CGT allowable expenses in the UK?

[joidevie]

Hello - I'm looking for some some guidance on the UK situation on capital gains on the sale of a French property.

French cgt is worked out with allowable expenses in the form of direct

factures from registered artisans and paid at the time of sale (16% as

a UK resident). These are then approved by a French fiscal

representative.

Capital gains is then worked out within the UK and charged at the

rate of 18%, and the amount already paid in France can be offset.

What are the rules in the UK for allowable expenses (ie. the French

artisan receipts) ? I have been told that home 'improvements' are not

allowable in the UK, but 'extensions' etc are. This could imply that

many artisan works are not allowable - however the situation I am

looking at is the conversion of a previously agricultural building

which had no existing services etc. and was required to have a change

of use. Can I presume that this would be deemed as similar to an

'extension'?

Also, if considering purchasing another property requiring

renovation, it would seem worth consideration the cost of works if they

were done on a 'house' as these costs may not be allowable against UK

cgt? This could amount to a number of receipts that could not be used

later on in the UK? Have I got this right?

Many thanks for any experiences..

[Anton Redman]

Suggest have a read through :

http://www.hmrc.gov.uk/trusts/cgt/calculating.htm#2

UK rules are driven less by vested interests

[Pickles]

[quote user="joidevie"]

French cgt is worked out with allowable expenses in the form of direct

factures from registered artisans and paid at the time of sale (16% as

a UK resident). These are then approved by a French fiscal

representative.

Capital gains is then worked out within the UK and charged at the

rate of 18%, and the amount already paid in France can be offset.

What are the rules in the UK for allowable expenses (ie. the French

artisan receipts) ? I have been told that home 'improvements' are not

allowable in the UK, but 'extensions' etc are. This could imply that

many artisan works are not allowable - however the situation I am

looking at is the conversion of a previously agricultural building

which had no existing services etc. and was required to have a change

of use. Can I presume that this would be deemed as similar to an

'extension'?

Also, if considering purchasing another property requiring

renovation, it would seem worth consideration the cost of works if they

were done on a 'house' as these costs may not be allowable against UK

cgt? This could amount to a number of receipts that could not be used

later on in the UK? Have I got this right?

[/quote]

Generally speaking, improvements which are still present at the time of sale are set against capital gains: maintenance is not, as maintenance is set against income in the year that it is incurred. The purchase and sale costs are also set against the capital gain. The correct link for CGT is www.hmrc.gov.uk/cgt/property/index.htm.

Regards

Pickles

[joidevie]

Thanks for the links.

Would I be right to presume that the calculation is then submitted in the 'foreign' section only of a UK tax return?

Many thanks.

[Pickles]

[quote user="joidevie"]Would I be right to presume that the calculation is then submitted in the 'foreign' section only of a UK tax return?[/quote]

IIRC, it goes in the Capital Gains section. The foreign pages in this context are for offsetting foreign tax paid.

Regards

Pickles

[joidevie]

Thanks again - I think I'm slowly getting there. As I understand it:

- I can offset against UK CGT French artisan receipts for building new walls, pouring concrete floors, installing new services, new windows etc etc regardless of whether it's for a house or a previously agricultural building which has change of use (in my case). Also the cost of the purchase price

- I fill the standard capital gains section in the UK tax return (I have already returned the French one which was handled by a 'representative fiscale' at a cost of 1%) and fill in the tax paid in France amount in the 'foreign' section.

Does this also imply that I could also use a couple of large receipts for floor tiles and plaster board which were not allowed by the French representative fiscale?

Please forgive the careful questioning, but I'm looking to buy another French property and need to know I'm not going to receive a shock from the UK revenue.

The French tax paid is 100% offset against the tax due to be paid to the UK (excluding the 2% difference with the UK being 18% and France 16%). I'm assuming the 2% difference will easily be absorbed by my UK CGT personal allowance of 10k. So, in effect, there is likely to be no further tax payable after returning the UK form?

Many thanks again.

[Pickles]

[quote user="joidevie"]- I can offset against UK CGT French artisan receipts for building new walls, pouring concrete floors, installing new services, new windows etc etc regardless of whether it's for a house or a previously agricultural building which has change of use (in my case). Also the cost of the purchase price[/quote]

Yes

[quote user="joidevie"]- I fill the standard capital gains section in the UK tax return (I have already returned the French one which was handled by a 'representative fiscale' at a cost of 1%) and fill in the tax paid in France amount in the 'foreign' section.[/quote]

Yes. You can probably justify claiming the cost of the representative fiscal as an expense of sale and deduct it from the capital gain.

