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In a recent series of articles, we have been looking at the possibilities of relocating abroad, and in this section we’ll be looking at paying tax on an overseas property, or properties.
A spell abroad can be an enriching experience for solo travellers, workers, families or retirees, but to make the most of the experience, and avoid the pitfalls, its best to know from the outset where you stand financially – this will not only give you peace of mind and leave you free to enjoy everything a spell overseas can offer, but also opens the door to exciting opportunities, such as acquiring a property while you are abroad.
Now let’s have a look at the tax implications of owning a property overseas – especially if you are buying your overseas property as a buy-to-let investment.
The good news about paying tax on a property abroad, is that in terms of the tax treatment it is very similar to owning a second property domestically. But there are differences you must be aware of.
What tax will I pay on the purchase and sale of my overseas property?
In the UK, you will ordinarily have to pay stamp duty when buying a property – the rate will be higher if it is a second property – between 3-15% depending on its value.
The UK government will not impose stamp duty on a property purchased overseas, but there may be taxes and fees imposed by the government of the country you are buying in. VAT, for example. VAT in Spain has been known to be as high as 8%, and in Italy, 10%.
The amounts and types of charges you will incur buying an overseas property will differ from country to country, but as a general rule of thumb you should expect to pay between 5-10% of the value of the house in additional fees, taxes and charges to the host country.
Selling or rental income
When it comes to selling your property, you will have to pay tax in both the UK (if you are resident there), and most likely also in the country where your property is. This “double tax” can be reclaimed however. The UK has “double tax” agreements in place with many countries. It’s best to check what the rules are before you put the property up for sale so you are aware of the process i.e. which country’s tax laws take precedence, and what you can reclaim.
Even where your home country does not have specific agreements in place, the chances are you will be able to avoid double taxation – so look closely (or engage the help of an expert), as you may be able to claim more than you think.
In the UK as the property owner you will be charged Capital Gains Tax on any gains above £11,000 for the tax year. Of course, you will need to factor that threshold against any other capital gains you may be realising in the year – not just the property. The rate will be 18% if you are a lower rate taxpayer, and 28% on any amount that brings you into the higher tax payer bracket.
It’s likely that the country where you are selling the property will levy similar taxes – once you have settled these, you can deduct this amount from your capital gains when completing your UK tax return, and effectively claim a tax credit for the amount that you have paid to a foreign government.
It does not matter if you are selling the property as a private owner or if you own the property through a property investment company that you have set up – you will generally have tax to pay – however, it is well worth considering, before you purchase your property abroad, which of these options may suit you best.
- You will almost always have to pay taxes in some form when both buying and selling a property abroad.
- When buying, you will pay tax to the country where the property is located – typically VAT or an equivalent tax. Expect to pay something akin to 10% of the value of the property in fees, charges and tax.
- When selling, you will most likely be obliged to pay Capital Gains Tax (CGT) in both the country you sell the property in, and in the UK (or your main country of residence). However, you can generally claim the tax back in your country of residence when completing your tax return – so there is no double taxation.
- Every country has a different set of rules and regulations, so always check what those rules are before you make a purchase, and make sure you can afford the extra charges. Always check what kind of “double taxation” agreement your country of origin has in place with the country where your property is located.
Should I set up my buy-to-let property as a business or a personal asset?
When investing in a buy-to-let property overseas you can choose to do so personally, or you can set up a limited company and acquire the property that way.
If you choose to acquire the property personally, the rental profits will be taxed personally to you; the extra income from your rental property could push you into the higher tax bracket – as much as 45%, and capital gains tax when you sell the property will either be charged at 18%, 28%, or somewhere in between depending on your taxable income.
As a company, however, rental profits will be taxed at just 20%, provided they are less than £300,000 per annum. Also, when it comes to selling the property, your capital gains tax will be charged at 20%.
The amount of stamp duty you pay is also different depending on whether you are buying personally or as a company, at a higher rate for the company, unless you can show that the property will be let out commercially. In that case, the rates you pay as a business will be the same as those you pay as a personal owner.
You will also pay tax on any lump sums that you take out of the company, again at a higher rate if the sum pushes you into a higher tax bracket.
Unfortunately, the costs of switching your privately-owned property into a company are prohibitive, thanks in the main to stamp duty costs, so when you are making your first purchase ask yourself if it could end up being the first of many, or at least more than one? If so, then it would be very wise to establish a property company.
Another advantage of acquiring properties as a company is that you can choose to add shareholders – your children, for example. This means that you can pay dividends, which would be taxed, but also the value of the shares would increase should the value of the property increase.
- Make a decision at the outset whether you want to buy a property personally, or as a company – it can make a big difference to the type, and amount of the tax you pay over the long term.
- By using a limited company, you may be taxed less on your rental profits, and you can appoint shareholders, and pay dividends (which will be subject to tax)
- Check to see if the amount of stamp duty you will pay on the purchase of a property is more or less if you buy as a company.
- If you plan to buy more than one property abroad, it’s always best to use a property investment company.
How Do I calculate the tax I am liable for?
