Capital Gains Tax and Inheritance of Real Estate

Capital Gains Tax (CGT)

UK

• Main residence: exemption from CGT (Private Residence Relief)
• Investment property: 18% (basic rate), 24% (higher rate) — from April 2024
• Annual exempt minimum: £3,000 (2024/25)
• Declaration and payment: within 60 days after completion
• Non-residents: CGT on UK property since 2015

Example: purchase £400,000, sale £550,000. Gain: £150,000 − £3,000 (allowance) = £147,000. CGT (higher rate 24%): £35,280

Spain

• Residents: 19–28% (progressive scale)
  • Up to €6,000: 19%
  • €6,001–50,000: 21%
  • €50,001–200,000: 23%
  • €200,001–300,000: 27%
  • Over €300,000: 28%
• Non-residents: fixed rate 19% (EU) or 24% (non-EU)
• Exemption for residents >65 years old (main residence)

Germany

• Speculative holding period (Spekulationsfrist): 10 years
• If held >10 years → full exemption from CGT
• If <10 years → gain taxed at ordinary income tax rate (14–45%)
• Exception: own residence (the last 3 years) — exemption even if <10 years

UAE

• 0% CGT — no capital gains tax
• One of the main advantages for investors
• No obligation to declare in the UAE (may be required in country of tax residence)

Comparative CGT Table

Inheritance Tax

UK: Inheritance Tax (IHT)

• Rate: 40% on value over £325,000 (nil rate band)
• Additionally: Residence Nil Rate Band £175,000 (when transferring residence to children)
• Maximum allowance: £500,000 per person
• UK property is subject to IHT even if the owner is a non-resident
• Example: non-resident owns an apartment in London £1,000,000. IHT = 40% × (1,000,000 − 325,000) = £270,000

Protection Structures against IHT

• Enveloped property — ownership via company (offshore SPV). Since 2017: ATED (Annual Tax on Enveloped Dwellings) and IHT still applies
• Trust — transfer to trust during lifetime (PET: potentially exempt transfer after 7 years)
• Life insurance — life insurance in a trust to cover IHT

Spain: Impuesto sobre Sucesiones

• Progressive rate: 7.65–34%
• Significant allowances for direct heirs
• Large variation between regions (Madrid: nearly 0%, Andalusia: substantial)

Germany: Erbschaftsteuer

• Rates: 7–30% (for close relatives), up to 50% (for unrelated persons)
• Allowances: €500,000 (spouse), €400,000 (children), €200,000 (grandchildren)
• Example: inheritance of a house €800,000 to a child: taxable base €400,000, tax ~€60,000

UAE

• No inheritance tax under UAE law
• BUT: for Muslims — distribution according to Sharia norms
• For non-Muslims: recommended to make a will at DIFC Wills Service Centre
• Without a will: risk of distribution according to Sharia (local court)

Tax Planning for Sale: Key Strategies

Optimization of capital gains tax is one of the most valuable skills of a tax consultant in real estate. In the UK, the basic tool is the CGT Annual Exempt Amount: annual exemption of £3,000 (from 2024, reduced from £12,300 in 2022). When selling jointly with a spouse/partner, the allowance can be doubled. The spread between 18% (basic rate) and 28% (higher rate) creates an incentive to structure transactions in years with low income. In Germany, the 10-year rule is a powerful tool: holding an asset for more than 10 years completely exempts the gain from Spekulationssteuer, which makes long-term German investments especially attractive to patient investors. In Spain, non-resident EU citizens pay CGT 19%, non-EU citizens — 24%, however DTAA agreements exist, allowing the tax to be credited against tax in the country of residence. For non-Muslims with assets in the UAE, it is critically important to prepare a will in the DIFC Wills Service Centre in advance: the cost is $100–1,000, and the savings when distributing assets without court intervention can amount to hundreds of thousands of dollars in legal fees and years of delay.

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Practical Exercises

Exercise 1. An investor bought an apartment in Berlin for €300,000 in 2020 and sells it in 2026 for €420,000. His marginal income tax rate: 42%. Calculate the CGT. What changes if he sells in 2031?

<details> <summary>Solution</summary>

Sale in 2026 (6 years of ownership, <10 years): gain €120,000. CGT = 42% × 120,000 = €50,400 + Solidaritätszuschlag 5.5% = €50,400 × 1.055 = €53,172. Sale in 2031 (11 years of ownership, >10 years): CGT = €0 — full exemption. Savings: €53,172.

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Exercise 2. A UK non-resident owns investment property in London worth £2,000,000. Draw up a plan for protection from IHT (40%).

<details> <summary>Solution</summary>

Without planning: IHT = 40% × (2,000,000 − 325,000) = £670,000. Strategies: 1) Life insurance in a trust: policy for £670,000 — heirs use insurance for paying IHT. 2) Sale and reinvestment in UAE: 0% IHT, but CGT when selling UK property. 3) Lifetime transfer: PET — after 7 years exemption from IHT, but loss of control. 4) Loan from offshore company: reduction of net value of UK asset (but HMRC scrutinizes carefully). The most practical option: life insurance in trust.

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