For anybody investing overseas, what are the five most important tax considerations they need to make?

I would list these as follows:

'How is any gain on the property you are going to invest in going to be taxed in that country where you are investing in?

How is any rental income going to be taxed? Is there a minimum tax on rental income? Is there a withholding tax (which means that the country where you get the rental income from somebody has to pay over a certain amount of tax to their tax authorities first)?

The third most important tax consideration is 'What Inheritance Tax will be levied on death or a gift of the property by the owner in hat country where the property is situated? '

The fourth one I would say would be 'Are there any other local taxes to consider such as, purchase taxes when you buy a property, annual rates, (the equivalent of UK rates or council tax), and one that you probably won't have thought of is - annual wealth taxes, which are based on the value of a persons assets situated in that country?'

And the fifth is to probably make sure that you know all the tax implications before you sign any legal binding agreement on the property.

If I invest overseas then when and where do I pay income tax?

With regards to income tax you will be liable to pay tax in the country where the property is situated. So for example if you have an investment property in Spain then you will be liable to pay tax in Spain.

It is important to note that you will also be liable to pay income tax in the UK on the rental income; however you will get a credit for any tax that you have to pay in the overseas country.

When does the tax year start and end in overseas countries?

Most overseas countries have a tax year that runs form the 1st January to the 31st December. This is very different to the UK tax year which runs from the 6th April to the 5th April.

What is a double taxation agreement?

These are agreements that are signed between the tax authorities of two separate countries. For example UK and France have a double taxation treaty. The objective of the treaty is to make sure that no income or gains or even other taxes are levied twice on the same portion of income.

So for example if you have a rental income of £10,000 on your property in France, then it should only be subject to income tax once as it would be unfair if this whole amount was taxed again in the UK.

The double taxation agreement also ensures that you do not pay income tax that is greater than what you would pay in the UK.

My overseas property developer does not provide any tax advice, so should I therefore make it my own responsibility to seek professional advice before I invest or leave it until I decide to sell the property?

Unfortunately, this is an increasingly (and worryingly) growing trend amongst overseas property developers. The fact of the matter is that like any investment you should take advice from the outset before you invest overseas.

The rush to jump onto the overseas property bandwagon leads to too many people not considering tax implications until they have purchased a property. Not only is this approach extremely high risk but can also be very costly as well!

For example so many people investing in Spain do not realise that it has a wealth tax. This is a tax on the value on anyone's assets in Spain and property is off course is classed as an asset. This is due annually and varies from between 0.2% and 2.5%. The higher the value of your property then the greater tax you will have to pay annually.

A very common misconception about Spain is that Spanish capital gains tax is reduced on an annual basis so that say after 10 or 15 years of ownership you are not subject to any capital gains tax. This tax break was actually revoked several years ago, but alarmingly developers have been selling properties and advising that there will be no tax liability in 10-15 years time.

I am non UK-Resident and living in Dubai. Is there any tax liability if I sell my UK property or should I re-invest the profits?

My wife and I jointly bought a property in the UK in 1998 for £130,000 and lived in it until April 2003 when we moved to Dubai. The property is currently valued at £300,000 with a £115,000 mortgage and an equity release loan of £25,000.

We are both classified as non-resident for tax purposes. The property has been let since May 2003.

My questions are:

1) Is there any tax liability now or in the future if we sell the property now?

Daniel Says
As the property was your UK Principal Private Residence you will be able to sell it free of UK capital gains tax for 36 months following the end of the period when it was your PPR.

That means you can sell it anytime up to April 2006.

Dubai does not levy any capital gains tax and so there would be no tax liability there either.

If you keep the property longer then, you may have to pay UK capital gains tax, but only if you sell the property and return to the UK less than 5 complete tax years following your departure.

2) If instead of selling we take out an extra equity release loan to fund the purchase of other UK properties, either jointly or individually, would there be any tax liability if we sell any of the properties, assuming that we are still living abroad when the sale takes place?

Daniel Says
Property or other investments acquired in the tax year following the one you left the UK do not generally come within the 5 year rule.

However, by investing in UK property directly you would have an ongoing income tax exposure on rental income (up to 40%) and an inheritance tax exposure on the properties should you die or make a gift to anyone apart from your wife.

I would consider investing in further properties via a non-UK Company to limit income tax on rental income and Inheritance tax on the properties in the future.

Can I sell my overseas contract and avoid tax?

A year ago I put down a 30% deposit on an 'off plan' apartment in Spain. It will be built in October at which point I will decide whether to get a mortgage and keep it or sell it before completion - at a profit I hope!

Will I have to pay CGT on the profit if I sell the contract without actually owning the property and will I have to declare the transaction to the Inland Revenue?

 

Daniel Says

Many people have been misled concerning the taxation in Spain and the UK of Spanish ' off plan' investments.

