What are the effects of exchange rate fluctuations if you sell property abroad?
Sterling has depreciated considerably against the Euro in the lastyear. Whilst this is of great interest to other Euro zone residents,who can buy property in the UK at much lower Euro cost, the oppositeapplies to UK residents who have purchased property elsewhere in theEuro zone.
For instance a property in Spain costing 1.5m Euros purchased early 2007 would have required an investment of £1m sterling.
A similar property may currently be worth 1.25m Euros. This is aloss on your investment of 250,000 Euros. Common sense might argue thatif you disposed of the property now, you would merely multiply the lossby the exchange rate prevailing when the sale completed? Unfortunatelythis is not the case!
Capital gains tax legislation dictates that you compare the sterlingvalue of the purchase at the date of purchase, with the sterling valueof the disposal at the date of disposal. In our example a propertydisposal today of 1.25m Euros converts to just under £1.2m sterling.You have made a taxable gain of almost £200,000. Brilliant you may saybut what if you want to reinvest the proceeds in another property inthe Euro zone? The sterling gain of £200,000 will cost you possibly£36,000 in UK taxes; that's £36,000 less to invest!
So be wary. A loss on sale in a local currency can produce unwelcome tax liabilities when converted to sterling.