International Property Tax Essentials by Daniel Feingold
Before you invest overseas, check out our essential information tables, to make sure you have some tax knowledge before you invest. To learn more about the specific tax liabilities in each country click on the links below:
Overview of Bulgarian Property Tax
If you are investing in Bulgaria, as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
This is subject to a 15% withholding tax after deducting allowable expenses such as mortgage interest etc.
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| Wealth Tax |
No Wealth tax in Bulgaria.
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| Capital Gains Tax (CGT) |
This is levied at 15% on any increase in the value of the property.
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| Inheritance Tax (IHT) |
This was levied at up to 10% up to 2004, but has been abolished altogether in 2005.
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Comments:
Some property interests in Bulgaria cannot be held directly by Foreigners and so buying through a local Bulgarian Company is recommended. Corporation tax is now 15% and so it makes little difference for income tax on rental income.
However, it does impact on the capital gains, as there would be a liability at Corporate level that would not get a credit against the UK liability. There may also be deferral possibilities on income using a local Company with careful planning.
For most investors the running costs of a Company will not be worthwhile.
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Overview of Italian Property Tax
If you are investing in Italy, as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
Rental income is subject to tax at the prevailing progressive income tax rates.
In 2004 these range from 23% to 45% on income over Euro 70,000. Remember that the usual deductions for expenses and mortgage interest are allowable.
N.B. In 2005 the income tax rates in Italy will change to 23% on income up to Euro 100,000 and 33% over that sum. This will mean that the Italian tax rate on rental income will be 23% for most investors.
There is also a deemed income tax on properties that are not rented out. This tax is calculated on the notional value and is usually never more than 1% of the actual value at most.
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| Wealth Tax |
There is no Wealth Tax.
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| Capital Gains Tax (CGT) |
If property is sold within five years of purchase, the gain is subject to Italian income tax. See the comments above about rates, both current and future.
If the property is sold more than five years after purchase, it is exempt from all Italian tax.
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| Inheritance Tax (IHT) |
There is no Inheritance Tax, but a transfer and registration tax on those inheriting the property is payable.
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Comments:
Italy has no Inheritance Tax and for investors prepared to hold for five years or more, no CGT. The only downsides are that on acquisition there are some fairly hefty local taxes that range from 4% and more typically 10%.
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Overview of French Property Tax
If you are investing in France, as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
There a number of regimes for taxing the income from French rentals. For furnished property there is the MICRO-BIC. This tax offers a deduction of a flat 72% for expenses on incomes up to approximately Euro 76,000 with the remainder taxed at 25%.
On income above that, you can only operate on an actual basis. This is very generous, but it plays havoc with UK tax liabilities as the MICRO-BIC deduction is not allowable and the income has to be calculated on an actual basis.
Again, unfurnished property income up to Euro 15,000 can benefit from MICRO-FONCIERS that allows 60% flat rate deduction and the remainder taxed at 25%. Above that sum the actual basis is used and again, for UK purposes a separate calculation will be needed.
It is therefore best for most UK Taxpayers to use the actual basis and pay 25% flat rate French tax and get a credit against your UK. The exceptions would be where the rental income is in a basic rate taxpayers name paying UK tax at 22%.
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| Wealth Tax |
If you have French assets over Euro 785,000 then there is an annual wealth tax at rates of .55% to 1.8%.
This applies to all French assets of non-residents, including bank accounts and property.
If this is an issue, there are planning measures to reduce this that can be taken especially by the creation of debts which are deductible
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| Capital Gains Tax (CGT) |
For EU Residents capital gains are chargeable at 16% for property held for 2 years or more.
For property held for less than 2 years, there is usually income tax chargeable at the normal rates which for 2006 go up to approximately 40%.
For property held for 5 years or more, there is a further annual deduction of 10% of the gain until after 15 years or more of ownership. After that, there are no Capital Gains to pay whatsoever.
It is also important to note that a Professional Landlord of furnished property taxable under the MICRO-BIC or on an actual basis is not subject to capital gains after 5 years of ownership.
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| Inheritance Tax (IHT) |
French Inheritance Tax is levied in progressive bands. The Spouse exemption is a mere Euro 76,000.
The rates then depend on who the property is left with, Spouses and close relatives paying at rates of up to 40%.
If the property is left to an unmarried partner or friend, the rates go up to 60% with a tax-free allowance of only Euro 1,500!
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Comments:
French income and capital gains taxes are generally lower than UK Rates and so do not present much of a problem for investors, unless they are going in for "OFF-PLAN" or other short-term investments that they will hold for less than 2 years.
French Inheritance Tax is much more of a problem and advanced planning is vital before the property is purchased. This can take the form of holding the property either EN TONTINE, a form of joint ownership, or under a MARRIAGE CONTRACT arrangement and through either a UK Company or a special type of French Company known as a "SOCIETE CIVILE IMMOBLIERE". Specialist advice needs to be taken as to the benefits and pitfalls of using each particular method along with the investor's own particular circumstances.
