Britons Warned On Tax Pitfalls Of Buying Property Abroad

by Robert Lee, Tax-News.com, London

15 August 2006

Buying property abroad is becoming an ever more popular investment for Britons looking to build a nest egg for their retirement or or boost their earnings with rental income. However business and financial advisers Grant Thornton are urging buyers to be fully aware of the different tax regimes abroad, before deciding where to buy.

Latest Government figures show there are 257,000 households with second homes abroad. Spain is by far the most popular location to buy property, followed by Portugal, France and Italy. The United States and Eastern European states such as Bulgaria are also becoming popular with British investors. But, as Grant Thornton points out, where you buy could have a serious impact on your finances in terms of taxes and other costs.

"While good weather, availability of low cost flights and the cost of property are the biggest factors when making the choice of where to buy, the local tax implications should also be carefully considered, as these can have a significant impact on the costs associated with the holiday home," stated Justin Rix, tax specialist at Grant Thornton.

"If you do buy a property abroad, income received from the rental of the property may give rise to local taxes. In many countries any gain arising on the sale of the property or merely its ownership can lead to a tax liability. Furthermore, if the owner of the overseas property is a UK tax resident, rental income or gain on the sale of the property may also result in a UK tax liability, with the individual having to obtain relief under the complex 'double tax relief' provisions. This is on top of all the property taxes associated with purchasing property," he added.

Taxes that buyers must be aware of when they buy abroad include tax on rental income, wealth tax, capital gains tax, and inheritance tax. There will also be tax consequences for the buyer at home in the UK.

These taxes vary widely by country. For example, while tax on rental income is up to 15% in Bulgaria, it can reach as high as 48% in France. Wealth taxes are also something to be aware of. While most countries where Britons are buying do not charge wealth tax, in France there is a wealth tax of up to 1.8% of the value of a property, and in Spain, wealth tax can be up to 2.5%.

Most countries also levy capital gains tax on the amount that a property has appreciated since purchase.

"CGT when selling a property may be a shock to some if the property has strongly increased in value," Rix continued.

"Individuals will also need to be mindful of the effect that fluctuating exchange rates can have, especially in countries with a less stable currency. For example, a loss on the sale of the property in local currency could actually turn into a profit for UK tax purposes, if the exchange rates varied enough between purchase and sale," he added.

Rental income received on an overseas property or a gain realised on its sale may also give rise to UK tax consequences. Where this is the case, relief will be available in the UK for taxes paid in the overseas country, but the rules are complicated and generally will result in the individual suffering taxes at the higher of the UK or overseas rates.

While tax regimes vary between countries, Grant Thornton also points out that one concern for UK offshore property owners is the increased scrutiny from HM Revenue and Customs (HMRC) on anyone who has an offshore bank account. A recent court decision means that HMRC can obtain details about who has an overseas account directly from banks.

Rix continued: "For individuals with property abroad, it often makes sense to have a bank account overseas to pay utility bills and other such costs. It is important to ensure that any interest income received in the overseas account is properly disclosed on the UK tax return. This is also true for any rental income or capital gains arising on overseas property."

The source of the funds used to buy the property or open the investment account may also be the subject of attention from the UK taxman.

Rix explained: "Information is also routinely and increasingly exchanged between Revenue authorities in different countries - the world has become a much smaller place for financial transactions."

He concluded: "People who are considering taking the plunge should seek specialist tax advice both in the country in which they intend to buy and in the UK - otherwise it could end up costing them much more than they bargained for."

Recommended