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Where Taxpayers and Advisers Meet

Failed purchase - CGT or Foreign Income

Pushp
Posts:6
Joined:Fri Jul 21, 2017 10:16 pm
Failed purchase - CGT or Foreign Income

Postby Pushp » Sat Jul 22, 2017 1:03 pm

Looking for some help to understand tax implications from a failed property transaction.

I Invested money to buy a property abroad but the property developer never delivered the property. After much deliberation, I was finally able to get my money back with some compensation for the opportunity loss from the developer. This has however thrown me into a tax dilemma and wondering if someone can help me. The compensation for lost opportunity was tax locally in the country of origin as per local tax law. Assuming I am UK domiciled and resident, what sort of tax will be applicable? - will this be classified CGT or Foreign income? The foreign country has a DTA with UK like most countries so I am hoping to get credit for foreign tax paid. Will foreign exchange rates calculation include capital as well as compensation when calculating overall gain. A weaker £ has put me in a rather unwanted situation. Any help is much appreciated. Thank you!

AmanSood
Posts:216
Joined:Mon Jan 09, 2017 4:12 pm

Re: Failed purchase - CGT or Foreign Income

Postby AmanSood » Sat Jul 22, 2017 1:26 pm

My initial thought would be that the compensatory element is related to the property so should be treated as your capital gain and you should pay capital gains tax in the UK on the disposal. The UK would then give you a credit for the overseas tax paid capped of course at the UK tax rate.
Advising on UK employment, expatriate and personal taxes
aman.sood@e-taxconsulting.com.
+44 (0) 207 846 0155

Pushp
Posts:6
Joined:Fri Jul 21, 2017 10:16 pm

Re: Failed purchase - CGT or Foreign Income

Postby Pushp » Sun Jul 23, 2017 3:16 pm

Thank you AmanSood. Can you also advise on foreign currency calculation applicable for this transaction please. Following is what I have deduced based on my research -

1. Use the GBP conversion rate published by HMRC for the month of initial transaction (on the capital)
2. Use the GBP conversion rate published by HMRC for the month when transaction was cancelled (on capital + compensation).
3. Then difference then becomes the capital gain (in GBP)
4. Report the gain on CGT form with SA
5. Claim Foreign Tax relied on form SA106

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Failed purchase - CGT or Foreign Income

Postby maths » Mon Jul 24, 2017 12:04 pm

No asset (ie foreign real estate) was actually purchased. The capital costs incurred were repaid.

Presumably the so-called compensation was for breach of contract?

How was the compensation categorised under the foreign law and how was it calculated?

Pushp
Posts:6
Joined:Fri Jul 21, 2017 10:16 pm

Re: Failed purchase - CGT or Foreign Income

Postby Pushp » Mon Jul 24, 2017 1:13 pm

Hi maths

The compensation was for breach of contract - the developer promised to launch the property within 1 year of advance payment but never got around doing so. Hence, as per terms of the agreement, the developer was required to return capital with compensation for loss incurred by investor (me).

In foreign tax return, this was classfied under headline 'Income from other sources'

Hope that helps

Thank you


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