Foreign Capital Losses and UK Capital Gains – What UK Taxpayers Need to Know
As international investment becomes increasingly common, many UK taxpayers hold overseas property, shares, investment funds, or other assets. A frequent question is whether a capital loss incurred on a foreign asset can be used to reduce UK Capital Gains Tax (CGT).
The answer is generally yes, but only if certain conditions are met.
The General Rule
For individuals who are UK tax resident and taxed on the arising basis, chargeable gains and allowable losses are computed under the UK Taxation of Chargeable Gains Act 1992 (TCGA 1992), regardless of where the asset is situated.
This means that:
- A gain on overseas property is generally taxable in the UK.
- A loss on overseas property may also be an allowable capital loss.
- Foreign capital losses can normally be set against UK chargeable gains in the same way as UK losses.
The location of the asset is generally irrelevant; what matters is whether the loss qualifies under UK tax legislation.
Conditions for Relief
To claim relief, the loss must generally satisfy the UK capital gains rules:
- It must arise on the disposal of a chargeable asset.
- The disposal must be recognized for UK CGT purposes.
- The loss must be computed under UK tax rules rather than under foreign tax legislation.
- The claim must be made within the statutory time limits.
Foreign tax calculations often differ significantly from UK computations. Exchange rates, acquisition costs, enhancement expenditure and local tax adjustments may produce a different result for UK CGT purposes.
Double Taxation Relief
Where foreign tax has been paid on the disposal of an overseas asset, the UK may provide relief under:
- the relevant Double Taxation Agreement (DTA), or
- the UK’s unilateral double taxation relief provisions.
However, double taxation relief applies to tax paid, not to capital losses. The availability of a foreign loss is determined under UK CGT legislation.
Practical Example
Sarah is UK resident and owns:
- UK investment shares producing a gain of £120,000
- An apartment in Spain sold at a UK-computed capital loss of £45,000
Provided the Spanish property loss is allowable under UK rules, Sarah may offset the £45,000 loss against the £120,000 UK gain, reducing her net chargeable gains to £75,000 before deducting any available annual exempt amount (where applicable under the rules in force for the tax year).
Points to Remember
- Overseas losses are not calculated using foreign tax rules.
- Exchange rate movements can create a UK gain or loss even where none exists in the foreign jurisdiction.
- Documentary evidence of acquisition costs, enhancement expenditure and disposal proceeds should be retained.
Unused allowable losses may generally be carried forward, provided they have been claimed correctly.
