A common miscommunication among UK taxpayers is that they need to pay tax on their UK income and gains only. However, UK residents are taxed on their worldwide income, while non-UK residents are only taxed on income generated within the UK.
Consequently, the taxes owed on overseas property depend on an individual's residency status. Non-residents do not need to declare or pay taxes on income derived from overseas property. However, UK residents are required to declare income from overseas property, whether rental income or capital gains from the disposal of such property.
Failing to disclose such income or gains can lead to significant penalties from HMRC. To address potential underreporting, HMRC has proactively issued "nudge letters" to taxpayers urging them to review and correct their filings. The following is an example of such a letter.
Selling an Overseas Property
When disposing of a residential property in the UK, you must report the gain to HMRC within 60 days of the completion date.
However, this 60-day rule does not apply to overseas properties, whether residential or commercial. That said, gains from overseas property sales must still be reported, and this can be done in one of two ways:
- Self-Assessment Tax Return – Reporting the gain as part of your annual tax return.
- Real-Time Capital Gains Tax Service – This option is available for gains on assets sold during the 2023/24 and 2024/25 tax years.
For overseas property, UK tax law governs the calculation of capital gains tax on overseas property unless it is restricted in the Double Taxation Agreement (DTA) between the UK and the respective country. Therefore, if a UK resident sells an overseas property, the gains will be calculated according to UK tax laws, irrespective of the laws in the overseas jurisdiction. The applicable rates depend on the type of property and when the sale occurred:
Disposals on or After 30 October 2024
- Residential Properties: Gains are taxed at 18% for amounts within the basic rate band (£50,270) and 24% for gains exceeding this threshold.
- Commercial Properties: Gains are taxed at 18% (basic rate) and 24% (higher rate).
Disposals Before 30 October 2024
- Residential Properties: Gains were taxed at 18% (basic rate) and 28% (higher rate).
- Commercial Properties: Gains were taxed at 10% (basic rate) and 20% (higher rate).
If there is no specific provision in the DTA between two countries regarding the double taxation relief or if there is no double taxation agreement, a credit will be given in respect of the tax suffered overseas. The credit is given at the lower of:
- UK tax that would have been payable
- Overseas Tax Suffered
Example
Mr Mehta earns £25,000 from his employment income in the UK and is selling his residential property in New Zealand, resulting in a gain of £50,000. After deducting the annual capital gains allowance of £3,000, his taxable capital gain is £47,000. He paid £2,500 Capital gains tax in New Zealand.
As Mr Mehta’s taxable income in the UK is £12,430 (25,000-12,570), his CGT will be calculated as follows:
Taxable gain according to UK Laws | 47,000.00 | ||||
Capital Gains Tax | |||||
Up to the basic rate band (37,700-12,430) at 18% | 4,548.60 | ||||
CGT on the remaining gain (47,000-37,700) at 24% | 2,232.00 | ||||
6,780.60 | |||||
Less: Double taxation relief at lower of: | |||||
| (2,500.00) | ||||
CGT Payable | 4,280.60 | ||||
Therefore, Mr Mehta would be liable to pay £4,280.60 as capital gains tax on the overseas property sold. If he fails to declare and pay the tax on time, there may be penalties and interest on this amount.
Penalties for Late filing
When you identify a penalty risk involving an offshore matter, you must find the territory in which the offshore matter occurred and then check the category lists at CH403147 to determine which category the territory falls into. If a territory is not listed in Category 1 or 3, it falls into Category 2.
The penalty range is calculated as follows, based on the category of the country and the nature of the information:
Header | Category 1 | Category 2 | Category 3 |
|---|---|---|---|
Deliberate and concealed | 100% | 150% | 200% |
Deliberate but not concealed | 70% | 105% | 140% |
Any other case | 5% | 5% | 5% |
Taxpayer Behaviour Assessment
As stated, HMRC charges a penalty based on the taxpayer's behaviour, resulting in revenue loss to HMRC. This section will explore the various types of behaviour and explain what falls within each type.
Deliberate and Concealed Behaviour
The most serious level of behaviour is a deliberate and concealed inaccuracy, which occurs when a taxpayer gives HMRC a document that contains a deliberate inaccuracy and actively takes steps to hide the inaccuracy either before or after sending the document to HMRC. Under these types of inaccuracies, the taxpayer takes active steps to cover their tracks by making arrangements to conceal the inaccuracy. Examples may include creating false invoices to support invoices, backdating or postdating contracts, destroying books and records, etc.
To follow up on the previous example, suppose that during a compliance check of her return, Sarah produces false invoices that she has prepared to support the figures of takings in her records. If that’s the case, preparing artificial invoices and giving them to HMRC represents an attempt to conceal a deliberate inaccuracy. Where the behaviour falls in this category,
Category | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|
Category 1 | Unprompted | 40% | 100% |
Category 1 | Prompted | 60% | 100% |
Category 2 | Unprompted | 55% | 150% |
Category 2 | Prompted | 85% | 150% |
Category 3 | Unprompted | 70% | 200% |
Category 3 | Prompted | 110% | 200% |
Deliberate and Not Concealed Behaviour
When taxpayers give HMRC a document that they know contains an inaccuracy, the inaccuracy is considered ‘deliberate’. Examples of activities that indicate a ‘deliberate’ inaccuracy may include knowingly failing to record all sales by intentionally omitting certain transactions or deliberately claiming a deduction for personal expenses of an uncommon size or frequency. Below is a demonstration of how this behaviour could be seen in a taxpayer’s affair.
Sarah takes £50 per week as ‘pocket money’. This money goes unrecorded when she adds up her weekly takings and enters the total into her records. Those records form the basis of Sarah’s turnover figure on her tax return, which she knows to be incorrect.
