Tax payable on sale of UK Property

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Hello

I wonder if anyone knows whether the German 10 year tax exemption rule starts running from 

exchange or completion of a UK property purchase? In our case we exchanged on a flat off-plan more than 10 years ago but actual completion was delayed and occurred 9 years ago. There is no UK CGT payable due to rebasing.

Would appreciate anyone‘s insights or experience of this.

Thanks, 

Pearly

 

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I assume that "the date of the purchase contract" is what we would call "completion", i.e. the date on which one legally signs the contract, pays the purchase price and takes legal possession of the property.  Exchange of contracts pre-dates that and one owns nothing at that point.

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Interesting - subtly different from the UK.

 

This article explains the basics of the UK process quite well.  Exchange and completion - Which? 

 

Exchange is when your legal firms swap copies of the signed contracts but they are not executed at that date.  As the article says, you are committed at that point to completing the purchase and will be subject to penalties if you back out - usually loss of your deposit.  Execution of the contract happens at completion when the date is entered and the transfer of ownership occurs.  Vendor gets their money; purchaser gets the keys and can move in.  This triggers some admin for your legal firm. They have 14 days to file your Stamp Duty Land Tax (SDLT) return and to pay the SDLT.  They also register the transfer of Title at Land Registry, generally within 30 days of completion.  There may be other tasks behind the scenes but I cannot think of any.  For all tax purposes (SDLT, CGT, Council Tax etc) completion is the crucial date.

 

If I understand correctly, that is subtly different from Germany, in that the processes after signing the contract are more protracted in Germany but in both countries it seems to be when the contract is actually executed.  If so, the OP would, I think, have to use the completion date, not exchange date for calculating the 10 years.     

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Would any gain fall under Progressionvorbehalt given that the UK has first rights on taxing property under the DTA?

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44 minutes ago, hamsterberlin said:

Would any gain fall under Progressionvorbehalt given that the UK has first rights on taxing property under the DTA?

If only up to 10 years elapsed between purchase and sale and the UK "effectively taxes" the profit from the sale, then yes, the profit from the sale would be income subject to Progressionsvorbehalt in your German tax return, so it would raise your German income tax rate on your other income, i.e. on the income on which Germany does have the taxation rights.

This right is given to Germany in the double taxation agreement (DTA) between Germany and the UK in article 23 (1) d): https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Grossbritannien/2010-11-23-Grossbritannien-Abkommen-DBA-Gesetz.pdf?__blob=publicationFile&v=3

  • d) Germany, however, retains the right to take into account in the determination of its rate of tax the items of income and capital which are under the provisions of this Convention exempted from German tax.

You may have noticed the "effectively taxes" in my first sentence.

What is that about?

The double taxation agreement between Germany and the UK has an "effectively taxed" clause (= subject-to-tax clause) in article 23 (1) a), which basically means that even though the DTA assigns the UK the taxation rights on the profit from the sale of real estate located in the UK in article 13 (1), if the UK then does not tax it, the taxation rights fall back to Germany:

  • 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.)

So when is profit "effectively taxed"?

If, for example, you declare the profit from the sale of the UK flat/house in your UK tax return and it is less than the tax-free allowance and you therefore do not have to pay any UK income tax, then that income was still "effectively taxed".

 

For a case where the UK real estate wasn't "effectively taxed" and therefore Germany's highest court, the BFH ruled that the taxation rights on the profit from the sale revert to Germany, please see here: https://www.gkkpartners.de/mandanteninformationen/veraeusserung-auslaendischer-ferien-immobilien-1789.html

 

***************************************************************************************

 

If more than 10 year elapsed  between purchase and sale, then no, the profit from the sale of your UK flat/house would then not appear at all in your German tax return.

 

Summary:

Wait until more than 10 years have elapsed before selling the UK flat/house!

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Thank you for all the very helpful info.

