Owning a property abroad can be taxing

One of the advantages of freelance work is the flexibility it affords. That, together with mobile technology, can tempt freelancers to join the growing number of British people who own property abroad.

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. The most popular place for Britons to buy is Spain, ahead of France, Portugal and Italy. The US is also a popular destination, with many also tempted by off-the-beaten-track locations such as Bulgaria. However, where you decide to buy could have a serious impact on your finances.

Justin Rix, tax specialist at Grant Thornton, said: "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.

"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."

Financial considerations

Below Mr Rix outlines some of the key financial considerations of owning property in some of the most popular destination countries.

UK France USA Bulgaria Average cost of property £184,924 (Land Registry) 30% less than UK £132,000 £16,000 Tax on rental income Up to 40% up to 48.09% Up to 35% (+ state taxes if applicable) Up to 15% Wealth tax (on value of property owned) NONE Up to 1.8% NONE NONE Could the gain on sale of the property be taxable? (Capital Gains tax - CGT) YES YES YES YES Inheritance tax (e.g. on death or gift) YES YES YES NO Comments Relief available from CGT. Wealth tax based on value of property over a certain value Favourable CGT rates are available. IHT issues are very complex State and local taxes will also need to be considered. Some property cannot be owned by foreigners. As corporation tax is 15% many choose to buy through a local company

Cyprus Spain Italy Average cost of property £100,000 £130,000 £130,000 Tax on rental income Up to 30% (plus defence tax of 3%) Up to 25% Up to 43% Wealth tax (on value of property owned) NONE Up to 2.5% NONE Could the gain on sale of the property be taxable? (Capital Gains tax - CGT) YES YES YES Inheritance tax (e.g. on death or gift) NO YES NO Comments Increasingly popular choice, with a relatively low cost of living. Permission to purchase a property must be obtained by written application Popular choice, due to weather and large UK community. CGT and IHT regimes make tax planning essential No IHT and CGT reliefs are attractive. However, local taxes on purchase can be up to 10% of property value

Tax on rental income

Mr Rix said: "The attraction for many who buy a second property abroad, is the income they can gain from renting the property. However the rates at which this income is taxed vary from a low 15 per cent in Bulgaria, to 43 per cent, for higher rate tax-payers in Italy. This tax will generally be applied to the rental income received after deducting allowable expenses, for example loan interest or agents fees, however in some countries the tax is figured on gross rents."

Wealth tax

This is effectively an annual tax on an individual's wealth, based on the value of their assets. Typically this will only be levied where an individual's assets exceed a certain amount (e.g. €750,000 in France) and for non-residents of that country will only apply on certain assets physically located in that country.

Again rules vary from country to country, and many places, such as the UK, do not levy wealth tax. However, it could be a nasty surprise for the unprepared buyer of a second property.

Capital gains tax (CGT)

CGT may be levied on a sale of a holiday home or investment property, typically this will be based on the amount that the property has gained in value since purchase.

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

Inheritance tax (IHT)

Mr Rix said: "IHT varies widely across different countries, and careful consideration of the interaction between the UK and overseas regimes is required. In the UK a will can be written to dispose of assets as desired (subject to any challenge), however, in most of Europe forced heirship rules limit the scope to divest of any assets. It is therefore essential to take tax and legal advice before purchasing a property and to write a will in the country the asset is situated."

Those with second marriages may find it particularly difficult to combine the best tax options with passing on assets in the way they desire. Owning property abroad can also lead to problems on death as foreign probate may be needed before the assets can be dealt with.

Interaction with UK taxes

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. The provisions for obtaining this relief are rather complicated, but generally will result in the individual suffering taxes at the higher of the UK or overseas rates.

Principal Property Relief (PPR)

Those who buy a second home can choose to elect one of the properties as their principal private residence (PPR). Most choose their UK home, and have an opportunity at a later date to elect their holiday home, obtaining a capital gains exemption for the period since it was elected - as well as the last three years of ownership, whether or not it is let out during that period.

Mike Warburton, senior tax partner at Grant Thornton said: "You may assume that there would be a disadvantage in electing for your holiday home to be your PPR because it limits PPR relief on your main house. As it happens, the period that you need the election on the second property to run can be very short indeed. The Revenue manuals give an example where the period is one week."

A common problem

While the tax regimes vary between countries, 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.

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

Preparation

Mr Rix 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. Once a property has been purchased, they should make sure their will is updated, and in certain circumstances, it would be wise to have a will in the country where the property is located."