UK tax consequences.


You could have avoided the 10% FIRPTA withholding by filing Form 8288-B when the property was sold; but that is not important today.

kelfish

Thanks for your response

kelfish

If there are any further responses I would welcomethem

00ec25

as already explained, you have 2 transactions:

1. the purchase and sale of a US property upon which you must calculate your CGT liability using the exchange rate applicable to the date of purchase and the date of sale. On that basis, if you made a loss after costs in USD, you may, or may not, have made a loss in £ terms. You need to do the calculation to be sure, but your CGT liability is, for sure, based on the £ values

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78310

2. If the exact date of the sale in 2012 was after 6 April 2012, the second part, dealing with the repatriation of cash held in a USD bank account starting in 2012 back to £ held in the UK in 2016, is, as Cook County (an accountant by trade) says, entirely exempt from CGT as the rules changed wef 6 April 2012.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78321

the link provided in post #2 is from 2010 and does not reflect the rule change made in 2012

PRE 6 April 2012 rules (not applicable after that date)
The pre April rules apply to cash withdrawals, not cash balances, so as long as you did not withdraw USD and convert to £ before 6 April 2012, you won't have to worry about the old rules anyway, but for the record only, they were:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78322

Cook_County

HMRC will doubtless look on you kindly, but if there is UK tax to pay HMRC suggest using their facility to minimise penalties. Had you used an accountant in the UK to handle both the US and UK reporting (rather than one located in the States) you would have heard about the UK tax issues rather sooner.

jimmo

If HMRC get involved in this they will require that capital gain on the property is properly allocated to the tax year in which the disposal of the property took place. If, as you say, you realised a capital gain of less than the CG annual exempt amount for that year then there was no CGT liability.
If you completed a Self Assessment Return for that year you were probably wrong in failing to declare the capital gain but the penalty for such a failure is a multiple or percentage of the tax "lost"
As the tax "lost" is nil, the penalty is nil.
If you were not required to complete a Self Assessment for that year you have not failed to notify liability and have done nothing wrong.
http://www.legislation.gov.uk/ukpga/1970/9/section/7/enacted

As others have said above there are no tax consequences in converting your US$ to Sterling.
If you are now comfortable that no tax is due the history is probably best left unsaid.

00ec25

jimmo wrote: »

If HMRC get involved in this they will require that capital gain on the property is properly allocated to the tax year in which the disposal of the property took place. If, as you say, you realised a capital gain of less than the CG annual exempt amount for that year then there was no CGT liability.
If you completed a Self Assessment Return for that year you were probably wrong in failing to declare the capital gain but the penalty for such a failure is a multiple or percentage of the tax "lost"
As the tax "lost" is nil, the penalty is nil.
If you were not required to complete a Self Assessment for that year you have not failed to notify liability and have done nothing wrong.
http://www.legislation.gov.uk/ukpga/1970/9/section/7/enacted

As others have said above there are no tax consequences in converting your US$ to Sterling.
If you are now comfortable that no tax is due the history is probably best left unsaid.

wow, it must be Christmas, Jimmo hasn't taken issue with posts about CGT

Jimmo being the now retired HMRC CGT tax inspector who knows everything about CGT, and although rarely first on scene (and selective about posts he replies to), once he has spoken there is nothing more anyone can say as that will be that!

kelfish

Thank you all for your very knowledgeable replies. You have been a great help.

If anybody else has anything to add please feel free.