Sarah deliberately recorded the wrong sales figures in the business records. However, there is no evidence of additional artificial or false records being produced to conceal this deliberate inaccuracy. Behaviours that fall within this category are charged penalties at the following rates:
Category | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|
Category 1 | Unprompted | 30% | 70% |
Category 1 | Prompted | 45% | 70% |
Category 2 | Unprompted | 40% | 105% |
Category 2 | Prompted | 62.5% | 105% |
Category 3 | Unprompted | 50% | 140% |
Category 3 | Prompted | 80% | 140% |
Any Other Case
Situations not covered by the above behaviours fall under ‘any other cases’, and the penalty charges will apply accordingly. The penalty rates for behaviours not deliberate are as follows:
Category | Behaviour | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|---|
Category 1 | Non-deliberate | Unprompted within 12 months | 0% | 30% |
Category 1 | Non-deliberate | Prompted within 12 months | 10% | 30% |
Category 1 | Non-deliberate | Unprompted after 12 months | 10% | 30% |
Category 1 | Non-deliberate | Prompted after 12 months | 20% | 30% |
Category 2 | Non-deliberate | Unprompted within 12 months | 0% | 45% |
Category 2 | Non-deliberate | Prompted within 12 months | 15% | 45% |
Category 2 | Non-deliberate | Unprompted after 12 months | 15% | 45% |
Category 2 | Non-deliberate | Prompted after 12 months | 30% | 45% |
Category 3 | Non-deliberate | Unprompted within 12 months | 0% | 60% |
Category 3 | Non-deliberate | Prompted within 12 months | 20% | 60% |
Category 3 | Non-deliberate | Unprompted after 12 months | 20% | 60% |
Category 3 | Non-deliberate | Prompted after 12 months | 40% | 60% |
Penalty on Inaccuracies
In addition to the penalties on late notification or filing, there are additional penalties where the taxpayer files an inaccurate return or sends inaccurate information. In such cases, the penalty rates are assessed on the behaviour of the taxpayer and whether the disclosure was prompted or unprompted. The definitions of the behaviours are as explained above:
Deliberate and Concealed
Category | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|
Category 1 | Unprompted | 40% | 100% |
Category 1 | Prompted | 60% | 100% |
Category 2 | Unprompted | 55% | 150% |
Category 2 | Prompted | 85% | 150% |
Category 3 | Unprompted | 70% | 200% |
Category 3 | Prompted | 110% | 200% |
Deliberate but Not Concealed
Category | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|
Category 1 | Unprompted | 30% | 70% |
Category 1 | Prompted | 45% | 70% |
Category 2 | Unprompted | 40% | 105% |
Category 2 | Prompted | 62.5% | 105% |
Category 3 | Unprompted | 50% | 140% |
Category 3 | Prompted | 80% | 140% |
Careless Cases
Category | Behaviour | Type of Disclosure | Minimum Penalty | Maximum Penalty |
|---|---|---|---|---|
Category 1 | Careless | Unprompted | 0% | 30% |
Category 1 | Careless | Prompted | 15% | 30% |
Category 2 | Careless | Unprompted | 0% | 45% |
Category 2 | Careless | Prompted | 22.5% | 45% |
Category 3 | Careless | Unprompted | 0% | 60% |
Category 3 | Careless | Prompted | 30% | 60% |
Making Voluntary Disclosure
If you are aware that you may have failed to declare your worldwide income or gains, you may wish to disclose the undeclared taxes on that income voluntarily. Doing so proactively is one way to mitigate the tax penalties for late payment of taxes. Willing taxpayers can use the Worldwide disclosure facility to make the disclosure.
The Worldwide Disclosure Facility is accessible to anyone who needs to disclose UK tax liabilities related entirely or partially to offshore matters. Offshore matters include any unpaid or omitted tax associated with:
- income from a non-UK source.
- Capital gains from non-UK source.
- assets located or held outside the UK.
- activities conducted outside the UK, and so forth.
If the eligibility criteria are met, anyone, regardless of residency status, can use this facility to make a disclosure.
Procedure
The first step in making the disclosure using this facility is to notify HMRC of your intention to disclose the Digital Disclosure Service (DDS). Upon successful notification, HMRC will give a unique Disclosure Reference Number (DRN) that should be used when filing the disclosure.
Once notified, you must gather the necessary information to make the disclosure and calculate final liabilities, such as tax, interest, and penalties, within 90 days of notifying HMRC of your intention to make the disclosure.
If taxpayers are unsure about any of these calculations, it is advisable to seek professional advice.
Penalties on the Undeclared Income
HMRC will penalise taxpayers for undeclared taxes on overseas income, known as potential lost revenue. The penalty rates will apply depending on the individual’s behaviour towards undeclared taxes.
Deliberate and concealed | 100% of Potential Revenue Lost by HMRC |
Deliberate not concealed | 70% of Potential Revenue Lost by HMRC |
Non-deliberate | 30% of Potential Revenue Lost by HMRC |
Conclusion
Declaring capital gains from foreign property sales is a legal requirement for UK residents, and non-compliance can lead to substantial penalties, especially in cases of deliberate concealment. HMRC’s proactive measures, such as nudge letters, highlight the importance of accurate reporting. Taxpayers who fail to declare gains risk escalating penalties based on the severity of their actions, with options like the Worldwide Disclosure Facility available to rectify past mistakes and reduce financial repercussions.
To avoid legal and financial risks, taxpayers should fully comply with UK tax laws, seek professional advice when necessary, and consider voluntary disclosure if they have undeclared income or gains. Staying proactive and transparent mitigates penalties and fosters a smooth relationship with HMRC, ensuring peace of mind and financial stability.
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