| 1. Don't Forget You Still Have UK Tax To Pay! | | | | local currency, but when you translate your purchase |
| Arguably, this is more of a warning than a tip, but it is | | | | and sale costs back into sterling, you may have a big |
| vital to remember that any UK resident individual buying | | | | Capital Gains Tax exposure in the UK. |
| property abroad is still exposed to UK tax on that | | | | Let's say you buy a property in Utopia for 100,000 |
| property. This may include UK Income Tax on rental | | | | Utopian Dollars at a time when the exchange rate is |
| income, UK Capital Gains Tax on property sales and | | | | two Utopian Dollars to the pound. That means you |
| UK Inheritance Tax on any foreign properties you | | | | have a purchase cost of £50,000. |
| leave to your children. | | | | Later, you sell the property for 120,000 Utopian Dollars. |
| The UK tax burden is often greater than any foreign | | | | In local terms, you have a modest gain of 20,000 |
| tax liabilities, so it makes sense to undertake UK tax | | | | Utopian Dollars. However, let us suppose that the |
| planning for your foreign property. Many of the same | | | | exchange rate is now 1.2 Dollars to the pound. This |
| planning techniques that work well on UK property can | | | | means that your sale proceeds for UK Capital Gains |
| be used equally on foreign property, although the | | | | Tax purposes are £100,000 and you have a |
| overseas angle adds an extra dimension and brings | | | | taxable gain of £50,000. |
| both additional opportunities and additional pitfalls to be | | | | Maybe that's fair: after all, if you bring the money back |
| wary of. | | | | to the UK, you will have made a profit of |
| 2. Main Residence Relief for Foreign Holiday Homes | | | | £50,000 on your investment. |
| There is nothing in the UK tax legislation to say that a | | | | Beware, however, that if you hang on to your Utopian |
| foreign holiday home cannot be a UK resident | | | | Dollars, they will become a new chargeable asset for |
| individual's main residence for Capital Gains Tax | | | | UK Capital Gains Tax purposes and may give rise to |
| purposes. | | | | a capital gain or capital loss when you eventually |
| A holiday home can be treated as your main | | | | spend them or exchange them into sterling or any |
| residence by making an election to that effect, | | | | other currency. |
| generally within two years of buying the property. | | | | The real problem to watch is that if you make a |
| The foreign property must be your own holiday home | | | | capital loss on your foreign currency in a later UK tax |
| for at least part of the time but, by making the election, | | | | year (year ended 5 th April), you will not be able to set |
| you will be able to exempt some or all of the capital | | | | that loss off against the earlier capital gain on your |
| gain on your foreign home from UK Capital Gains Tax. | | | | foreign property. |
| Beware, however, that you're only allowed one main | | | | The tax tip here, therefore, is to make sure that you |
| residence and, if you're married or in a civil partnership, | | | | dispose of your foreign currency sale proceeds in the |
| you're only allowed one between you, so electing to | | | | same UK tax year as you dispose of the foreign |
| treat your holiday home as your main residence could | | | | property itself. |
| backfire if you sell your main house back in the UK. | | | | 7. Get VAT back with leaseback |
| You can get the best of both worlds though, if you | | | | In the UK, we are accustomed to the idea that any |
| only elect to treat your foreign property as your main | | | | purchase of residential property is exempt from VAT. |
| residence for a short period, say a week. How does | | | | This is not the case in every country, however, and |
| this help? Well, since every main residence is also | | | | many European countries charge VAT, at rates of up |
| exempt for the last three years of ownership, that | | | | to 20%, on new residential property purchases. |
| week buys you three years. In other words, you lose | | | | One way to recover the VAT on such a purchase is |
| one week's worth of exemption on your main house | | | | to enter into a 'leaseback' scheme. Under these |
| but gain three years (and a week) of exemption on | | | | schemes you, the owner, lease the property back to a |
| your foreign holiday home. | | | | hotel operator. This means that your property |
| 3. Travel at the Treasury's Expense | | | | becomes a business property and you are able to |
| If you're renting out foreign property, you have a | | | | recover the VAT. Typically, you are allowed a few |
| foreign rental business. Like any other business, you're | | | | weeks of personal use of the property each year and, |
| entitled to claim tax relief for your business expenses. | | | | eventually, after a suitable number of years, it is yours |
| That includes any travel costs which you incur for | | | | outright again. |
| business purposes. | | | | The scheme only works for certain types of property, |
| Furthermore, all foreign property rentals are treated as | | | | such as hotel rooms and apartments, and may carry |
| one business. Hence, for example, you could claim the | | | | disadvantages for other foreign taxes, such as higher |
