Patience advised with your place in the sun

Published 06th Sep 2007

Many of us return from our holidays with dreams of buying a home in the area we visited, however an impulse decision now is highly likely to come back and bite you in the future
Unexpected problems abroad can rear their heads more frequently than most would imagine whilst abroad and planning is imperitive to make sure that the legalities and tax liabilities of home ownership in another country don’t cause undue financial stress.

The 2007/08 Budget opened doors which many Brits tempted by the idea of owning an idyllic villa abroad might now look to go through, especially where home ownership through a company is concerned. It is now possible to buy foreign property as a business venture through a company yet use it for your own enjoyment during the year, however Leonie Kerswill, tax partner at PricewaterhouseCoopers LLP (PWC) advised a degree of caution with such an enterprise.

She 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.

“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."

The most common tax issues concerning foreign acquisition of property are local government taxes or VAT on new purchases, alongside deemed rental income charges and wealth tax.

Seven key issues to bear in mind:
• Pay close attention to the ownership structure. Each type of ownership, and indeed each country, has different advantages and disadvantages whether the property is owned via a company, partnership or other entity. 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 Societe Civile Immobiliere 'SCI'), for administrative purposes and to ease transfers of property. However be aware that 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 the UK’s HM Revenue & Customs views it as a company with potentially very differing tax consequences. However PWC believe that the prospect of a tax charge for owning your own property via a company is receding following the announcements made in the March 2007 Budget.

• Wills should be always be considered to help fit in with the inheritance rules of the country the property is in. There could be translation and legality issues when attempting to use a UK Will for assets abroad so it is best to create a support system via a local notary alongside your UK arrangements to make sure nothing slips through the net.

• Capital gains tax (CGT) is one of the most important issues. 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 (PPR) for CGT purposes to mitigate against excessive tax.

• If letting out the property, people are likely to need an overseas tax return for local or national property taxes as well as their UK tax return. 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.

• 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).

• Legal points. Remember that a good solicitor who is fully 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 an alphabet that they do not understand.

• On a later sale or gift of the property, foreign gift taxes and death duties may apply, as well as UK 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.

Source: ' Personal Finance & Savings '

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