Alicja lives in Edinburgh and plans to stay here,which is why she recently sold a flat she had owned in Poland. She wrote to me asking whether she really, as some people told here, doesn't have to account for anything in the UK, as she has already dealt with taxes in Poland. To answer whether Alicja should pay tax on her Polish property sale (the Capital Gains Tax), in the UK, we need to establish some facts.
The most important in this case (and in many other tax situations) is to establish Alicja’s tax residency.
I have seen more than once, on various Internet forums, statements such as "if you have dealt with this sale abroad, it's all fine, because we have an agreement between UK and that particular country on double taxation". This is only half-true - you do not pay taxes in both countries, of course, but it is because you pay where you are resident for tax purposes - and this is in turn defined by the location of your main "life centre". Alicja lives and works in Scotland. Her daughter was born here, she has a bank account here, she simply lives her life here. She is undoubtedly a tax resident in the UK and pays her taxes in the UK - not in Poland. Wherever in the world she earns an income, she has to pay her taxes in the UK.
The first fact is established and we can tick it off - Alicja is a tax resident in the UK, so she pays taxes in this country. We must therefore be guided by the rules set by UK tax laws. In this case, it will be the Taxation of Chargeable Gains Act 1992 (TCGA 1992).Now we move to the next point of the programme - we need to determine where Alicja's Principle Private Residence (PPR) was located. She owns an apartment in Edinburgh,bought in 2010. Why is this important? Because if she had only one flat at the time, then we could treat it as her Principle Private Residence. However, she owned two, and she was physically able to live only in one in the period between 2010 (when she bought a flat in Edinburgh) and the date the Polish flat was sold.
The second fact is, therefore, that the flat in Poland was Alicja's PPR until she bought the flat in the UK, while since 2010 Alicja's PPR has been the flat in Edinburgh.
The third fact - also very important - is that the flat in Poland was being rented out. In this article I am discussing Capital Gains Tax (CGT) and not income tax, so I will assume that Alicja accounted for her rental income in her income tax calculations. The fact of renting the Polish flat will help us reduce the CGT by applying relevant relief.In the next point I would like to explain what relief Alicja can use if we treat her flat in Poland as her PPR. Now is the time to truly digest the TCGA 1992 to see how I can legally save Alicja as much as possible on tax.
PPR relief is only applicable to your "only or main residence". The flat in Poland was indeed Alicja's only place of residence until 2010.
We use the actual occupation
and deemed occupation
dates for the calculation. The residence periods calculated in this way are used to calculate the relief as a percentage. If,for example, it turned out that during the 15 years Alicja owned the Polish flat, she lived in it for 10 (actual and presumed) years, then these 10 years -or 66% of the time - would qualify for PPR relief.What is the deal with "deemed occupation"?The regulations define three types of deemed occupation:
1. When we were sent abroad by our employer.
2. When we decided to change our place of residence ourselves to take up another job (limit of 4 years).
3. Any other reason (limited to 3 years). Thus we can also allocated 7 years of relief to Alicja from these very assumptions. In addition, the last 18 months are always added (9 months since 6April 2020),
which gives a total of 8 years and 6 months of relief.
However, we must remember, and it is very important,that HMRC will only recognise the deemed occupation periods when they are preceded and followed with actual occupation. This is a prerequisite forgetting the relief.
In general, the principle for calculating the CGT
is as follows:
Gain on Property - that is, your profit in selling your flat;
Minus PPR relief - the relief we have calculated = Chargeable Gain - the profit that will be used as a basis for CGT
It is worth noting that if the property also included a plot of land with an area over half a hectare, we would apply different calculation principles.After taking into account the amount of PPR relief,there is also a £ 12,000 tax-free amount
, so-called Capital Gains Tax Allowance
. In addition, we can also use letting relief.
Since Alicja rented out her flat, she is eligible for an additional discount of either £ 40,000 or an amount equal toPPR.All in all, it turns out that Alicja's apartment in Lublin, sold for 350,000 PLN, or 70,000 GBP, may qualify for many forms of tax relief - it may even turn out that she will not have to pay any tax in the UK.
In such situations, instead of trying to hide in come from the sale of a property (or in fact any other asset that CGT applies for –for example shares or personal items such as artworks or jewellery worth less than £6,000), it is better to arrange a consultation with your tax adviser.
It is very likely that based on the information you provide and knowledge about applicable regulations and rules for calculating relief in such situations, it may lower your Capital Gain Tax, even all the way to zero. And if the sale happened abroad, you will no longer have to wonder howto bring that suitcase full of cash from abroad and explain it in case of an inspection... There is no definite answer to the original question. Each case must be considered individually.
The answer can only be - "it depends." It depends on how long such a person owned the flat abroad, and whether and how long they lived in it, whether they owned another property at the same time, which may have qualified for PPR relief and whether the flat was rented out at any time.
In the case of Alicja, a small amount of tax had to be paid, because the apartment could not be treated as PPR for about 2 years.However, as Alicja herself said: "I paid these few hundred pounds, but at least I sleep peacefully now and I'm not worried that I will receive a letter one day from HMRC asking where this transfer to my account came from. "
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