When selling property abroad, UK residents are often surprised to discover that they may be liable to pay Capital Gains Tax (CGT) on any profits made from the sale. While the property might be located overseas, the tax rules of the UK apply to worldwide income and gains. In this blog, we'll explore how CGT applies to the sale of overseas property for UK residents, the allowances available, and the steps you need to take to stay compliant.

What is Capital Gains Tax?

Capital Gains Tax is a tax on the profit you make when you sell or dispose of an asset that has increased in value. It is the gain you make that is taxed, not the total amount of money you receive. CGT applies to a wide range of assets, including stocks, business interests, and real estate, whether in the UK or abroad.

For UK residents, CGT is applied to the sale of overseas property if the profit exceeds the annual CGT allowance. The government updates this allowance regularly, and as of the 2024-2025 tax year, it is £6,000 for individuals.

Are UK Residents Liable for CGT on Overseas Property?

Yes, if you are a UK resident, HMRC requires you to pay CGT on the sale of your overseas property. This applies even if you have already paid a similar tax in the country where the property is located. The UK government taxes UK residents on their worldwide income and gains, which includes profits from selling foreign property.

How to Calculate CGT on Overseas Property

To calculate the capital gains on your overseas property, you first need to establish the profit you made from the sale. This involves subtracting the original purchase price (plus any allowable costs such as legal fees, improvements to the property, and selling costs) from the sale price.

For example:

• Purchase price: £200,000


• Allowable costs (improvements, legal fees, selling costs): £50,000


• Sale price: £300,000

Your gain would be £300,000 - (£200,000 + £50,000) = £50,000.

Next, subtract the CGT annual allowance of £6,000 (as of 2024-2025) from your gain. This leaves a taxable gain of £44,000.

CGT Rates for Overseas Property

The rate of CGT you pay depends on your total taxable income and the size of the gain. In the UK, there are two main rates for CGT on residential property:

• 18% for basic-rate taxpayers


• 28% for higher- and additional-rate taxpayers

To work out which rate applies to you, you need to add your taxable gain to your other income. If the total stays within the basic-rate tax band (up to £50,270 for 2024-2025), you'll pay CGT at 18%. Any amount above this threshold is taxed at 28%.

Let’s take an example:

• Your income for the year is £40,000


• You have a taxable gain of £44,000 from selling your overseas property

The first £10,270 of the gain (to reach the basic rate threshold of £50,270) is taxed at 18%, and the remaining £33,730 is taxed at 28%.

Foreign Tax Credit Relief

If you've already paid tax in the country where the property is located, you may be able to claim Foreign Tax Credit Relief. This relief ensures you are not taxed twice on the same gain. You can usually claim a credit for the foreign tax paid against your UK CGT liability. However, you can only claim relief up to the amount of UK CGT payable on the gain.

For example, if you pay 20% tax in the country where the property is located and 28% CGT is due in the UK, you would only pay the 8% difference in the UK.

Reporting and Deadlines

Any gains from the sale of overseas property must be reported to HMRC. UK residents have to include the details of the sale and the gain on their annual self-assessment tax return.

You must report the gain and pay any tax due by 31st January following the end of the tax year in which you made the sale. For example, if you sell the property in the 2024-2025 tax year, you need to report the gain by 31st January 2026.

If you don’t usually file a self-assessment tax return, you’ll need to notify HMRC of your liability by 5th October following the end of the tax year when the property was sold.

Tips for Reducing Your CGT Liability

While you can't avoid CGT entirely, there are several ways to potentially reduce your tax liability:

1. Use your annual exemption: Ensure you make use of your CGT annual allowance of £6,000.


2. Offset losses: If you’ve sold other assets at a loss, you may be able to offset these against your capital gain.


3. Timing the sale: Consider spreading out disposals over different tax years to make full use of your annual exemption.

Conclusion

Selling an overseas property can result in a significant CGT liability for UK residents. It's essential to understand how the tax rules work and to be aware of any reliefs that may be available to you, such as Foreign Tax Credit Relief. Proper planning, timely reporting, and understanding the tax rates will help you stay compliant and possibly reduce the amount of tax you owe. If you’re unsure about your obligations, it’s always a good idea to seek professional advice to ensure you're paying the correct amount of tax.