Many UK residents choose to buy property overseas for holidays or as investments. As well as the local tax issues that need to be addressed, ownership and the final disposal of the property can create tax problems back in the UK.
Previous UK case law has determined that sterling is the only permissible unit of account for computing chargeable gains and allowable losses. This can have adverse implications for taxpayers where assets have been held for a period in which there has been a large fluctuation in the value of sterling: in many cases this can trigger substantial UK tax bills that don’t reflect the true economic position of the taxpayer. This has been debated recently in the First Tier Tribunal in the case of Rawlings and another V HMRC.
What were the facts of the case?
The Rawlings, all UK tax residents, jointly purchased a residential property in Switzerland in August 2006 for CHF 563,000 partially funded by a Swiss franc mortgage secured against the property. The property was rented out as a holiday let throughout ownership and then sold in December 2016 for CHF 730,000.
In calculating the gain to report on their UK tax returns, the Rawlings deducted from the sale proceeds the mortgage repayments and related fees converted to sterling at appropriate exchange rates at the date of each repayment. This calculation method produced a gain of £39,433.
HMRC opened discovery assessments into the tax returns and on receipt of additional information provided, disputed the method of calculation, and argued that a revised gain of £267,000 was correct. This calculation did not take in to account any deduction for mortgage payments made during ownership. HMRC then raised penalty assessments totalling £8,664.09 for careless behaviour in reporting the disposals incorrectly on the tax returns.
Rawlings stated that where the depreciation of sterling over the period of ownership had been significant it should be held that the increase in value of the Swiss franc mortgage payments is allowable as a deduction against disposal proceeds. Without doing so, Rawlings argued that the gain arising would be considerably greater and not representative of the true economic position.
The First Tier Tribunal acknowledged that Rawlings found themselves in an “unfair” position. However, it also noted that the legislation is not predicated on a “fair” or even a “reasonable” basis of taxation. In practice, there have been cases where investors have actually lost money on the value of a property, but currency fluctuations have created a UK taxable gain. The First Tier Tribunal found against the taxpayers and the additional tax liability and penalties stood.
The UK Office of Tax Simplification is tasked with identifying unnecessary complexity in UK tax law. Recognising this problem with the rules, it had previously asked the Government to consider whether gains and losses on the disposal of offshore assets should in fact be computed by firstly calculating the gain or loss in the relevant foreign currency and then converting to sterling. The Government confirmed in November 2021 that there were no plans to make changes to how these disposals were computed.
How can we help?
International property or investment transactions create a range of tax complexities for UK residents individuals should be aware that the UK tax payable on such disposals may not reflect the true economic position. It is therefore important to seek expert UK tax advice on the implications of transactions before they are completed to understand the financial consequences.
For help and advice on any UK tax issue, please get in touch with your usual BDO contact or Fiona Hall. We advise private individuals and their advisers based in Switzerland and across the world, and have extensive experience in the specialist tax, residence and advisory issues facing this jurisdiction. Our London team work closely with our local teams in Zurich and Geneva.