Capital Gains Tax on foreign rental property

El_Torro

I'm having trouble helping a relative of mine submit his self assessment form. Normally he does it himself every year, as his affairs have been quite simple. Last June though he sold a rental property he owned in Spain and he's having trouble giving the details and calculating the right amount of CGT to pay. Some details:

He bought the property with his wife in 1989. It was bought in pesetas but in Euros that comes to about 140k. 
His parents then lived in the property (no rent paid) until 2002. 
Since then he has been renting the property out through an agency. I don't have the exact years it was rented out but I can find out.
In 2015 he divorced and as part of the divorce settlement he kept 100% of the property.
Last June he sold the property for 590K Euros. After expenses (estate agent fees, etc...) he ended up with 506K Euros. From what I can see on the details he has been sent he paid about 25K Euros in Capital Gains Tax (or whatever they call it there) in Spain. That 25K Euros is part of the 84K in expenses. 

When I helped him fill in his self assessment it only allowed for very few details, mainly the value at purchase, value at sale and the expenses of the sale. He also sold some unwrapped shares last year, though the tax won't be huge on that as the capital gain was only £14k. 

We haven't submitted the self assessment yet but the calculation is now saying that his tax bill for last year is about £90k. Usually it's about £3k. Most of the difference will be the capital gain on the sale of the property. 


This figure seems too high for me, especially since he has already paid 25K Euros in tax on this property in Spain. I don't expect you clever lot to come up with an exact figure, but any information on how I can make a better calculation would be great. I have already suggested he speaks to an accountant but he has already spoken to one who was pretty useless / unresponsive. If I can't sort it out he may need to find another accountant. 


I will ring HMRC to ask for their advice tomorrow, any suggestions on where else to look would be good too. 

[Deleted User]

I really would suggest that you seek professional advice on this given your statement - it could cost a lot more by doing this incorrectly and I wouldn’t necessarily be relying upon HMRC call centre advice. 

For example, the Spanish tax paid cannot be regarded as an ‘expense’ but can be claimed as a foreign tax credit against the U.K. liability. If he doesn’t know this, he really should not be completing the return.

Dazed_and_C0nfused

I'm no CGT expert but if you have claimed the foreign tax as an expense (which isn't necessarily correct) why would you expect it to further reduce any UK tax payable?

I think it might help if you provided details of the (few) CGT related entries actually included on the draft return?

El_Torro

[Deleted User] said:

I really would suggest that you seek professional advice on this given your statement - it could cost a lot more by doing this incorrectly and I wouldn’t necessarily be relying upon HMRC call centre advice. 

For example, the Spanish tax paid cannot be regarded as an ‘expense’ but can be claimed as a foreign tax credit against the U.K. liability. 

Fair point. He isn't against using an accountant, just that the last few he has used (there's been more than one over the years) he has not had a great experience with. Spending a few hundred pounds on a good accountant to get this right is probably worth the spend.

Dazed_and_C0nfused said:

I'm no CGT expert but if you have claimed the foreign tax as an expense (which isn't necessarily correct) why would you expect it to further reduce any UK tax payable?

I think it might help if you provided details of the (few) CGT related entries actually included on the draft return?

I don't have the form in front of me unfortunately. We did it  online at my relative's house and I don't have his login details. From memory though there was no field to add how much CGT has already been paid on this sale. Essentially the fields were:

Date of purchase 
Value at purchase
Date of sale
Value of sale
Any expenses incurred as part of the sale

That was it. So there's a lot of information which could potentially reduce the CGT that was not possible to include in the self assessment form.

[Deleted User]

El_Torro said:

purdyoaten2 said:

I really would suggest that you seek professional advice on this given your statement - it could cost a lot more by doing this incorrectly and I wouldn’t necessarily be relying upon HMRC call centre advice. 

For example, the Spanish tax paid cannot be regarded as an ‘expense’ but can be claimed as a foreign tax credit against the U.K. liability. 

Fair point. He isn't against using an accountant, just that the last few he has used (there's been more than one over the years) he has not had a great experience with. Spending a few hundred pounds on a good accountant to get this right is probably worth the spend.

Dazed_and_C0nfused said:

I'm no CGT expert but if you have claimed the foreign tax as an expense (which isn't necessarily correct) why would you expect it to further reduce any UK tax payable?

I think it might help if you provided details of the (few) CGT related entries actually included on the draft return?

I don't have the form in front of me unfortunately. We did it  online at my relative's house and I don't have his login details. From memory though there was no field to add how much CGT has already been paid on this sale. Essentially the fields were:

Date of purchase 
Value at purchase
Date of sale
Value of sale
Any expenses incurred as part of the sale

That was it. So there's a lot of information which could potentially reduce the CGT that was not possible to include in the self assessment form.