 

Panda, I do have one follow up question if it’s not too cheeky to ask:

 

Just on your „effectively taxed” point: We would be subject to UK Capital Gains Tax in the UK with the sale of our property, but would effectively not pay any tax under the so called rebasing rules. This is a rule which allows UK non-residents to use the value as at 5 April 2015 instead of the historic purchase price, since this was when the UK introduced a non-resident CGT on real estate for non-residents (Work out your tax if you're a non-resident selling UK property or land - GOV.UK (www.gov.uk)). Before, this only existed for UK residents (not selling their primary residence property etc.).

 

Do you have any experience whether this is still considered to be “effectively taxed” for those DTA purposes or whether this is considered to be a specific non-resident exemption rule which leads to the DTA rule you mentioned allowing German to tax?

 

Thank you

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40 minutes ago, pearlyqueen said:

Just on your „effectively taxed” point: We would be subject to UK Capital Gains Tax in the UK with the sale of our property, but would effectively not pay any tax under the so called rebasing rules. This is a rule which allows UK non-residents to use the value as at 5 April 2015 instead of the historic purchase price, since this was when the UK introduced a non-resident CGT on real estate for non-residents (Work out your tax if you're a non-resident selling UK property or land - GOV.UK (www.gov.uk)). Before, this only existed for UK residents (not selling their primary residence property etc.).

Haven't had such a case yet, sorry.
My clients had all passed the 10 year ownership mark.

 

https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-calculating-taxable-gain-or-loss#rebasing-from-2015

But just to let me understand, if we take the numbers from the example on the above website:

62250377892cf_2022-03-0619_54_13-Workout

 

Rebasing to 5 April 2015 would in this case mean having to declare 220,000 GBP profit in the UK tax return?

 

220,000 GBP

-12,300 GBP capital gains tax allowance

______________________

207,700 GBP to be taxed?

 

--> Did your own flat not increase by very much since 2015, i.e. by less than 12,300 GBP, since you say that you won't have to pay any tax to the UK?

 

 

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In my view the gain is "subject to tax", i.e. "effectively taxed" as it is not exempt from UK CGT.  HMRC allows 3 ways to ascertain the gain when you dispose of UK property as a non-resident and you are allowed to use the one that results in the lowest chargeable gain.  All other CGT rules then apply in terms of allowable deductions in calculating the gain and your annual allowance.  If that ends up in nil tax payable, then that is not because the gain was exempt but because, when applying the UK rules, there was no tax due. That is pretty much demonstrated by Panda's example above.

 

I had a quick look at the tax case Panda mentioned and it is quite complex and specific to its facts in relation to an investment fund.  If I understand it correctly, it was not a question of whether a capital gain was taxable or exempt but whether the amount in question was a capital gain at all, or an amount subject to what is described as clawback taxation (not a term I am aware of).  As such, it makes sense that the court found that the CG article did not exempt the amount from German tax.

 

I cannot think of any circumstance in which a gain on the sale of immovable UK property would be exempt from CGT, though I have been involved in tax for long enough to "never say never"...  

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The value of our flat has gone up since purchase, but current value is less than the 2015 

valuation we got done for the rebasing when those rules came into force hence no CGT payable.

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Yes, that sounds like "effectively taxed".

But please note that the Progressionsvorbehalt if you sell after less than 10 years will be calculated according to German rules, i.e.:

 

selling price

- ancillary costs at sale

- intitial purchase price, i.e. not value on 5 April 2015

- ancillary costs at purchase

_________________________________________

= profit subject to Progressionsvorbehalt

 

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Out of interest, was that a professional valuation, or an estate agent giving a view?  It's just that in most areas prices have risen since 2015.  The media hype would suggest they have risen massively in every area but that is not the case.  We have a property and have kept an eye on prices as and when similar ones in the same complex come on the market.  While nothing like the increases pronounced in the media, we have seen a steady rise in value - maybe 10% since 2015.  

 

That said, even if there is an increase in value, £12,300 of any gain is covered by the annual allowance for each person, so if it is a joint asset, £24,600... 

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2 minutes ago, PandaMunich said:

Yes, that sounds like "effectively taxed".

