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Tax implications of non-resident selling UK residential property

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Hi,

 

My sister and I inherited our family home in 2012/2013. At that point I did not live there anymore. A year later I moved to Germany. My sister continued to live in the property but now agreed to sell it. I was positively surprised that I would not have to pay taxes on the income from selling the house in Germany until I realised that the UK has created a Capital Gains Tax (CGT) for non-residents that are selling a residential property in the UK. So it seems that this applies to me, while my sister will not have to pay CGT because she lives in that property.

 

Apparently, there are three methods of of calculating the non-resident CGT: rebasing, straight-line apportionment and gain over whole period. The first depends on the value of the property on 5 April 2015.

 

Is there any way to retrospectively obtain a credible estimate of the value of the house at that time?

 

All calculations depend on the value of the property when our father died. We have had an estate agent in at the time providing an estimate. I think this was necessary to determine our liability for inheritance tax. However, estate agents state generally that their quotes are "for marketing purposes only" and may not reflect the true market value at that time. So, here we have another relatively loose point of reference. It seems quite a bit of guesswork involved in determining the tax due. Do you have any advice of how to approach that?

 

Will the solicitor/conveyancer pay the tax or do I have to take care of that?

 

Is there anything else that is relevant in determining the tax owed to the UK as a non-resident selling UK residential property?

 

 

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Have you looked at the following HMRC pages?

Non-resident Capital Gains for land and property in the UK (Self Assessment helpsheet HS307) - GOV.UK (www.gov.uk)

Tell HMRC about Capital Gains Tax on UK property or land if you’re non-resident - GOV.UK (www.gov.uk)

Work out your tax if you're a non-resident selling UK property or land - GOV.UK (www.gov.uk)

 

I assume you may have looked at some of those, given that you have looked at the 3 calculation methods.

 

Based on my reading of the guidance, and as there is unlikely to be a loss, I assume you will look at methods 1 and 2 (rebasing and apportionment).   If no capital enhancements have been done to the property since you owned it, then, in a linearly-rising market the two methods should give a similar result.  If you did improve the property between acquisition and 2015, then method 2, apportionment, may give a more favourable result for you.  If you did the improvements after 2015, then method 1 may give the more favourable outcome.  Personally, I would run through both calculations using the HMRC calculator and then decide which one to adopt - either way, you need the 2015 valuation!

 

In terms of values, you will have the probate value for acquisition in 2012/13 (i.e. that used to establish the values for Inheritance Tax purposes in relation to the estate of your deceased parent(s)).  It is then up to you to obtain a realistic valuation from an independent valuer, or and average from say 3, and to use that for the 2015 value.  If HMRC challenges the value using its enquiry powers to enquire into your tax return then the ultimate arbiter would be the Valuation Office Agency but as long as your engaged valuer(s) provide a reasonable value or average of their values, you should be fine...  This is not really any different from completing the Inheritance Tax return when dealing with the estate - HMRC could have challenged your 2012/13 valuation of the property but did not, so that value is now cast in stone and should/must be used.  The solicitor may be able to advise on how best to obtain the 2015 value.

  

You are liable for calculating and paying the tax and for submitting your return (using the Report and pay Capital Gains Tax on UK property - GOV.UK service), within 30 days of the sale completing.  Don't miss the deadlines, or penalties may be charged. 

 

If you look at the above links and follow the additional links on those pages you should be able to answer most of your questions but feel free to come back with others.  I cannot claim to be an expert on this but may know my way around the HMRC website as a former "insider"... 

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13 hours ago, GaryC said:

either way, you need the 2015 valuation!

I think I must have been sleeping when I wrote this - time apportionment does not require a valuation at 2015.  You literally time apportion the gain over the period from 2015 to date of completion of the sale.  So, if the market has risen at a pretty steady rate and you have not made capital improvements that are reflected in the price on sale, e.g. an extension, then time apportionment may be the easiest option.  