| cost of going to Dubai to look for a possible new rental | | | | Income Tax rates; so it's one to investigate carefully |
| property against the rental income from a villa which | | | | before you sign up. |
| you already have in Spain. | | | | 8. Borrow to Save |
| 4. Understand the Local Taxes | | | | Many countries impose Wealth Tax, Inheritance Tax, |
| Most countries will tax foreigners on any property they | | | | or both, on foreigners owning property in their country. |
| own in the country. Local taxes often apply to | | | | Wealth Tax is usually an annual charge on the |
| property purchases and sales and to rental income. | | | | property owner's net wealth in the country. |
| Furthermore, you will often have to pay annual taxes | | | | Foreign Inheritance Tax also usually applies only to a |
| on foreign property, even if you do not rent it out, and | | | | foreigner's net assets in the country. |
| many countries also have gift and death taxes. | | | | In most cases, you can reduce your net wealth in the |
| You will get double tax relief in the UK for any foreign | | | | foreign country for tax purposes by taking out a |
| tax on the same income or capital gains when the UK | | | | mortgage on your foreign property. In this way, it will |
| accepts that the foreign tax is broadly equivalent to | | | | usually be just your net equity in the property which |
| the UK tax you are paying. | | | | attracts foreign tax. |
| Beware, however, that every country has a different | | | | If you don't actually need a mortgage, you can invest |
| tax regime and not all of them are compatible with the | | | | the borrowed funds somewhere else outside the |
| UK tax system. If you suffer a foreign tax which is | | | | country where your property is located. |
| different in character to any UK tax, or which arises | | | | 9. Avoid Evasion |
| when no UK tax is due, you may not get any relief for | | | | When you buy property in a foreign country, you will |
| it in the UK. | | | | usually also be acquiring tax obligations in that country. |
| So, a foreign tax at 30% which is deductible from your | | | | In fact, many countries require prospective foreign |
| UK tax liability on the same income may actually cost | | | | property purchasers to register themselves with the |
| you less than a foreign tax at 10% for which no double | | | | local tax authority before they can complete their |
| tax relief is available. All these factors need to be | | | | purchase. |
| considered before you invest in foreign property. | | | | If you want to sleep at night, you need to make sure |
| 5. Do You Want Double Tax Relief? | | | | that you fulfil your local tax obligations in the country |
| As a general rule it is usually worth claiming double tax | | | | where your property is situated. Many foreign tax |
| relief for any foreign taxes whenever you can. By | | | | authorities have the power to seize property where |
| claiming double tax relief, you deduct the amount of | | | | taxes are unpaid. |
| foreign tax paid from your UK tax liability. | | | | Naturally enough, the local tax authority will write to you |
| However, you cannot get any repayment of foreign | | | | in their own language. Do not ignore this |
| tax through a double tax relief claim and the best you | | | | correspondence just because you don't understand it: |
| can ever do is to reduce your UK tax liability to nil. | | | | this is no defence. You will need local help and advice |
| Sometimes, the foreign tax may actually exceed the | | | | to make sure that you deal with the local tax authority |
| amount of the taxable income or capital gain for UK | | | | appropriately and meet all of your obligations as a |
| tax purposes. In these situations, it is better to claim the | | | | taxpayer in the country. |
| foreign tax as an expense rather than to claim double | | | | 10. Expect the Unexpected |
| tax relief. | | | | If the UK tax system is all Greek to you, or seems like |
| Where you claim foreign tax as an expense, it | | | | Double Dutch, why should you expect foreign taxes to |
| reduces the amount of the taxable income or capital | | | | be any different? Every country has its own tax and |
| gain and can even create a loss. This loss can be | | | | legal system and, when you buy property abroad, you |
| carried forward to give you future tax relief and | | | | must abandon all of your preconceptions. |
| hence, in some situations, can actually give you better | | | | Assume nothing until you have investigated the local |
| value for your foreign tax than a double tax relief | | | | tax system thoroughly. Your destination country will |
| claim. | | | | have different taxes, different tax rates, a different |
| 6. Reduce Your Foreign Exchange Tax Risk | | | | tax year and a whole different set of rules, regulations, |
| All UK tax calculations for individual taxpayers are | | | | reliefs and exemptions. |
| carried out in pounds sterling. This creates some | | | | Local property law and succession law is likely to be |
| particular problems when it comes to capital gains on | | | | different too and a UK investor who overlooks this |
| foreign property. You may make very little gain in the | | | | fact may suffer a great deal more than just tax! |