Q: Do I need tax advice?

Taxation of overseas property.

Taxes vary widely from country to country and unless you are planning to make a permanent move overseas, owning property abroad may have implications for your taxation liabilities at home. Tax filing dates, procedures and requirements may vary widely and penalties for making a mistake can be severe. This makes the need to seek specialist advice doubly important. Wherever you buy, you will need to take advice on local taxation and the implications for your tax status at home. The information below highlights some potential issues, but professional advice from a qualified tax expert should always be sought.

Taxation can make the difference between a rewarding investment and a pocket-emptying plunge. This means that the level of taxation is one of the invisible driving forces behind the dispersal of buyers across different property markets. For example, higher rate income tax in Germany is 45% whilst Slovakia has a flat tax of 19%. Investment conditions in Germany would have to be very strong to compensate for the tax burden.

Main tax considerations:

How will any gain on the property be taxed in the country you wish to invest in?
How will rental income be taxed? Is there a minimum tax on rental income? Is there a withholding tax?
Are there any other local taxes to consider? These could include purchase taxes, annual rates (for example, the UK council tax) and annual wealth tax (countries with this include France, Switzerland and Greece – although many countries are now in the process of abandoning the wealth tax. Spain has just abolished wealth tax, as of 2009)
Will any profits be taxable in your home country?

Forms of taxation

There are several forms of taxation with the potential to make life seem very rosy of very blue for property investors. Some taxes are easy to calculate and your estate agent should be able to give you a good idea of the fees attached to buying in any particular country. Stamp duty, for example, is calculated as a percentage of the purchase price and is correspondingly easy to work out.

Other taxes are harder to calculate. Capital gains and income tax on renting can swallow up money like a starved boa constrictor but these taxes will depend on the amount of money made during the period of ownership. Reporting taxes in a foreign jurisdiction and working out which allowances apply is a matter for a specialised accountant. This is something else that will have to be factored into your costs.

Taxes can also impact on people in a way that they don’t expect. Some countries operate a withholding tax, where a tenant is obliged to keep back tax on the payment of rent when the landlord is overseas. This can be levied at rates of over 20%, creating problems for landlords dependent on rental income for interest payments or mortgages. Other jurisdictions, France for example, levy a wealth tax. This is collected annually on a sliding scale between 0.55% and 1.8% depending on the value of your property.

Capital Gains

Capital gains are a charge on profit made whenever a company or individual sells an asset to someone else and makes a profit. Capital gains are levied on all sorts of goods, from paintings to stocks, although many countries operate a dispensation on homes used as a primary residence.

However, if the property you own abroad is an investment, the dispensation given on primary residences will not be available to you. This means that when you sell the property you may be liable for some form of capital gains tax.

‘Taxation can make the difference between a rewarding investment and a pocket-emptying plunge’

The rate of capital gains tax and how it is calculated can vary significantly from country to country. Some countries offer taper relief which reduces the amount of capital gains owed for each year that you own the property. These sorts of schemes are often in place where governments are trying to stop rampant speculation in the property market.

Capital gains tax is usually charged against profit, but what is defined as profit will vary. Some countries may define the capital gain as the difference between the purchase price and selling price, whilst others may make allowances for other costs incurred such as purchase costs, selling costs and even property maintenance.

Care should be taken when it comes to capital gains as some countries have been found to be far from transparent in their dealings. At the time of writing it would seem thousands who sold property in Spain between March 2004 and December 2006 could be owed a 20% tax rebate from the Spanish government. British non-residents who sold their Spanish properties during this period were charged 35% capital gains tax whilst a rate of just 15% was paid by Spanish nationals – this contravenes European Community Treaty rules. Sadly those who sold pre January 2004 have also been affected but cannot issue a claim as the four-year claims period has now elapsed.

Income Tax

Income tax will be charged against rental income. The rate of tax will vary from country to country and may also vary according to the amount of income you make. In many countries, foreigners will be entitled to the same income tax allowances as locals. This means that you pay no income tax on some of your rental income, but then pay increasingly higher levels of tax on amounts of income above and beyond pre-defined thresholds. You will also need to understand any allowances on offer to offset against your income. Some tax departments will tax you on your gross rental income, whilst others will allow you to deduct some costs such as mortgage interest, maintenance and even travel before taxing you on the net remaining income.

Inheritance Tax

Inheritance or death taxes can be particularly problematic for overseas property holders. Some countries have very high death taxes and it is also worth considering inheritance laws as in many countries, property doesn’t automatically pass to your next of kin. You will almost certainly find that your existing will is insufficient and that you will need to make a local will for all the assets you own abroad.

For countries where inheritance rules for property are against your interest, the usual response is to buy through a wholly-owned company. Even if this overcomes local inheritance and taxation issues, you should also be aware of the taxation of your estate in your home country. For everyone domiciled and resident in the UK, inheritance tax may be payable on your total worldwide assets.

Double taxation

Many people select a country in which to invest based upon its attractive tax environment. However, this approach often overloods the fact that whilst there may be no taxation in the country in which you are buying, it doesn’t mean that you don’t owe tax at home. A classic example of this is Dubai, where there are no capital gains or income taxes of any kind. People buy in Dubai for this very reason, perhaps choosing it as a preferential place to invest over a country such as Bulgaria where capital gains tax is 15%.

The problem that many people don’t realise is that their total tax liability is likely to be the same in both circumstances. If you are domiciled in the UK or US, the Revenue is likely to want to take a slice of any capital gains you make in Dubai or Bulgaria at your usual rate. If your usual rate of capital gains tax is 18% then you will pay 18% capital gains tax on the gain you make in Dubai or Bulgaria. The only difference is that, as long as a double taxation treaty between your country of domicile and Bulgaria exists, you would pay 15% capital gains tax in Bulgaria for which you would be given a tax credit in your own country to reduce your liability there to 3%. Either way you end up paying the full 18%.

Domestic Tax Liability

Many international investors are entirely unaware of their domestic tax liabilities resulting from overseas property. This is very dangerous as a failure to accurately declare your interests could be seen as evasion. It is essential that you take appropriate advice and report all of your activities as necessary, both at home and abroad.

For all that has been said above, it is important to be aware of the existence of double taxation treaties. These treaties are formulated between governments to ensure that you are not taxed twice on the same slice of income. If you invest in a country where there is no double taxation treaty you may find yourself paying both local tax and domestic tax. If there is a double taxation treaty in place you will be given a tax credit for paying the tax locally and therefore only need to pay the difference in your home country.

The UK has more than 100 bilateral double-tax treaties, the largest network in the world and agreed with countries from Uzbekistan to Myanmar. World-wide, there are more than 1,300 double-taxation treaties. The treaties work to the advantage of countries as well as individuals. Companies are more confident about trading overseas if they know that they won’t be taxed twice.

If the UK doesn’t have a double-taxation agreement with the country where you own property, UK tax payers may be entitled to special relief called ‘unilateral relief’ or to something called a foreign tax deduction. Your local tax office should be able to give you more advice about whether you are eligible for this relief.