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Overview of Spanish Property Tax
If you are investing in Spain, as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
Rental income is subject to 25% of gross rents without any deductions.
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| Wealth Tax |
Spanish Wealth tax is levied on Spanish Assets of non-residents without any exempt amount.
Spanish residents enjoy a nil band of more than Euro 100,000!
So, any value of Spanish property will be subject to at least .2% and up to 2.5% wealth tax (although this latter rate kicks in at over Euro 10 million.). This is added to the rental income tax and paid at the same time.
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| Capital Gains Tax (CGT) |
This is a shock for most non-residents, as the rate for Spanish residents is only 15%! For non-residents its 35% and the worse news is that under Spanish tax law the purchaser must withhold 5% of the purchase price and pay it to the tax authorities on account of this tax.
You then have to make a repayment claim, if this is higher than the actual gain.
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| Inheritance Tax (IHT) |
This tax is levied based on the relationship of the beneficiary to the deceased.
For a Spouse, there is an exempt amount of just Euro 16,000 and then tax at progressive rates from 7.65%- 34%. For unmarried beneficiaries such as girlfriends and friends, there is NO EXEMPT amount and rates up to 81.6%!
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Comments:
Spanish high capital gains and exorbitant inheritance tax rates for surviving spouses and unmarried partners, mean planning is essential. This may involve using a UK or Spanish Company, holding the property as joint owners, or taking out life insurance. The failure to plan for Spanish taxes often leads to taxes so high that the property has to be sold to pay them.
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Overview of USA Property Tax
If you are investing in the USA, as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
The standard withholding tax rate of 30% is applicable to rental income.
If a US return is filed claiming property expenses and mortgage interest and a depreciation allowance (this will be clawed back on sale and not allowed for UK tax purposes); then the income will be taxed at progressive US rates from 15% -35%. In some states there will be "State Income Tax", as well.
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| Capital Gains Tax (CGT) |
If the property is owned for more than one year, then the US Capital Gains rates will be either 8% up to 15% for larger gains.
The shocker here is that under a US law called FIRPTA, the purchaser or his agent must withhold 10% of the purchase price and pay it over to the US IRS on account of your Capital Gains tax liability.
There is a little known exemption to this, if the property is sold for less than $300,000 and the purchaser or a member of his family will occupy it as their residence and they certify to that effect. Obviously, if the withholding is made you can make a repayment claim if it exceeds the Capital gains and it usually does!
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| Inheritance Tax (IHT) |
This is a real shocker! Although US Estate tax rates offer a generous exemption Non-Citizens cannot benefit and only have a $60,000 exempt amount.
After that they are subject to progressive rates rising to 48% in 2004 and 47% next year 2005. Don't forget, there is State Inheritance tax that is levied either on top of, or as a deduction from Federal Estate Tax. If you give away your property during your life, there is a wholly separate Gift tax, with its own rules to consider.
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Comments:
US Income and Capital Gains rates are fairly low. Inheritance Tax is the real problem and needs to be planned for.
Holding the property through a special type of Offshore Company may help, as may planning to leave the property in a "Special US Qualifying Domestic Trust" to your Spouse as this will produce a Spouse exemption up to the US exempt amount currently $1.5 million. It all needs specialist advice, taking into account the UK aspects as well.
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Overview of Portugal Property Tax
If you are investing in Portugal, then as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
A flat 25% deduction from rental income with no allowance for mortgage interest.
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| Wealth Tax |
No Wealth tax in Portugal
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| Capital Gains Tax (CGT) |
A 25% rate on Capital Gains.
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| Inheritance Tax (IHT) |
Portugal has recently abolished its IHT, but this applies to gifts and inheritances to close relatives. Unmarried partners are subject to a 10% transfer tax.
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Comments:
Portugal has recently taken drastic steps to prevent the avoidance of Capital Gains using Offshore Companies. To this end it has raised transfer taxes and transfers by Offshore Companies are now subject to a 16% transfer tax. There is still scope for planning using certain Companies including UK ones, but it all needs careful planning.
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Overview of Cyprus Property Tax
If you are investing in Cyprus, then as a non-resident property owner, you could be liable for the following taxes:
| Tax On Rental Income |
Rental income is taxed at progressive rates ranging from 20%, 25% to 30% on income exceeding 20,000 Cypriot pounds. The usual deductions for property expenses and mortgage income are deductible.
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| Capital Gains Tax (CGT) |
The first 10,000 Cypriot Pounds are exempt and the rest of any gains minus an allowance for indexation to account for inflation are taxed at 20%.
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| Inheritance Tax (IHT) |
Abolished in 2000
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Comments:
There may be planning measures allowable to use a Cypriot Company for a reduced rate of tax on rental income to 10/15%. This planning can also reduce the rate on capital gains. These measures must be used carefully to retain the benefits of such savings against UK tax liabilities and more structuring may be necessary to achieve this.
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International Property Tax - International Property Tax Essentials