 

In Spain, if you have been registered with the legal title to the property (and your Spanish Lawyer should have done so), then you are selling an interest in Spanish property. Even if you are not, you will still be taxable in Spain, as you are dealing with a contract right over Spanish property. This is subject to 35% Spanish CGT.

 

The only possible exception is if you are actually just purchasing a share in some form of foreign investment vehicle outside Spain that owns the Spanish property (and this would be very risky!).

 

In Spain, the Purchaser must withhold 5% of the purchase price and pay it over to the Spanish tax authorities.

 

You then have to file a tax return in Spain and if the 5% is more than the 35% you will be entitled to a repayment.

 

In the UK you are taxable on your world-wide income and gains. So, you would get a credit for the 35% Spanish CGT and would, if you are a higher rate taxpayer, owe a further 5% to the Inland Revenue here, to make it up to 40%. You need to declare the gain here and to claim credit for the Spanish tax paid.

 

In the event that you do not pay Spanish tax, you would then simply have to pay 40% in the UK.

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Can I choose which country I pay tax in? For example the tax rate may be cheaper in the country where I hold my overseas property?

No, not normally. If you are a UK resident and domiciled person (that is somebody who is born and brought up here) you will be liable to UK tax on your world-wide income and capital gains. You will also have to pay income tax and CGT in the country that the property is situated.

However, you need to remember that you will receive a tax credit against your UK tax liability for the tax that you have paid overseas.

Case Study

John buys an investment property in Spain for £300,000.

He rents it out for several weeks in the summer and receives £10,000 in rental income. His tenants or the Spanish agent should withhold 25% (without any deductions) and pay that over to the Spanish tax authorities as his Spanish tax liability.

In the UK John will be able to deduct the Spanish tax charged at 25% from his UK tax liability charged at 40% (assuming he is a higher rate taxpayer).

John will be able to deduct any expenses in Spain such as agent’s fees, repairs and mortgage interest. He may find that he has little or no further UK income tax liability because the Spanish tax has been deducted without taking into account any expenses.

What tax implications if I move to Australia?

I am planning to immigrate to Australia for approx 10 years. I have owned my property since 1998 and intent to rent in out in my absence. What tax am I liable to pay?

Who needs to know about this and how can I go about sorting this out?

Daniel Says
You will continue to be liable for UK income tax on the rental income and UK inheritance tax on the property on the basis that it is a UK situated asset.

The income tax liability can be met either by the tenants or any UK agents withholding 22% of the gross rents and paying that over to the HM Revenue &Customs.

The much more preferable way is to apply under the Non-Residents Landlord Scheme for no tax to be withheld by tenants or UK agents. This will then allow for you to settle the tax liability on the basis of 22% of the net income, after deducting all expenses such as agents fees and mortgage interest. In this situation the tax will be paid on the usual dates of January 31st and July 31st.

In Australia you will be liable for Australian income tax on your world-wide income with a credit for anything paid in the UK.

Because Australia is a high tax country, income will be subject to the highest rate of 48.5% on world-wide income above $80,000 Australian dollars.

Australian capital gains at half the relevant income tax rate will apply, but only on any increase in value from the date you take up residence there.

A good tip is to get a valuation of the UK property at that date.

The only good news on tax in Australia, is that it has no Inheritance Taxes.

Sadly, if you intend to return to the UK in approximately 10 years time this may not help; as you will continue to be Domiciled in the UK and subject to UK Inheritance Tax on your world-wide assets. A good will is therefore essential.

You will need to make an application for the UK Non-Resident Landlord's Scheme and to register with the Australian tax authorities. Timing your leaving can impact your tax liabilities in both countries.

You might want to get more detailed professional advice!

How should I arrange my Florida property assets?

In Jan 05, I bought four properties in Florida (all owned in my name rather than a property company).  When built all properties will be short term rented out. How should I arrange my assets to minimise UK CGT?

 

Daniel Says

The US is a sophisticated tax jurisdiction and it is hard to avoid US taxes ,except for very large investments.

 

US rental income will be subject to income tax@ rates between 15 and 35% for individuals.

 

However, the top rate is only reached on incomes of approximately $334,000 and above. If you file in the US you will be able to deduct interest and all other expenses. For US capital gains tax the rate is 15% maximum after owning an asset for more than one year.

 

For property this means 1 year after Closing, as sales inside this timeframe will be subject to US income tax.

 

A purchaser has to withhold 10% of the purchase price and pay this over to the US taxman on sale.

 

Vendors then have to file a US tax return to get any tax back. Remember, for both income and capital gains tax, UK tax is payable with a credit for any US tax paid.

 

Inheritance Tax in the US is a trap and the best way to avoid it is to acquire property through a Special Trust, otherwise the exemption on assets passing between spouses is a mere $60,000.

 

The UK/US estates tax treaty helps to increase this amount via a complicated formula; but it is best to avoid a US liability altogether.

 

Remedial planning maybe possible depending on costs and whether property has risen in value creating a capital gains or income tax liability on transfer.