Chapter 15 - Buying Property Abroad

15.1 Introduction

Many UK property investors are thinking about buying property abroad. Many are interested in the emerging markets of Eastern Europe (Latvia, Poland, Bulgaria and the like). Others stick to traditional favourites such as France, Italy and Spain.

There is a tendency amongst investors to get caught up in the excitement of owning an overseas property and neglect certain important financial issues, such as how any income and capital gains will be taxed.

The UK tax treatment will depend primarily on the tax status of the purchaser. Let us have a look at the UK tax implications for different types of purchaser, pooling together what we have learned in previous chapters.

15.2 UK Resident and Domiciled

Any income and gains arising from the property will in the first instance be liable to UK taxes in full. The property will also be included within your estate for inheritance tax purposes.

Example

Jake is resident and domiciled in the UK. He decides to purchase a property in Latvia for letting during the summer months and for his own occupation during the winter. The rental income will be subject to UK income tax. Any gain/profit on a subsequent disposal will be liable to UK capital gains tax (less various reliefs). If he were to die whilst still owning the Latvian property, this would be taken into account when assessing the amount of inheritance tax he would pay.

15.3 Non-Resident and Non-UK Domiciled

As a non-resident, any income and gains from the overseas property will not be liable to UK taxes. Similarly, the property would not be included within the individual's estate for inheritance tax purposes.

Example

Jacob, originally born in Portugal, has lived in Spain for 15 years and is regarded as non-UK resident and non-UK domiciled. His Spanish property would not be subject to UK taxes.

Note that for capital gains tax purposes, an individual must be non-resident for more than five complete tax years before being exempted from UK capital gains tax on assets held at the date of their emigration (after 5 April 2013).

15.4 UK Resident and Non-UK Domiciled

Individuals who are UK resident but non-UK domiciled have a number of advantages when it comes to UK taxes. Such individuals are typically foreign nationals (usually born overseas) who have come to live in the UK for a number of years.

The key aspect will be that for income tax and capital gains tax, the remittance basis can apply. This means that any rental income from overseas property would be exempt from UK taxes provided the income is not remitted to the UK. In addition, on a future disposal, no UK capital gains tax would be payable provided the sale proceeds are retained overseas.

As discussed in previous chapters, as from 6th April 2008 any non domiciliaries wanting to take advantage of this remittance basis will have to claim it (unless the overseas income or gains are less than £2,000). As well as losing certain UK allowances, if they have been UK resident for more than 7 of the last 10 tax years they will be subject to the annual £30,000 tax charge. This rises to £50,000 after 12 years of UK residence.

Therefore in practice a non UK domiciliary with an overseas property, paying income tax at the higher rate, may be looking to take advantage of the remittance basis where:

• They have been UK resident for 7 or fewer of the last 10 tax years; or
• They already have significant overseas unremitted income that makes paying the £30,000 or £50,000 charge tax efficient (e.g., over around £83,000 or £133,000 per tax year respectively).
• They are selling the overseas property and are realising a substantial capital gain to be retained overseas.

Again, from a UK tax perspective, there would be no UK inheritance tax impact. As a non-UK domiciliary, your estate would include only UK assets.

Example

Petra has lived in the UK for 5 years but has retained her overseas domicile. Petra has purchased a property in Monaco. She plans to rent this out for two years and then dispose of it for a (hopefully!) significant profit.

Provided Petra claims the remittance basis, retains the income overseas (for example, in an offshore bank account) and doesn't bring it into the UK, there will be no UK income tax charge. The same principle will apply to the sale proceeds. This will allow Petra to build up a tax-free amount that she could use to purchase further offshore properties.

Similarly, the property would not be classed as part of Petra's estate for inheritance tax purposes (being non-UK property of a non-UK domiciliary).

One thing to watch out for is the 'deemed domicile' rules. These apply for inheritance tax purposes only and state that individuals are deemed to have a UK domicile:

• If they have been UK resident for 17 out of the last 20 years, or
• They have lost their UK domicile in the last three years.

Example

In the above example, assume Petra has been living in the UK since 1970. For income tax purposes and capital gains tax purposes, Petra is of non-UK domicile. However, for inheritance tax purposes, she is deemed UK domicile as she has lived in the UK since 1970 and would therefore have been resident for more than 17 years.