Paying tax on letting an overseas buy-to-let property is broadly the same as paying tax on a domestic one. Tax is based on net profits, so the first thing that you have to do is calculate the income from the property (or properties), and then deduct the allowable expenses. Whatever remains (providing this results in a profit) will be taxed.
Allowable expenses can include any costs that are incurred for the purposes of running a buy-to-let property or business. The expense must be “wholly and exclusively” for this purpose, and include letting agent fees, legal and accountancy fees, buildings and contents insurance, maintenance and repairs, utilities, service charges, ground rents, cleaning, repairs, administrative costs (including travel to and from the property), and even the interest on a loan used to purchase the property – even if that loan is secured against a UK property.
There is also a “wear and tear” allowance permitted for properties that are let fully furnished, which allows landlords to allocate 10% of net rental to upkeep of fixtures and fittings; sofa’s armchairs, coffee tables etc. So, it is well worth keeping track of all repairs that you make – and each time that you make a trip to the property – the travel costs are tax deductible also.
All of these deductions can be calculated when you complete your tax self-assessment form if you are a private owner, or your company accounts if you are a company, in the relevant sections. It is worth keeping detailed notes plus all receipts related to spending on your property.
If you run a portfolio of property companies, you can offset the costs of travelling abroad to view a prospective new rental property against income from an existing rental property. This is another advantage of electing to set up a company rather than purchasing a property privately.
- Tax on overseas property is often very similar to tax paid on a buy-to-let property in your country of origin
- Tax is paid on a net basis i.e. deduct your costs from your rental income – this is important as you may be able to deduct more costs than you were aware of
- You cannot “net off” costs of a foreign property against a domestic property – this is not permissible
- If you let a fully furnished property, you can allocate 10% of net rental to upkeep of fixtures and fittings – this is known as “wear and tear”.
- Always keep detailed notes of spending (and prevailing exchange rates)
What about inheritance tax?
Double taxation relief is also available on inheritance tax. The UK has formal agreements in place with the Republic of Ireland, South Africa, the US, Netherlands, Sweden, and Switzerland, however even if your overseas property is not located in one of these countries, you can obtain relief under the UK government’s Unilateral Relief provisions.
If inheritance tax is charged by the country in which the property is situated then this can be reclaimed as part of the overall inheritance tax calculation.
Bequeathing a property will result in the value of the property forming part of an estate subject to Inheritance Tax (IHT),
It is also possible to give an overseas property away to one’s children in which case there will be a CGT charge calculated on the market value of the property, but there would be no IHT charged if you survive for seven years after making the transfer. However, if the total value of transfers during a seven-year period exceeds the £325,000 limit, a 20% IHT charge is standard.
- Expect any overseas property to be included in inheritance tax calculations
- Double taxation rules also apply when it comes to inheritance tax with any tax paid in the country the property is based deducted by HMRC – but always check to see what agreements are in place between your country of origin and country where your property is situated.
- Making a gift of your property to children will incur capital gains charges, but provided you survive for a further seven years, makes the property a potentially exempt transfer for IHT purposes
Does Foreign exchange play a part in tax treatment?
In short, yes! All costs incurred that are related to your property must be translated into sterling when you are calculating your tax due in the UK (including double taxation relief), so you must keep track of exchange rates whenever you are purchasing new furniture, carrying out repairs, settling overseas fees and taxes, etc.
The same goes for the rental income itself. If you are receiving income in euros, for example, the rental value must be translated into pounds for tax treatment purposes back in the UK. This can throw up some issues, if you make a small gain in the local currency, for example, but a larger one in pounds sterling due to fluctuating exchange rates, you may end up paying more tax than you had budgeted for, or vice versa.
When selling a house, it is important that you remit the proceeds of the sale into your the country you are resident in in the same tax year as you sold the property, to avoid making a capital loss on your foreign currency in a subsequent tax year.
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- When completing your tax return, you will be obliged to convert all foreign currency purchases, rental payments and profits into your home currency. So, keep careful track of exchange rates at all times and make sure you apply the correct rates.
- Remember, fluctuations in exchange rates can make a big difference to profits realised, and the amount of tax you have to pay.
- When selling a property, always try to remit the proceeds of the sale into your home currency in the same tax year as you sold the property.
- Use an international money transfer site such as The Money Cloud to find the best deals on remitting your money back into the UK, or your country of origin.
As you can see from the above, there is a great deal to think about when calculating tax on an overseas buy-to-let property or on the sale, and even the purchase of an overseas property.
This should not put you off making a purchase overseas, after all, taxation is inevitable, and the more you prepare for it, the easier is it to deal with when the time to submit your return comes.
The above will help you understand what your responsibilities are and give you some options, but speaking with an expert is highly recommended, particularly somebody who knows and understands the region you are buying in. If you are looking for advice, feel free to reach out to us.
Remember, as a rule of thumb add 10% to the value of a property to cover fees, maintenance, charges, and tax, and investigate thoroughly – and try to stay aware of all the tax pros and cons. That way, you will not be hit by hidden or unexpected charges when you do decide to make a purchase. This will give you peace of mind and allow you to focus on what’s important – enjoying the experience of owning a property abroad!