 

The annual exempt amount allowance will be available, so tax will only be payable if your share of the gain is more than £12,300 in 2021/22.

 

Oh, and if you want to quiz HMRC on any of this, try their new(ish) customer forum  Customer Forums - Community Forum - GOV.UK (hmrc.gov.uk) - some of the responses are, in my view, a bit cryptic and/or short but you will get pointed in the right direction.

 
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You do need the 2015 value if you wish to use the rebasing method. This was beneficial for me when I sold my property, as the value had increased more rapidly since 2015. 

 

I obtained the 2015 value by asking the estate agent who sold my property. He provided a valuation without additional charges, and it was accepted by HMRC. 

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11 minutes ago, apel said:

You do need the 2015 value if you wish to use the rebasing method. This was beneficial for me when I sold my property, as the value had increased more rapidly since 2015. 

 

Indeed but I was correcting my error where I suggested it is also needed for apportionment. 

 

I am not surprised that your value was not challenged by HMRC.  Remember, UK tax is now run on a self-assessment basis where you state your tax position and HMRC has a period of time in which to challenge your position (i.e. undertake a compliance check, previously called an enquiry) based on their internal risk assessment processes.  If your valuation is reasonable it is likely not to be challenged. 

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Not my area of expertise but why would there be no German tax consequences?  You have not lived in the house or owned it (your share) for more than 10 years and are tax resident in Germany.  I am sure someone will chip in and confirm the position... 

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1 hour ago, GaryC said:

why would there be no German tax consequences?

You have not ... owned it (your share) for more than 10 years and are tax resident in Germany.  

Under German law, heirs also "inherit" the purchase dates.

--> if the parent who died had bought the house (or inherited it him/herself) more than 10 years ago before the sale of the house now in 2021, then the profit from selling the house would not ne subject to tax if the house were located in Germany, and therefore also not subject to Progressionsvorbehalt since it is located in the UK, i.e. it does not get mentioned at all in your German tax return: https://www.toytowngermany.com/forum/topic/335156-german-capital-gains-tax-on-overseas-property/?do=findComment&comment=3757928

 

The only exception would be if you had fallen foul of the "effectively taxed" clause in article 23 of the double taxation agreement (DTA) between Germany and the UK, i.e. if you commit tax evasion by not declaring the profit from selling the UK house in your UK tax return, since in that case, the taxation rights fall to Germany and you would have to tax the entire profit (= difference between selling price and parent's purchase price) in Germany with your personal variable income tax rate (up to 42%): https://www.gkkpartners.de/mandanteninformationen/veraeusserung-auslaendischer-ferien-immobilien-1789.html

Article 23 (1) a) of the DTA: 

  • a) There shall be exempted from the assessment basis of the German tax any item of income arising in the United Kingdom and any item of capital situated within the United Kingdom which, according to this Convention, is effectively taxed in the United Kingdom and is not dealt with in subparagraph b).
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Interesting.  In the UK the acquisition date is when you took ownership, e.g. through purchase or inheritance and the value at that date...

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Just to be clear: the taxation right falling back to Germany in case the profit isn't declared in the UK tax return only matters if the house on the date of the sale has not been owned for more than 10 years (taking into account "inherited" purchase dates). 

 

If it has been owned for more than 10 years (adding up all ownerships times of the testators too), the profit is anyway not taxable under German law.

 

But in both options, the Finanzamt will send HMRC a note informing them that they have noticed income that hasn't been taxed in the UK where it should have been taxed.

 

20 minutes ago, GaryC said:

In the UK the acquisition date is when you took ownership, e.g. through purchase or inheritance and the value at that date...

That sounds like the "step-up in basis" that is practiced in the USA after you inherit financial assets (stocks, funds, bonds, ...) and real estate: https://www.investopedia.com/terms/s/stepupinbasis.asp

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My family owned the property for 30 odd years, so German taxation does not apply and would not apply given that the UK has retained taxation rights on UK property. At least that is my current understanding.