For inheritance tax purposes, Petra would be subject to UK inheritance tax on her worldwide estate. This would mean that the property in Monaco could potentially be subject to UK inheritance tax.

In addition, as she has been UK resident for 12 or more of the past 14 years she would need to pay an annual £50,000 tax charge to take advantage of the remittance basis.

Non-UK domiciliaries can have a useful tax advantage when considering investing in overseas property. If they invest shortly after arrival they will have an eight year window during which they can claim the remittance basis on overseas rental income and capital gains.

After this, provided they claim the remittance basis and reinvest proceeds offshore, they can limit their UK tax charge to £30,000 until they have been resident for 12 years. They can later bring the overseas taxed income back to the UK, free of tax, once all other untaxed overseas income has been remitted.

Where capital gains are expected to be significant (for example where more than one overseas property was sold in a tax year), this could result in a significant increase in the size and value of their investment portfolios as it enables them to reinvest in more overseas properties. This can give a useful boost to an offshore property portfolio.

15.5 Use of an Offshore Company/Trust

A common misconception is that an offshore company or trust can be used in virtually all situations to avoid UK taxes. Unfortunately this is not true. For UK resident and domiciled individuals the UK tax authorities have a number of powerful anti-avoidance measures at their disposal.

This essentially allows the taxman to deem income to be subject to UK tax in a number of situations. It is therefore only in a number of limited situations that UK residents and domiciliaries can use offshore companies/trusts to avoid UK taxes.

As from April 2008, the Revenue will not be looking to levy a UK benefit-in-kind tax charge when a person buys an overseas property via a company, and then occupies that property. In practice, however, there are many other tax issues to be considered when buying an overseas property through a company.

Not least is the fact that using a company may well substantially increase the tax bill when the property is eventually sold.

Non-UK domiciliaries can, however, still make good use of offshore trusts to purchase overseas property provided the remittance basis applies. The trust would not be subject to UK inheritance tax as the assets of the trust would be overseas assets.

From a capital gains tax perspective, the trustees would not be liable to UK capital gains tax, as the trust would be non-resident. Provided the creator of the trust retains his non-UK domicile status, the UK anti-avoidance provisions attributing/deeming gains would not apply provided he is not a beneficiary. If he were a beneficiary, then the remittance basis would apply in terms of capital payments from the trust.

Provided the overseas jurisdiction does not levy capital gains tax, there would also be no overseas tax charge (for example, in the Isle of Man).

Another useful opportunity for the non-UK domiciliary is to ensure that UK assets are owned by a non-resident company, of which the non-domiciliary is a 100% shareholder.

This would then ensure that the individual owns offshore assets (exempt from inheritance tax for non-UK domiciliaries) as opposed to UK assets (charged to UK inheritance tax).

15.6 Using Mixed Residence Partnerships to Avoid CGT

Another option that could be considered is using a partnership.

There are occasions where a UK resident (individual A) is looking to invest in overseas property but may also have a non-resident friend, relative or business partner (individual B) who will be undertaking the investment with them. The question is how should they structure the property purchases?

They could keep the purchases in the name of the non-resident. As a non-resident and not ordinarily resident individual, B would be outside the scope of UK capital gains tax. A, as a UK resident individual, would be subject to CGT on any gains arising. The problem with this arrangement is that it is unlikely to be commercially acceptable to A, who would want to have some entitlement to the assets.

A further problem is that, for tax purposes, HMRC would look to the beneficial ownership of the property as opposed to the strict legal ownership. Therefore, even if title was solely in B's name, if A would be entitled to a share of any rental income and proceeds of disposal there is a risk that HMRC could assess a share of the gain on A in any case, and UK capital gains tax would be charged.

This is where a partnership may be beneficial. If they were to use a partnership structure the general rule is that each partner would be assessed on their share of the partnership's profits and gains. In this case, however, the partnership would be a mixed residence partnership (as B would be non-resident, and A would be UK resident). This complicates matters and special rules relating to mixed residence partnerships would need to be considered.

