9543 CGT on under-declared sale price

Say you bought a house in Italy 10 years ago, back in the days when under declaring the amount paid was the norm. Say you actually paid €200K but declared €100K. Say also that you are a UK citizen, non-resident in Italy (i.e. it is a holiday home). Say that now you sell the house for €400K (and as of today, you will not find anyone willing to let you significantly under-declare the sale price).

So, you've made an actual capital gain (forgetting fees etc.) of €200K, but a declared gain of €300K. Now, having owned the house for > 5 years there is no CGT to pay in Italy, but as a UK citizen you have to declare the proceeds as a capital gain on foreign property, and the gain (less any CGT exemption, taper relief & expenses) would attract 40% tax.

My question is this - at face value, the UK revenue would have to tax you on the declared gain of €200K rather then the actual €100K. Does anyone know whether the old Italian practice of under-declaring is in any way recognised by the UK revenue, and whether they can ever be convinced that the actual purchase price was way higher than was stated in the atto? I strongly suspect not, in which case, the individual would clearly face a massively inflated CGT bill.

This may seem a rather convoluted scenario, but it arises directly from the changes in Italian law to prevent under-declaring in future, and the abolition of Italian CGT (which effectively prevents Italian residents from getting screwed by the end of the under-declaring culture).

I'd imagine there are many Brits in this situation, if not In italy, then certainly in Spain where under-declaring was also standard practice and where oodles more Brits' bought holiday homes long ago.

I know that there are work arounds for this scenario (don't sell until after becoming a tax resident in Italy, when the UK govt lose any claim over the gain you make when you sell) - but I wonder meantime what has happened to those who are forced to sell immediately due to changed circumstances/credit crunch etc. and are faced with the prospect of an artificially large CGT.

Category
Legal

Submitted by Anonymous (not verified) on Tue, 05/13/2008 - 12:12

sorry, re-reading my own post, I think I slightly lost the plot midway through ... what I'm really getting at is, if the new Italian law allows for paying tax on the cadestral value (while declaring the actual price paid) is there any milage in someone in the above circumstances attempting to convince UK taxman that the UK taxable gain should also be based on cadestral values rather than actual sale price?

Submitted by Anonymous (not verified) on Tue, 05/13/2008 - 13:02

Having read both posts...........I would say .......that I lost the plot as well ...........sorry no help at all

Submitted by Anonymous (not verified) on Tue, 05/13/2008 - 14:15

Unless you've paid in cash in an unmarked envelope you've likely got some proof of how much you've paid.

Is the UK government really going to care if you've screwed the Italian tax man out by under pricing the intial price?

Other thing when you file your UK taxes what documents do you normally file? I'm used to a "trust" based system. You declare. The tax man then has seven years to audit you if they don't believe. If they audit you find the box of receipts and waste months :eeeek:

I can't imagine the tax man caring what the cadestral value is. You received X. You paid Y. The diference worries the. Unless it's a non-arms length transaction then they might ask for an independent valuation.

Submitted by Anonymous (not verified) on Tue, 05/13/2008 - 14:27

take your point(s) NickZ, it was largely a philosophical question on my part. I have no intentions of selling in the forseeable future and hopefully if I ever decide to, I'll either be non-resident in UK by that stage or I'll declare the actuals and wait to see if anyone wants to investigate (you're right on the 7 year itch). If the worst happened, I would then point to the huge € cash withdrawl on the same day as the bankers draft etc. etc.. Just wondered whether there were perhaps sufficient people left in this situation currently for some honest souls to have sought a ruling from HMCE ..