Brexit and European Capital Gains Tax

Friday, August 12, 2016

Brexit and European Capital Gains Tax

The majority of public and press discussion on a UK exit from the European Union concentrated on immigration, the UK’s financial contribution to EU coffers, and the control of domestic legislation.

But, it is important to be aware of the rates of capital gains tax (CGT) you might end up paying in Europe on the sale of a holiday home when the UK leaves the EU.

Overseas capital gains taxes

While indirect taxes (VAT, customs and excise) have been specifically introduced by way of EU regulation, direct taxes (income tax, capital gains tax and corporation tax) should be firmly in the realm of a member state’s domestic legislature

Yet in the past decade, the EU has increasingly influenced member states’ direct tax systems. The focus of this attention has been not so much on the adoption of EU tax legislation but more the influence of the European Court of Justice (ECJ) in direct tax matters.

So, has the influence of the ECJ been good or bad for UK nationals owning holiday homes in Europe?

European capital gains taxes

It is quite common in Europe for nations to impose unfavourable methods of calculating gains or higher rates of CGT on disposals of real estate owned by non-resident individuals.

In France, where a resident would pay capital gains tax on real estate gains at a rate of 19 per cent, non-residents would normally pay 33.3 per cent. In Portugal, a resident obtains a 50 per cent reduction in the capital gain and benefits from inflation on the cost of the assets after two years — reliefs which are generally denied to a non-resident.

In Spain, capital gains tax has been up to 35 per cent on non-residents.

European Court of Justice

The ECJ becomes involved whenever there is an infringement like inequitable tax law. Member states are obliged to accept all the consequences of an ECJ ruling and to implement them in their national law.

ECJ judgments altering domestic tax law

For UK residents who own holiday homes in Europe, the ECJ’s involvement has resulted in the benefit of the same methods of calculating gains, and the same, lower rates of CGT as would apply to residents in France, Portugal and Spain on property disposals.

An ECJ ruling forced France to amend its capital gains tax legislation, and from January 1 2015 the CGT rates applying to residents and non-residents living in the EU were aligned at 19 per cent.

After another ruling, Portugal amended its legislation, with the result that from January 1 2008 a non-resident living in the EU can opt to be taxed as a Portuguese resident on gains, thereby obtaining the same 50 per cent reduction in tax.

And in Spain the government, nudged by an ECJ ruling of September 3 2014, decreased CGT to bring it on a par with the resident’s rate of 19 per cent from this year.

Consequences of the UK leaving the EU

One of the consequences of the UK leaving the EU is likely to be that those owning real estate in mainland Europe would no longer benefit from the ECJ interceding on their behalf where there is an inequality in the tax rates applied to resident and non-resident taxpayers.

If we are outside the EU, the higher, non-EU rates of tax and unfavourable methods of calculation which applied pre-ECJ would probably return.



Jason Porter

Originally published in the A Place in the Sun magazine - Issue 126