Owning a holiday home overseas has become commonplace, particularly in European holiday destinations such as France or Spain.
Sales of capital assets, like properties, are subject to capital gains tax. It is easy to think only in terms of home currency when thinking about whether a capital gain has been made on the sale of the holiday home.
Let’s consider an example of Spanish Villa bought in May 2000 for the €100,000, and sold in May 2022 for €150,000 (following the Spanish property index). The taxpayers think only in their home currency and believes the capital gain to be €50,000 which they mentally convert to be £41,640 (using May 2022 exchange rate of £1=€1.2008).
However for capital gains tax purposes the rules are that you have to convert the purchase price at the exchange rate in force at the date of purchase, and similarly convert the sales price at the exchange rate in force at the date of sale. This can distort the position from what the taxpayer ‘feels’ it should be.
In the example above the exchange rate was £1=€1.752 in May 2000, reducing to £1=€1.2008 in May 2022.
| Euro | Sterling | ||
| Sales | €150,000 | £124,917 | at £1=€1.2008 |
| Purchase | €100,000 | £57,078 | at £1=€1.752 |
| Gain | €50,000 | £67,839 | difference between the above figures |
As you can see the ‘real’ cash sterling gain of £41,640 is actually a gain for tax purposes of £67,839. The strengthening of the Euro over the years increases the sterling equivalent of the increase in the property price. However, if that property was financed using a Euro mortgage then the owner loses out. The sterling equivalent of the liability of the finance does not get factored in to the capital gains tax computation in any way and cannot compensate against the sterling increase to the asset value. This acts to the detriment of people financing the property in the home currency.
A £100,000 finance was worth £57,078 when taken out in 2000, but costs £83,278 to redeem in 2022. No relief is given within our tax system for this.
This catches many people out and can even turn an apparent loss into a gain for tax purposes.
If you are thinking of selling an overseas property and would like help in calculating your capital gain please contact Ellis & Co on 01244 343504.