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Rawlings: Swiss property and CGT confusion

/ 28 February 2022

Andrew Levene

Rawlings [2022] UKFTT 00032 (TC) is a case involving computation of a capital gain on an overseas property.

Specifically, in 2016 Mr and Mrs Rawlings sold an apartment in Zermatt.  After deducting costs of sale, it realised some CHF 670,000.  They had bought the apartment ten years earlier for about CHF 580,000 including costs.

What seems to have confused Mr and Mrs Rawlings was the combination of:

(a) the property having been bought with a mortgage;

(b) the mortgage having been a non-sterling one;

(c) the fact that they had remortgaged to release equity during their period of ownership; and

(d) the appreciation of the Swiss franc against sterling in the period.

In fact, none of these factors (except, indirectly, the last) has any impact on the computation of the gain for the purposes of Capital Gains Tax (‘CGT’).  Rather, the right approach is to translate the cost into sterling at the exchange rate applying on acquisition and to compare it with the sale proceeds translated into sterling at the exchange rate applying on sale.  So, despite the difference in cost and proceeds being only CHF 90,000, the gain for CGT purposes turns out to be nearly £270,000 (most of which is, in economic terms, attributable to the appreciation of the Swiss franc, of course).

And that is what the Tribunal decided (as it was bound to do in the light of previous decisions on which the courts considered the point).

In their computation, Mr and Mrs Rawlings had correctly recognised that the proceeds had to be translated into sterling.  And they had correctly deducted as a cost the deposit (which was CHF 280,000) translated at the appropriate rate.  But they had then apparently sought to deduct as a cost the amount of mortgage debt paid off on sale (translated at the rate applying on sale) and capital repaid during the period of ownership (translated at an average rate).  Since they had remortgaged during their ownership, these amounts exceeded the cost of the property (as well as having been translated at the wrong rates).

A similar misunderstanding or oversight can arise even without the complication of foreign currency.

It’s not unusual, as the value of a property grows, for a property investor to release part of the increased equity by remortgage.  Tax-free money!  Well, yes: but the result may well be that when the property comes subsequently to be sold, the capital gain exceeds the net cash available from the sale.  In some cases, the net proceeds after repaying the increased mortgage debt may not even be sufficient to pay the tax.

It’s surprising how often this point comes up in practice.  Beware of it.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Andrew Levene

Director of Property Taxes

T +44 (0)20 8922 9394
E andrew.levene@bkl.co.uk

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