[quote user="joidevie"]Does this also imply that I could also use a couple of large receipts for floor tiles and plaster board which were not allowed by the French representative fiscale?[/quote]

I would say "yes". On what grounds were they disallowed in France?

[quote user="joidevie"]The French tax paid is 100% offset against the tax due to be paid to the UK (excluding the 2% difference with the UK being 18% and France 16%). I'm assuming the 2% difference will easily be absorbed by my UK CGT personal allowance of 10k. So, in effect, there is likely to be no further tax payable after returning the UK form?[/quote]

Assuming that you have no other gains and that the gain is no more than about 500K, then I'd say that you'd be correct.

Regards

Pickles

[joidevie]

Thanks Pickles..

The 'disallowed' receipts were for the 'purchase only' of two invoices of 5k for tiles and plasterboard. Even though the items were delivered to the property address. The representative would ONLY allow registered artisan receipts with a registration number, and even now I have to produce 'preuve de paiement' for those. It seems DIY is not always the most efficient or cheapest way to go in France as materials are not allowed to be offset in the usual way.

On another note - if one shows a little more CGT expenses in the UK than in France, are these of any use in offsetting against any other income tax in the UK, or can CGT expenses only be used to offset against actual CGT liability?

Regards & thanks.

[Pickles]

[quote user="joidevie"]The 'disallowed' receipts were for the 'purchase only' [/quote]

Of course they were. I had overlooked that obvious possibility.

[quote user="joidevie"]On another note - if one shows a little more CGT expenses in the UK than in France, are these of any use in offsetting against any other income tax in the UK, or can CGT expenses only be used to offset against actual CGT liability?[/quote]

Turning this around; essentially the way HMRC will see it is that you have paid more tax in France than you would be liable for in the UK, and so the excess is not reclaimable, offsettable or anything useful. Look at the bright side - at least you have a profit to be taxed on!

Regards

Pickles

[joidevie]

Many thanks again..

I had one last detail to clear up which I suspect I know the answer..

I presume the UK CGT will be made entirely at the exchange rate at the date of sale of the property? By that I mean that the purchase price + cost of works is deducted from the sale price in Euro (and not each converted into Sterling at the rate applicable at the time of purchase which will be quite different 4 years ago) and then the 'capital gain' is merely exchanged at the exchange rate on the day of sale and used for tax calculation?

Sale price in Euro (day of sale)

minus

Purchase cost in Euro (regardless of date/exchange rate)

Works cost in Euro (regardless of date/exchange rate)

Leaving the difference on the day of sale to be exchanged into Sterling from Euro to be taxed

I can only assume this is right?

Many thanks.

[Pickles]

[quote user="joidevie"]I presume the UK CGT will be made entirely at the exchange rate at the date of sale of the property? By that I mean that the purchase price + cost of works is deducted from the sale price in Euro (and not each converted into Sterling at the rate applicable at the time of purchase which will be quite different 4 years ago) and then the 'capital gain' is merely exchanged at the exchange rate on the day of sale and used for tax calculation?

Sale price in Euro (day of sale)

minus

Purchase cost in Euro (regardless of date/exchange rate)

Works cost in Euro (regardless of date/exchange rate)

Leaving the difference on the day of sale to be exchanged into Sterling from Euro to be taxed[/quote]

I do not think that that is that case. SA 108 notes provides a working sheet to help you do the calculation. The values that you should use for the acquisition cost, purchase costs, improvements and disposal proceeds are all pounds sterling. Normal practice is that you would convert the Euro values to £ values at the conversion rate applicable on the date that they arose/were incurred. As a basic example: say you bought an item for 100,000 € at a point in time when the £ was worth 1.5€, and then sold the same item for 100,000 € some time later when the £ was worth 1.1€. In France, there would be no capital gain. In the UK there most certainly would be, since the respective values are £66667 and £90909, giving a UK capital gain of £24242.

So the calculation is

Sale price in £ (converted from € at the rate applicable on the date of sale)

Minus

Purchase cost in £ (converted from € at the rate applicable on the date of purchase)

Improvements costs in £ (converted from € at the rate(s) applicable on the date(s) incurred)

Regards

Pickles

[joidevie]

Thank you pickles, you've been incredibly helpful.

