How Mortgages Can Trigger Surprise Expat Tax Bills

Tax Planning

British expats moving overseas and paying off a mortgage on their UK home could face unexpected tax bills, warn financial advisers.

Although foreign currency gains or losses on residential property mortgages are not taxed in the UK, the same rule does not apply in many other countries.

One of the exceptions is Australia, which is a favourite destination for thousands of British expats.

Depending on how the Australian dollar fares against the pound when a mortgage is paid off, the foreign exchange difference could be treated as a taxable gain or a loss that can be relieved against other income.

The warning is given by financial advisers discussing foreign exchange issues for expats in trade publication FT Adviser.

Tax implications of repaying a mortgage

One example is given showing how a British expat now living in Australia is affected by local tax rules once they have moved overseas.

In that case, an expat had a £100,000 mortgage in the UK which was worth AUS$150,000 and is redeemed when the exchange rate is AUS$2.20 to the pound.

Paying off the mortgage is then equivalent to AUS$220,000, leading to an AUS$70,000 loss that is can be offset against other income.

However if the exchange rate dropped to give a foreign exchange profit, the expat would pay tax in Australia on the amount.

The rule also applies for taxpayers resident in the US.

Tax tips for expats

Best advice for expats to watch foreign exchange rates against the pound in the country where they are tax resident to time the redemption of a UK mortgage to minimise any tax due on a gain.

Also expats should check before leaving the UK if the country where they intend to live taxes foreign exchange gains on mortgage redemptions to make sure no unexpected tax bill arrives in the post.

The foreign exchange gain problem often catches expats because gains are not taxed on liabilities in the UK, only on assets. However, business property mortgages can be an exception.

In some cases, the tax bill on a mortgage liability for an expat can exceed the any price rise in the value of the property.


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