Do you have overseas property?

Of itself, ownership of an overseas property does not give rise to potential tax liabilities; it is the fact that it generates an income or capital gain for you that matters. So those keeping a home in the sun for personal / family use only are not affected – provided no money or value is received from friends and family using it. (There are however, other local taxes that will apply and overseas assets are counted for UK inheritance tax.)

The rules are quite simple. If you are a UK resident, you are liable to tax in the UK on your income and capital gains worldwide from whatever source, including bank interest, property rental and income from trade or profession – so it is no use writing a book and having it published in Spain, it will still potentially be taxed in the UK if you live here for more than 90 days a year on average over any four-year period (subject to a maximum of 183 days in one year).

If any money you generate from renting out your overseas home is subject to local taxes, then you will probably benefit from double taxation relief in the UK, to the extent that you have already paid locally. So a basic rate taxpayer with rental income in Spain subject to 24% tax will have nothing further to pay; but a higher rate tax payer would be liable for a further 16%.

The good news is that if you declare to HMRC that you have overseas income before 22 June 2007, they are likely only to charge you the tax due plus 10%; if you leave it any later, or fail to tell them altogether and they find out about it, they will charge a 100% penalty on top of the tax due. After making your declaration to the taxman, you will have up to five months to give them full details.

Due to an unprecedented level of inter-state co-operation, it is most unlikely that those with overseas property will escape detection, so honesty is definitely the best policy.

Having said this, owning a home in the sun and even letting it to help cover the costs should not be discounted. At the very least, this can provide a source of cheap holidays for yourself and friends; at best, it might prove a good investment, even after tax.

One important consideration will be how to finance your purchase. If you are re-mortgaging your UK home to release cash to buy a home overseas, you options are limited. If, however, you are intending to borrow against the security of the overseas property, you might wish to consider an overseas mortgage, perhaps in euros, dollars or whatever local currency applies. The reason for this is that your rental income is probably going to be in the local currency (unless you let exclusively in the UK) as will be your main costs such as local taxes, management fees and so on. By having your mortgage in the same currency as the income generated by the asset, you avoid currency fluctuations making your mortgage disproportionately expensive, should exchange rates move against you.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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