Was the foreign section of the return completed with regard to the foreign tax credit relief (correct) or the capital gains section (definitely incorrect) ?

Later in the completion of the form there would be an opportunity to claim the Foreign Tax Credit relief. 

On the ‘accountant’ issue, this is a return which will be scrutinised by HMRC due to the complexity - it is important to have the fullest of knowledge before submission and in response to any clarification sought by HMRC. For example, what exchange rate was used at each point, purchase, expenses, sale proceeds etc?

Jeremy535897

The situation is potentially rather more complex than suggested. The first task is to establish the sterling equivalent of the pesetas that the house cost when it was bought. At least half of the base cost will be based on this figure. Sterling equivalents of the costs of purchase, and any enhancements reflected in the value of the property at the date of sale, will need to be established too.

The next step is to establish whether the disposal by his ex-wife of her share of the property was a no gain no loss transaction, or whether it was treated as being at market value at the time. This will determine whether the acquisition cost is simply the sterling equivalent of the price paid when it was bought, or whether half of it is based on that figure, and half on the sterling market value in 2015.

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

Dazed_and_C0nfused

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

And they will presumably need removing from any eligible expenses??

That 25K Euros is part of the 84K in expenses. 

[Deleted User]

Dazed_and_C0nfused said:

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

And they will presumably need removing from any eligible expenses??

That 25K Euros is part of the 84K in expenses. 

Yes - it seems that the U.K. Capital gains section was completed and foreign tax paid claimed as an expense. 

As Jeremy has outlined, this is not a straightforward return. 

Jeremy535897

Dazed_and_C0nfused said:

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

And they will presumably need removing from any eligible expenses??

That 25K Euros is part of the 84K in expenses. 

It depends on what is in that figure. You can only claim once, either as a credit, or as an expense. Credit is almost always better, as it reduces the UK CGT bill pound for pound (assuming it is no more than the UK tax). However, the 84k figure may include some taxes which don't qualify for credit, so those would be deducted as an expense.

El_Torro

Jeremy535897 said:

The situation is potentially rather more complex than suggested. The first task is to establish the sterling equivalent of the pesetas that the house cost when it was bought. At least half of the base cost will be based on this figure. Sterling equivalents of the costs of purchase, and any enhancements reflected in the value of the property at the date of sale, will need to be established too.

The next step is to establish whether the disposal by his ex-wife of her share of the property was a no gain no loss transaction, or whether it was treated as being at market value at the time. This will determine whether the acquisition cost is simply the sterling equivalent of the price paid when it was bought, or whether half of it is based on that figure, and half on the sterling market value in 2015.

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

Good point on the initial value of the property. The GBP was a lot stronger against the peseta / Euro in 1989 than it is now so that should be taken into account. 

As for the divorce, they split their assets 50/50. The market value of the property was calculated in 2015 (I don't have that figure to hand but we do have that figure) and that figure was used as part of his 50% of the assets. 

One more question: Does the fact that the property was not rented out for a significant period of time relevant? Especially since his parents lived there rent free for roughly 13 years. Or is this information irrelevant?

[Deleted User] said:

Dazed_and_C0nfused said:

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

And they will presumably need removing from any eligible expenses??

That 25K Euros is part of the 84K in expenses. 

Yes - it seems that the U.K. Capital gains section was completed and foreign tax paid claimed as an expense. 

As Jeremy has outlined, this is not a straightforward return. 

Yes, this is correct. I now have a pdf copy of the self assessment (not submitted to HMRC yet) and we did fill it in that way. We didn't declare the foreign tax in the correct section. 

[Deleted User]

Jeremy535897 said:

The situation is potentially rather more complex than suggested. The first task is to establish the sterling equivalent of the pesetas that the house cost when it was bought. At least half of the base cost will be based on this figure. Sterling equivalents of the costs of purchase, and any enhancements reflected in the value of the property at the date of sale, will need to be established too.

The next step is to establish whether the disposal by his ex-wife of her share of the property was a no gain no loss transaction, or whether it was treated as being at market value at the time. This will determine whether the acquisition cost is simply the sterling equivalent of the price paid when it was bought, or whether half of it is based on that figure, and half on the sterling market value in 2015.

The UK-Spain double tax agreement will allow a deduction of Spanish tax from the UK tax liability, but cannot result in a refund. Box 51 of SA108 is where to enter foreign tax credits.

SA 108 should not be used for claiming foreign tax credit. Instead complete SA 106 and declare foreign tax paid and foreign tax credit inboxes 37 and 39 respectively.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1148476/SA106_2023.pdf