11/26/07Finding overseas property taxing

When HM Revenue and Customs announced a partial amnesty on those with overseas assets to own up or face massive tax penalties, few realised that this covered more than just offshore bank accounts.

Of itself, ownership of an overseas property does not give rise to potential tax liabilities; it is the fact that it generates an income or capital gain for you that matters. So those keeping a home in the sun just for personal/family use are not affected in the short term, provided no money or value is received from friends and family using it (there are, however, other local taxes that will apply and overseas assets are counted for UK inheritance tax). Capital gains tax will also apply in due course.

The rules are quite simple. If you are a UK resident, you are liable to tax in the UK on your income and capital gains worldwide from whatever source, including bank interest, property rental and income from a trade or profession; so it is no use writing a book and having it published in Spain, it will still potentially be taxed in the UK if you live here for more than 90 days a year on average over any four-year period (subject to a maximum of 183 days in one year).

If any money you generate from renting out your overseas home is subject to local taxes, then you will probably benefit from double taxation relief in the UK, to the extent that you have already paid locally. So a basic rate taxpayer with rental income in Spain subject to 24% tax will have nothing further to pay; but a higher rate tax payer would be liable for a further 16%.

Under the amnesty, those with overseas assets had until 22 June 2007 to declare the income. Failure to do so will result in HMRC charging not just the tax due plus 10% when they find out about it - which they almost certainly will - but also a 100% penalty on top. After making your declaration about overseas income to the UK taxman, you have up to five months within which to give them full details.

It is also important to declare any capital gains you make when selling your overseas property, as this counts against your annual allowance in the UK (currently £9,200 per person). Due to an unprecedented level of inter-state co-operation, it is most unlikely that those with overseas property will escape detection, so honesty is definitely the best policy.

Having said this, owning a home in the sun and even letting it to help cover the costs should not be discounted. At the very least, this can provide a source of cheap holidays for yourself and friends: at best, it might prove a good investment, even after tax.

One important consideration will be how to finance your purchase. If you are re-mortgaging your UK home to release cash to buy a home overseas, your options are limited. If, however, you are intending to borrow against the security of the overseas property itself, you might wish to consider an overseas mortgage, perhaps in euros, dollars or whatever local currency applies.

The reason for this is that your rental income is probably going to be in the local currency (unless you let exclusively in the UK) as will be your main costs such as local taxes, management fees and so on. By having your mortgage in the same currency as the income generated by the asset, you avoid currency fluctuations making your mortgage disproportionately expensive, should exchange rates move against you.