Beware the overseas home sale traps


Millions of pounds have been flooding back to the UK as overseas property owners sell their place in the sun.

Farmhouse,  Tarifa Spain

Selling up: Those selling overseas property should beware the traps

While some are seeking to cash in on the rise of the euro, others have found the cost of running a holiday home or retiring on the Continent too high as the pound has fallen to historic lows.

Foreign currency broker HiFX has seen a 180% rise in the amount of euros being converted into sterling in the past six months compared with the same period the previous year.

At Foreign Currency Direct, Britons returning from Spain accounted for a 187% increase in transactions in the first six weeks of the year against the same period in 2008. France made up the next highest at 91%.

But selling up is proving tough. Prices have plunged by almost 50% in some regions, and buyers are scarce. And once you've lured a buyer, there are taxes to be paid and large sums to be transferred.

For homeowners in Spain, any profit is subject to 18% capital gains tax (CGT) after the first year. Unlike the UK, this applies even if it is your main home - unless you are over 65. Long-term owners should check whether taper relief applies to them.

If it's a second home, or was a second home for part of the time, you are liable for CGT in the UK, too. Since the Spanish rate - at 18% - is the same as in Britain, in theory, you will not be taxed again.

But as Wynne Thomas, senior partner at London law firm Dawsons, points out, the UK tax will be based on the sterling equivalent.

He says: 'Even if the euro value of your home is the same as you paid for it, you are likely to have CGT to pay here because sterling has weakened so much against the euro.'

For example, if you paid e200,000 for a home three years ago when the exchange rate was €1.5 to the pound and sold it now for the same price, with the rate at €1.13 to the pound, you would still have made a profit of £43,657. In sterling, the value has risen from £133,333 to £176,990.

In France, if you are resident in the country, the CGT is 16% falling to zero after 15 years, according to Mr Thomas.

The good news is if it's your main home - or your principal private residence - you are exempt from CGT tax both in France and the UK.

Those liable for CGT will have to make the amount paid up to a total of 18% back in the UK - so if you have paid 10% in France you will never have another 8% to pay here. But you will receive a tax-free allowance of £9,600 per person.

Don't let the notary handling the sale simply bank the money locally, as your cash is likely to be transferred back home using the tourist rate which can be 4-6% worse than you can get through a broker - making a significant difference on a large sum.

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Pound coin with house cut out of it

The exchange rate between sterling and the euro has been jumping around more than usual lately. It is possible to fix the rate now while you wait for the euros from your sale to come through if you want the security of knowing exactly how much you will receive in sterling.

You do this by buying a forward contract through foreign currency brokers which locks you into the current rate. You will have to put down a deposit of typically 6-11% of the amount you will want to transfer to secure the rate.

The length of time the rate is guaranteed depends on the broker. At Foreign Currency Direct it is 24 months, while at HiFX it is 12 months. Mark Bodega, at HiFX, recommends you don't do this unless you know when you will need to transfer the money back, while Stephen Hughes at Foreign Currency Direct is more positive.

He says: 'You can hedge your bets by locking away some of it at today's rate, but not all of it. This way, if a sale falls through or you have to drop the price at the last minute, you won't have bought too much.'

Alternatively, you can open an account beforehand with a reputable foreign currency broker and move the money once you have the funds. You can even set the rate you want by putting a stop and limit order in. The stop order catches the rate before it falls too low and the limit order means your euros will be converted once it reaches that rate.

Brokers don't charge commission, but pick an established firm. Foreign currency brokers are not regulated.

Finally, before returning to the UK you might wish to take advice on estate planning. 'Once you return, you will come under the UK inheritance tax regime,' says Mr Thomas. 'So tax planning should be considered before you come home.'

Pound v Euro graphic

Beware the overseas home sale traps

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