If you’re a UK resident living abroad as an expat, and you’re looking to sell your property, there’s a high chance you may need to pay something known as capital gains tax. Even if you’re not a UK resident, there may be circumstances where payment of this UK tax applies to you. To ensure you can properly account for this complex subject in your tax planning, here is everything you need to know about UK capital gains tax on properties and assets, at home and overseas
What is capital gains tax?
In simple terms, capital gains tax (CGT) is the tax you owe when you sell, give away, exchange, or ‘dispose of’ something that you own, assuming it has increased in value, and you’re set to make a profit from the sale.
However, it’s important to know that you’re not taxed on the total amount of money you receive from the sale. Instead, capital gains tax only applies to any profit you make from the exchange after a country’s stated tax-free allowance.
When do you pay capital gains tax?
In the UK, capital gains tax is most commonly paid on the sale of an ‘asset’ or a property that’s not your main residence and must be done so within the given time limit of the country.
The definition of ‘asset’ is broad, but in the UK, it typically includes any of the following:
- Most personal property worth over £6,000, excluding vehicles for personal use.
- Property that’s not your personal home.
- Your main home if you’ve let it out (excluding lodgers), used it for business, or if it’s extremely large.
- Shares that are not in an ISA.
- Personal Independence Payments.
- Business assets.
- Gifting assets.
- The disposal of certain cryptocurrencies.
Generally speaking, you will have to pay CGT upon the sale of any of your expensive possessions, though some private possessions are CGT exempt. On top of this, any wasting assets (items with a life expectancy of 50 years or less) are generally immune to CGT.
There are also certain CGT rules that may apply to those returning to the UK after living abroad. In this scenario, tax will likely only be payable upon your return within a set period of time, so it’s best to speak to a financial expert on the matter, such as our advisors at Blacktower.
If, on the other hand, you become a non-UK resident for any length of time before returning to your home country, you may be liable to pay capital gains tax on any property sold or trades carried out while you were a non-resident.
What is exempt from capital gains tax?
While capital gains tax can be levied on a variety of assets, there are many that are immune to CGT. The following are considered non-taxable assets:
- The sale or gifting of private cars
- Gifts between married individuals
- Gifts to charities
- The sale of your main residence
- The sale of a buy-to-let or second home that was your main home within the last 18 months
- A variety of financial products
- Assets left as inheritance
What percentage is capital gains tax in the UK?
When it comes to how capital gains tax works in the UK, it’s not as simple as having a single percentage rate that covers all taxable assets. Instead, UK CGT is split into two categories:
- Property, such as your second home, business premises, buy-to-let investments, land, or inherited property.
- All other assets, such as jewellery, vehicles, trades, etc…
Unlike most assets, property is charged at a higher tax rate, so you can expect to pay more on capital gains tax on overseas property. But on top of this, the CGT for both property and other assets is split into a further two bands: basic and higher rates.
For property, the basic UK capital gains tax sits at 18%, while those falling into the higher rate can expect to be charged 28%. As for other assets, the basic rate sits at 10%, while the higher rate sits at 20%
Whether or not a sale is charged at the lower rate, the higher rate, or a combination of two rates, depends on the total taxable income of the person making the sale.
For example, if the person making the sale is a higher-rate taxpayer (i.e.: their total taxable income was more than £50,000 for the most recent tax year), the entire chargeable gain will be taxed at the higher rate.
If, on the other hand, you earn less than £50,000, you’ll only be charged the basic rate until your profits exceed £50,000, at which point, any remaining profit will be charged under the higher rate.
How is capital gains tax calculated in the UK?
As we’ve previously mentioned, in the UK, CGT is only charged on profit over the annual capital gains tax allowance (also called the annual exempt amount).
In the UK, the exemption amount for individuals is £12,300, and £24,600 for couples. Any profits over these totals are subject to capital gains tax in the UK.
Therefore, to calculate your payable CGT, you would minus your exemption amount from your total profit and then add this to your taxable income for the year to see what band of CGT you would need to pay on the profit.
So, when applied to a real-life scenario, if someone earned an income totalling £32,000 for the tax year, and sold a property for a total chargeable gain of £28,000, the amount of capital gains tax they paid would be split between the two bands as follows:
- The first £18,000 of the property sale would bring the total taxable income to £50,000, so they would be charged at the basic rate of 20% for this part of the payment.
- The remaining £10,000 would then bring the total taxable income over the £50,000 threshold, meaning they would then be charged at the higher rate of 28%.
Based on this, the total capital gains tax calculation for the above example would look like the following:
- £18,000 x 20% = £3,600
- £10,000 x 28% = £2,800
As a result, the total capital gains tax due would be £6,400.
How do you calculate capital gains tax on overseas property?
Much like capital gains tax on property in the UK, if an individual chooses to sell their overseas property as a resident of the country they are in, they will be subject to all the local capital gains tax laws of that country.
These laws vary from country to country, and many have their own definitions of exemption levels and rates, but the process of calculating capital gains tax will be similar once exemption levels and rates are known.
As it stands, the basic capital gains tax rates of some other European countries are as follows (please note that exemptions and modifications may apply):
- France – 30%
- Spain – 23%
- Portugal – 28%
- Italy – 28%
- Germany – 26.375%
- Ireland – 33%
- The Netherlands – 30%
On top of this, if an individual resident abroad chooses to sell their UK property, then it’s possible that capital gains tax will be deducted in both the country of residence and the UK.
This depends on the country of residence’s tax system, but Spain, for example, levies CGT on all overseas sales. To help avoid confusion, the UK government has signed ‘Double Taxation Treaties’ with Spain and many other countries in order to work out exactly where it’s is due in these situations.
Capital gains tax for overseas property can be an extremely complicated subject, so it is highly recommended that you consult an expert in such matters before proceeding with any sale.
How to reduce capital gains tax
Although capital gains tax is often unavoidable, there are a few ways you can reduce the amount you owe:
- Consider making assets jointly owned if you’re married to increase the exemption threshold.
- Buy expensive items individually instead of as a set to make use of the exemption threshold for each piece.
- If you and your partner are unmarried, denote different homes as your main residence.
- Consider living in a property you plan to let beforehand.
- Sell any shares within your given CGT allowance.
With this information to hand, you should hopefully find it much easier to navigate the tricky world of capital gains tax. Of course, if you do have further questions, then don’t hesitate to get in touch with our team.
Here at Blacktower, we’re experts in financial advice for expats and living oversea. From wealth tax to buying property in another country, we can walk you through the steps you’ll need to take to start your new life abroad.
For more information, you can also visit our free guides and locations pages for further details on moving to the different countries we operate in.
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This communication is for informational purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.