I've done some sums, and re-calculated adjusting for the exchange rates. I've come to a figure that is the UK 18% of the 'profit'. I've then deducted the 16% figure of the French tax paid (again converting to the £ at time of payment) and this leaves an amount still 'liable' in the UK (less than double figures). Am I right that I can then simply deduct my 'personal allowance' of 10k (ish) for CGT in the UK and be leftover with no further tax payable?

And (yet) another technicality (sorry) - the property was bought as a personal investment/second home. I intend to buy another as soon as possible (as a second home - but hope to keep it for a while). Are there any circumstances that may deem this as income derived from a development rather than CGT? I ask as one year after buying it and starting the work I was asked to help a colleague in the creative field in the UK to freelance 'project manage' the conversion of his studio/office premises (basically chasing workmen for him - he was impressed with what I was achieving in France). This modest amount of income over a one year period was declared as 'project management' along side other income derived from my main trades. Would this be an issue? I'm assuming not as the property was never intentionally bought 'as a development' nor was it run as a business.. ?

Please forgive my attention to detail..

Many thanks again.

[Pickles]

[quote user="joidevie"]I've done some sums, and re-calculated adjusting for the exchange rates. I've come to a figure that is the UK 18% of the 'profit'. I've then deducted the 16% figure of the French tax paid (again converting to the £ at time of payment) and this leaves an amount still 'liable' in the UK (less than double figures). Am I right that I can then simply deduct my 'personal allowance' of 10k (ish) for CGT in the UK and be leftover with no further tax payable?[/quote]

The extended calculation is:

Sale price in £ (converted from € at the rate applicable on the date of sale)

Minus

Purchase cost in £ (converted from € at the rate applicable on the date of purchase)

Improvements costs in £ (converted from € at the rate(s) applicable on the date(s) incurred)

This gives the capital gain.

Assuming that you have no other capital gains in the tax year, you then deduct the 10K-ish UK CGT allowance (per owner)

Then you calculate 18% of the remainder

Then you deduct the French CGT paid (converted at the rate on the date when it was paid).

That gives you the amount of UK CGT payable. If it is a negative value, then you can't get a refund.

[quote user="joidevie"]And (yet) another technicality (sorry) - the property was bought as a personal investment/second home. I intend to buy another as soon as possible (as a second home - but hope to keep it for a while). Are there any circumstances that may deem this as income derived from a development rather than CGT? I ask as one year after buying it and starting the work I was asked to help a colleague in the creative field in the UK to freelance 'project manage' the conversion of his studio/office premises (basically chasing workmen for him - he was impressed with what I was achieving in France). This modest amount of income over a one year period was declared as 'project management' along side other income derived from my main trades. Would this be an issue? I'm assuming not as the property was never intentionally bought 'as a development' nor was it run as a business.. ?[/quote]

I do not think this is likely to be a problem, unless you subsequently make a habit out of doing developments, or else are doing multiple developments simultaneously.

Bear in mind that my knowledge of tax rules is primarily concerned with things that are of direct relevance to me - ie they are situations that I face or will face, or are similar situations to the ones that I encounter/will encounter; I am in no way a tax expert.

Regards

Pickles

[joidevie]

Many thanks again.. Almost there, just one more detail.

If the property has been let as a holiday home and complied with all the criteria for taxation as a furnished holiday home like in the UK (ie. treated as a business), then I believe 4/9ths of the net gain from the sale can be deducted before calculating the chargeable gain. So 18% is charged on this reduced figure (less the annual personal allowance for CGT.)

Would using this relief (above) in any way affect also using the 'tax already paid' in France as an offset? At what stage would you use the French tax as a relief?

Many thanks.

[Pickles]

[quote user="joidevie"]If the property has been let as a holiday home and complied with all the criteria for taxation as a furnished holiday home like in the UK (ie. treated as a business), then I believe 4/9ths of the net gain from the sale can be deducted before calculating the chargeable gain. So 18% is charged on this reduced figure (less the annual personal allowance for CGT.)

Would using this relief (above) in any way affect also using the 'tax already paid' in France as an offset? At what stage would you use the French tax as a relief?[/quote]

If it meets ALL the conditions for a furnished holiday lettings business the Entrepreneur's relief is available, up to a gain of £1million.

Rather than getting involved in the 4/9ths mucking about, since basically the Entrepreneurs's relief drops the CGT rate to 10%, do the same calculation as before, but substitute 10% as the tax rate rather than 18%. It has no effect on the tax credit for the foreign tax paid.

Regards

Pickles

[joidevie]

Great, many thanks for all your helpful contributions..