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Advisor Urges UK Foreign House Buyers To Look Before They Leap

by Jason Gorringe, Tax-News.com, London

02 August 2007


Tax advisors PricewaterhouseCoopers have urged British buyers of holiday and investment homes abroad to make sure they are fully aware of the potential legal pitfalls that await them when purchasing and owning foreign property, particularly in the area of taxation.

With many Brits returning from their holidays with dreams of owning their place in the sun, PwC has cautioned that impulse decisions can often lead to unexpected problems for buyers and highlighted the essential need for sound advice and planning to avoid expensive and time-consuming issues at a later stage.

Leonie Kerswill, tax partner at PricewaterhouseCoopers LLP, said:

“While the UK rules have changed so that it is now possible to buy foreign property through a company, it is still important that any decision to buy property abroad and how to own it is well thought out. The most common issues tend to involve foreign acquisition taxes such as local government taxes or VAT on new purchases, deemed rental income charges and wealth tax.

“Good advice is essential for those buying abroad and once the purchase has been made, a regular UK and foreign tax review should be carried out to ensure that owners are up to date with new rules that may increase or reduce the tax rates in each country.”

PricewaterhouseCoopers has seven tips for those considering buying property abroad:

1. Consider the ownership structure. This could be direct ownership or via a company, partnership or other entity. These have different advantages and disadvantages depending on the country concerned. For example, certain company structures make buying property in countries such as the Czech Republic or Bulgaria a much simpler process.

Partnerships may be used (such as the French Société Civile Immobilière ‘SCI’), for administrative purposes and to ease transfers of property. However, such structures may have different tax treatments in the overseas country and the UK. For example, the French SCI is generally a ‘see-through’ structure in France, and is not taxable in its own right, whereas HM Revenue & Customs view it as a company with potentially very differing tax consequences. It does seem as if the prospect of a tax charge for owning your own property via a company is receding following an announcement in the March 2007 Budget.

2. Wills should be considered to help fit in with the inheritance rules of the country the property is in.

3. Capital gains tax. If owners use the overseas property for a considerable amount of time, for example it is regularly lived in over the winter months, it may be possible to elect that it should be the principal private residence for UK capital gains tax (CGT) purposes. Some care is needed here though, as such an election may impact on the CGT principal private residence relief for their UK home, and will not help reduce any CGT liability in the overseas country.

4. Reporting requirements. As well as reporting any rents on UK tax returns, people are likely to need an overseas tax return for local or national property taxes. With the ease of information transfer nowadays, the tax authorities in both countries will share information on property acquisitions and tax paid, so it is important that the returns are correct and on time.

5. Invest or develop? In recent years more UK residents have been considering developing a property offshore, taking advantage of low labour costs and the chance of significant profits on a sale in new property hotspots. A common misconception is that such profits are liable to capital gains tax or are even tax free. However, repeated development projects, followed by sale of the properties will almost certainly be regarded as a trading activity and so subject to UK income tax (as well as any foreign taxes).

6. Legal points. Remember that a good solicitor conversant with the legal systems and customs of both the UK and the foreign country is needed, especially given that buyers may be dealing with a language or even alphabet that they do not understand.

7. Selling the property at a later date. On a later sale or gift of the property, foreign gift taxes and death duties may apply, as well as UK capital gains tax (CGT) or inheritance tax (IHT). In addition, forced heirship rules or the lack of civil partnership equivalent legislation may conflict with a person’s plans. Foreign withholding taxes or disposal taxes should be considered, even where profits are also taxable in the UK, as care is required to ensure that the appropriate credit is available and, if so, used against any UK tax liability.


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