But please note that the Progressionsvorbehalt if you sell after less than 10 years will be calculated according to German rules, i.e.:

 

selling price

- ancillary costs at sale

- intitial purchase price, i.e. not value on 5 April 2015

- ancillary costs at purchase

_________________________________________

= profit subject to Progressionsvorbehalt

 

Good point.  As you said earlier, keep the property for at least 10 years if possible, even if that "costs" money in the UK.

 

Would I be right in saying that if a person is earning, say 40k in Germany and sells a UK house they owned for 9 years and 364 days for a gain of 30k € under German rules, but less than £12k under UK rules, then while there is no UK CGT, Progression would hit them with over 3,000€ in Germany? If so, delaying the sale, even if it "cost" £1,000 by way of extra costs, lost income or capital loss would still be worth it...

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29 minutes ago, GaryC said:

Good point.  As you said earlier, keep the property for at least 10 years if possible, even if that "costs" money in the UK.

 

Would I be right in saying that if a person is earning, say 40k in Germany and sells a UK house they owned for 9 years and 364 days for a gain of 30k € under German rules, but less than £12k under UK rules, then while there is no UK CGT, Progression would hit them with over 3,000€ in Germany? 

Yes, 3,245€ in additional tax because of Progressionsvorbehalt: https://www.finanzamt.bayern.de/Informationen/Steuerinfos/Steuerberechnung/Progressionsvorbehalt/

 

Screenshot_20220306-214832_Chrome.jpg.cd

 

 

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What actually is the definition of "market value" of a property on 5.4.2015?

Or more general: what is the market value of a property on a day other than the day the property changes owner???:wacko::huh:

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On 06/03/2022, 00:19:11, PandaMunich said:

@GaryC

You sign on the date of the purchase contract, but paying the purchase price and your name being entered into the land register (Grundbuch), i.e. you getting to be the legal owner, happens weeks/months later: https://www.dahlercompany.com/de/ressort/immobilie-verkaufen/was-passiert-nach-der-notariellen-beurkundung

 

Great advice as always @PandaMunich. We were considering selling our house this year. Just checked the Grundbuch Bescheid and see that it is 6 months after purchase so the 10 year point is February 2023. 

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23 minutes ago, Gambatte said:

What actually is the definition of "market value" of a property on 5.4.2015?

Or more general: what is the market value of a property on a day other than the day the property changes owner???:wacko::huh:

Market Value, or perhaps better expressed as the unrestricted open market value is an estimate by someone with appropriate skills and available information of the amount a willing unconnected purchaser would offer to a willing unconnected vendor on a particular day.  Or, to put it another way, it is an estimate of what you would realistically achieve on that day if said buyer and seller did the deal.  It is used all over the place from tax to selling businesses as a going concern, to valuing shares in unlisted companies.

 

In the context of this thread, HMRC may accept a value provided by an estate agent or an average of values provided by a number of agents but if push comes to shove they, or, ultimately a tribunal if the parties cannot agree, would required a professional valuation on your part.

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5 minutes ago, GaryC said:

Market Value, or perhaps better expressed as the unrestricted open market value is an estimate by someone with appropriate skills and available information of the amount a willing unconnected purchaser would offer to a willing unconnected vendor on a particular day.  Or, to put it another way, it is an estimate of what you would realistically achieve on that day if said buyer and seller did the deal.  It is used all over the place from tax to selling businesses as a going concern, to valuing shares in unlisted companies.

 

In the context of this thread, HMRC may accept a value provided by an estate agent or an average of values provided by a number of agents but if push comes to shove they, or, ultimately a tribunal if the parties cannot agree, would required a professional valuation on your part.

 

Thanks. Asking an agent "had I sold this property this many years ago, how much much do you think I would have sold it for?" sounds very inaccurate but so be it.

But what is the difference between a "professional valuation", and a "value provided by an estate agent"?

Ultimately I think you're right, if there's no agreement with HMRC ultimately it will either go to a tribunal, or HMRC will impose their decision.

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