What are the tax implications of purchasing property overseas?
What UK residents need to know before purchasing property overseas.
You reside in the UK and have decided to buy a property in the Spanish sunshine, perhaps as a holiday and subsequent retirement home. You need to consider inheritance and gift taxes, wealth tax, income tax, capital gains tax, property tax, stamp duties and notarial fees.
Immoveable property is taxed for inheritance tax purposes on the death of the owner by the country in which that property is located. In each case, the tax rate depends on the relationship between the deceased and the beneficiary, with rates exceeding 80%. Should the deceased be resident and domiciled in the UK, that property could also be liable to UK inheritance tax (40% over net worth of £270,000) in addition to the Spanish inheritance tax with no set-off of the Spanish tax against the UK tax. Simply put, the tax could exceed the value of the asset. That property in the sun will incur taxes and fees of about 10% of the cost price at the time of purchase, and changing the way that you own the property will incur the same level of charges. Planning your purchase in advance is therefore absolutely crucial.
Should you decide to live more than 180 days in a calendar year in Spain, you will become liable to Spanish taxes on your worldwide wealth and assets and that includes income, capital gains, wealth and inheritance taxes. Placing cash in an offshore bank account does not remove those assets from their liability to all these Spanish taxes. It is essential to structure how you hold your assets to minimise Spanish taxes. The liability is irrespective of holding ‘residencia’ (residential permit). Before you ask ‘How will the Hacienda (tax office) know?’, modern technology allows the Hacienda to check utility usage and claim accordingly - as the French already do.
You will remain domiciled in the UK until you obtain a letter from the UK Inland Revenue that accepts that you are no longer domiciled, and to obtain that letter you must convince the Inland Revenue of no intent to return. Buying a burial plot or telling relatives of your wish to have your ashes scattered on the South Downs is still an intent to return! As long as you remain domiciled in the UK, your estate is liable to UK inheritance taxes at 40% on any value that exceeds the threshold (£270,000 presently). If you move to Spain, you may give up your domicile after 5 or 6 years.
Similar considerations apply in most other countries and some, like Germany, can be even worse because the Finanzamt (German tax office) will claim worldwide taxes if you spend as much as four weeks in a German property.
The solutions to these tax issues vary according your nationality, residency and domicile and to the country where the second property is located.
Discuss these matters with Woodbrook Group Corporate Service, and we will propose solutions in conjunction with your own professional advisors.