Advisers should be aware of the foreign exchange implications of clients selling properties once they have moved overseas several tax experts have warned.
Speaking to FTAdviser, Montfort International managing director Geraint Davies explained that if a client discharges a foreign mortgage it can be taxable, giving Australia as a common example.
“If you have a UK mortgage and you live in Australia, then depending on circumstances then if you owed £100,000 or A$150,000 when you took it out and it’s still £100,000 and the exchange rate is A$2.20 to pound, then you have to have A$220,000 to redeem it and that A$70,000 can be claimed as a loss against taxable income – but on the other hand it could be the other way round and you get a tax bill.”
He warned that over the last few years there have been several cases of mortgage redemptions incurring large tax bills, which could have been avoided with a bit of prior preparation from an experienced adviser.
“The international tax system doesn’t differentiate on wealth and that means regardless of how many pounds or dollars you have in the bank – you are still subject to tax rules.”
Jeff Bowman, founding partner at Bowman & Associates International Tax Consultants, agreed that people will often look to move back or retire to Australia, selling up from UK properties once they have got there.
“This can often be an issue for those looking to sell-up and down-size at retirement, so it’s often a problem of timing, as people might want to wait for the exchange rates to switch back into their favour.
“Australia taxes any foreign exchange gains on individuals’ properties, unlike the UK, which only does so for business property,” he pointed out.
“It’s not widely appreciated that you can have an income gain on a liability, advisers can really add value for clients by getting their heads round this, because redeeming mortgages can result in a pretty hefty income tax bill, which can far exceed any capital gains from the sale.”
Nigel Neville, a technical tax specialist at Baker Tilly, noted that a rule change in the UK from 6 April 2012, stated that foreign currency gains or losses made by individuals are exempt for capital gains tax purposes, meaning that a foreign currency loss cannot be relieved, including on the discharge of a foreign currency debt.
“There are special rules that apply re income tax relief for exchange gains and losses for unincorporated businesses, i.e. the self-employed. Long-term loans are mentioned as a debt to which this could apply if the required conditions are fulfilled for the self-employed.”
He added that there are also special rules that apply to exchange rates for those individuals using the remittance basis.
Ray Boulger, senior technical manager for John Charcol, added that a lot of lenders have an aversion to Australia, which is down to complexities with local tax regulations.
peter.walker@ft.com
