As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.
What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.
CGT on overseas properties
Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.
If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.
Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.
However, it was established in Capcount Trading v Evans , that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.
This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.
Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.