Unlike the UK, many European countries have strict time limits for capital gains tax exemptions when selling the main home. Getting this wrong by just one day can be the difference between paying tax on the full gain or nothing at all. We outline how this affects Britons moving to France, Spain or Portugal.
Many people who leave the UK to live abroad prefer to retain their UK home as security in case things go wrong, at least until they are fully settled in their new country. What many do not realise is that selling this property outside a certain time window can expose them to capital gains tax in their new location.
Like the UK, most countries have a form of main home relief from capital gains tax on sale. However, the UK’s concept of ‘time apportionment’ – splitting the period of ownership between qualifying and non-qualifying periods – is unique.
Most other countries offer an all-or-nothing approach to the relief, whereby you only qualify for complete exemption within a certain timeframe of absence from the property. By selling the home beyond this period – or not reinvesting the proceeds into a new main home in time – the entire gain can become taxable.
Here are a few examples:
In France, main home relief is only available if the UK property is sold within 12 months of it ceasing to be the main home. Go just one day beyond this and the full gain is potentially taxable (although this happens immediately if the vendor loses French residency – see more in our article ‘Selling a French home after leaving France’).
However, for French residents the capital gains tax and social charges payable gradually taper according to how long the property has been owned:
- Capital gains reduce by 6% per year after the first 6 years of ownership up to and including year 21 ¬– so after 21 years of ownership the reduction is 96% (16 years at 6%). It then reduces 4% for year 22, reaching full exemption from this point.
- Social charges are reduced by 1.65% per year after the first 6 years up to and including year 21 – so after 21 years of ownership, the reduction is 26.4% (16 years at 1.65%). Year 22 brings a 1.6% reduction, followed by 9% for each year between year 23 and year 30.
Total exemption therefore applies after 22 years’ ownership for capital gains tax and 30 years for social charges.
Under certain conditions, individuals receiving a state pension or holding an invalidity card may be exempt from capital gains tax in France on the sale of real estate, regardless of length of ownership.
In Spain, the capital gains relief on the sale of the main home depends on age.
For an individual under 65 years of age they must meet all the following conditions and time requirements:
1. Have lived in the property they are selling for at least three years from the date the property was bought or built.
2. Used the property as the main home, either at the time of sale or at any time during the last two years before the date of sale.
3. Purchased the new main home within two years either side of the sale date.
4. Live in the new home for a continuous period of at least three years from the purchase date.
This effectively allows a two-year window in which to sell a UK property after moving to Spain, so long as you reinvest the full proceeds from sale in the new main home.
If the amount re-invested is less than the sale proceeds, only this portion will be exempt, with any excess taxable. For full relief to apply, the purchase price of the Spanish property must therefore be at least the sale proceeds of the UK property (net of any outstanding mortgage).
For the over 65s, sale of the main home where it has been occupied for more than three years is tax–free for Spanish residents, with no requirement to reinvest the proceeds into a new property.
The gain on a sale of a UK main home is exempt if the entire proceeds (net of any mortgage taken out to acquire the property) are re-invested in another main home in Portugal or the EU/EEA. This must be done within 36 months after the date of sale, or 24 months before.
If this period has expired and the full proceeds have not been reinvested in another main home, any tax payable will become due, together with penalties and interest for late payment.
However, if someone qualifies for the special non-habitual residence (NHR) tax regime, the gain on the sale of their UK home would not be taxable in Portugal within their first ten years in the country.
Where capital gains tax is payable on property, Portuguese residents are charged on 50% of any gain, but inflation relief is available if the property is held for more than two years. The gains are added to other income within that Portuguese tax year and taxed at scale rates, up to 48% for 2018.
The importance of early planning
For clients moving to Europe, careful and early planning when selling a UK property is crucial to prevent paying taxes that could have been easily avoidable. They should also be aware that they remain liable for UK taxes in the form of non-resident capital gains tax (NRCGT) on gain since April 2015.
With Blevins Franks’ cross-border expertise, UK nationals can take advantage of available reliefs and tax-minimising opportunities when selling and buying a home, and ensure that their finances are suitably structured for their new life abroad.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.