In this case it would be necessary to look at the control and management of the partnership (in a similar way that HMRC would look to see if an offshore company was controlled from the UK). If the control and management of a partnership carrying on a trade or business is situated outside the UK the business is deemed to be carried on by individuals not resident in the UK. For CGT purposes, a partner in such a partnership is treated as if he were not resident in the UK (but only in relation to disposals of that partnership's assets).

Therefore, provided they could show the management and control of the partnership was overseas, and that the partnership was engaged in a business, for capital gains tax purposes, both A and B should be exempt from UK capital gains tax. Note that in terms of any rental profit, A would still be within the scope of UK income tax.

Establishing an overseas residence for the partnership would be a complex area. However, as when looking at the residence of an overseas company, HMRC would tend to look at the place of the highest level of management rather than day-to-day management.

They would usually look at factors such as the location of partners' meetings, the seniority of the partners in age and experience and where major transactions were undertaken.

A and B could also consider having equal capital sharing ratios (to split capital equally) but giving the non-resident partner a higher profit sharing ratio to increase his interest in the partnership and possibly increase the likelihood of establishing the partnership offshore. Any planning that involves using an offshore partnership would need to be carefully considered with your professional adviser.

15.7 What about Overseas Tax Implications?

Of course the downside to all of the above is that we have only looked at the UK tax implications. Many countries retain the right to tax:

• Residents, and
• Assets of non-residents located within their jurisdiction.

Therefore, anyone considering purchasing a property overseas should take advice from a relevant tax professional as to how any income or gain will be taxed locally.

In the case of Spain, for example, individuals are taxed at a standard 21% on any gains arising on a disposal and 24.75% on the gross rental income.

In addition, the 'standard' double tax treaty that most countries choose to adopt would treat the income/gain as being sourced from the country in which the property is located and therefore subject to the overseas tax regime. It would therefore only be if a property was purchased in a 'tax haven' that liability could be avoided. Such tax havens include Andorra, Monaco, and the Cayman Islands.

15.8 Double Tax Relief (DTR)

If you are subject to tax both in the UK and overseas, there are provisions designed to ensure that you do not pay tax twice. As mentioned earlier this is known as double tax relief (DTR), and you can claim DTR against your UK tax charge.

DTR is given as the lower of:

• The UK tax on the overseas income
• The overseas tax

Therefore, if the overseas tax was charged at 50%, with UK tax being 40%, you would obtain DTR at 40%. Similarly, if the overseas tax was charged at 20% and UK tax 40%, you would only obtain DTR at 20%. The net effect of this is that you will be left paying the highest tax charge.

Example

Richard, a UK resident individual has the following income in the 2013/14 tax year:

His tax calculation would be:

The income tax levied on this taxable income would be reduced by double tax relief.

As the overseas income will be subject to tax at the higher rate (as the taxable income exceeds the UK higher rate tax band), we can calculate that the double tax relief will be the lower of

• The UK tax on overseas income (40% x £3,000) = £1,200
• The overseas tax (50% x £3,000) = £1,500

Therefore total double tax relief in this case would be £1,200 (lowest of the two figures,) and this would be given as a credit against Richard's tax liability.

15.9 Summary

The tax implications of purchasing a property overseas are certainly not straightforward, and you should always consider carefully the UK and (just as importantly) the overseas tax implications.

By way of a summary, I would suggest that the following points be borne in mind when purchasing a property overseas:

• Assess your residence/domicile position to ascertain your liability to UK taxes.
• Obtain overseas tax advice to determine what rate of taxes (if any) exists overseas.
• Retain all receipts (for example, conveyancing fees, valuations, agency fees) -- these can be offset when calculating any gain charged to UK capital gains tax.
• Keep full information/documentation of any tax suffered on overseas income/gains -- this will be required to substantiate a DTR claim, should HMRC ask questions after you submit your tax return.
• Think about the most effective structure for the purchase, whether by you individually or via a company or trust.
• If you are a non-UK domiciliary, watch out for the deemed domicile rules and consider getting advice from a professional about establishing an offshore trust. It is best to do this sooner rather than later. It is the status of the trust creator on the date the trust is established that is crucial for inheritance tax purposes (and is for capital gains tax and income tax purposes after 6th April 2007). If you later became a UK domiciliary, the trust assets would still be exempt from UK inheritance tax.

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About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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