 

On 12/07/2021, 20:44:41, apel said:

You do need the 2015 value if you wish to use the rebasing method. This was beneficial for me when I sold my property, as the value had increased more rapidly since 2015. 

 

I obtained the 2015 value by asking the estate agent who sold my property. He provided a valuation without additional charges, and it was accepted by HMRC. 

 

@apel Should it not be the opposite? If there is a higher increase of value before 2015 than the rebasing method should compute a lower CGT to be paid.

 

I asked our estate agent for a free estimate and the sales guy referred me to a surveyor who quoted over 400 GBP for a valuation. Crazy. Maybe I should get back to them.

 

One advice I found on the web on how to minimise CGT was to gift half of my share of the property to my wife so that we both could claim the full annual CGT exemption. It would definitely be a form of partial tax avoidance. Apparently, it is not clear whether this would be legal or not. It might be that doing this shortly before selling the house might be considered improper by the HMRC. I am also not sure whether it is worth it given that it complicates the transaction. A solicitor suggested that doing so might jeopardise the chances for the buyer's to obtain a mortgage as it raises a red flag with lenders when an owner owned a property for less than six month. 

 

20 hours ago, GaryC said:

Interesting.  In the UK the acquisition date is when you took ownership, e.g. through purchase or inheritance and the value at that date...

 

Except in the case of gifting to a spouse where the original acquisition date remains valid.

 

@all Thanks for all your insight!

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4 minutes ago, Chris Marston said:

@apel Should it not be the opposite? If there is a higher increase of value before 2015 than the rebasing method should compute a lower CGT to be paid.

 

Sorry, yes, you're right, that's what I meant. 

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7 minutes ago, Chris Marston said:

Except in the case of gifting to a spouse where the original acquisition date remains valid.

 

Indeed but not relevant of course in the context of you original question...

 

In terms of gifting half of your share to your wife I think you are correct that it would complicate matters and have legal consequences, not just CGT, for a potential saving of the AEA at 18% - £2,200 or so.  In theory SDLT would payable (though the 0% band is currently £250,000) and Land Registry plus solicitor/conveyancer costs, leaving aside the view HMRC or lenders may take of a transaction that is without any economic substance other than seeking to mitigate a tax liability?   

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@GaryC I'm not sure about the question mark but you're definitely right.

 

What annoys me about the CGT tax law is how it applies to me and my sister. She is exempt from CGT as she lives rent free in the house, while I am paying rent in Germany and will have to pay CGT on top due to this double taxation agreement between Germany and the UK. I understand, however, the purpose of expanding the taxation to non-residents from a British perspective. As I understand it, there is a lot of foreign investment in UK property driving up prices for normal Brits.

 

 

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Yeah, not sure why the question mark made the cut, sorry about that.

 

From a policy perspective, when a person disposes of an asset they are subject to CGT on any gain they make and can carry forward a loss to set against other gains in the future. There are a variety of reliefs and exemptions but this fundamental position has nothing to do with the double tax agreement.  That is there to ensure that where both the UK and Germany (in this case) have a right to tax income or gains - one because it arises in its jurisdiction (the UK here) and the other because it has the right to tax its residents (Germany here) on their worldwide income - the taxpayer does not get taxed on that same income or gain twice.   

 

I also think you are also mixing up rent and tax, or trying to make a link that simply isn't there.  You and you sister jointly own a valuable asset that you sell.  That gives rise to taxable event.  However, where that asset is a residential property, and where it has been a person's principle private residence, a specific relief is available, meaning, in simple terms, when we move home we don't have to pay tax on any gain.  This is why your sister's gain will not be taxed. You, however, are doing no more than disposing of an asset.  The fact that you pay rent in relation to your principle residence is, not to be too blunt, irrelevant: it is completely unrelated to the disposal of the asset in question.  The same would apply if your were resident in the UK and rented property or owned your residence, subject to a mortgage.  

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