Overseas Tax

Overseas Tax

Holiday Home Headaches

Purchasing a holiday home abroad can give rise to some interesting tax quandaries, warn GARY HEYNES and JULIE CAMERON.

THE PACE OF property purchases across southern Europe by Britons continues unabated. Many enter into arrangements unaware of the UK tax implications and even less aware of the local tax consequences. This article will cover some of the broader issues which advisers should be aware of, but, as always, specific advice is needed for individual circumstances. It considers the position for a UK resident and domiciled individual who already owns or is purchasing a property overseas, which may be let on a holiday basis and/or is available for personal use. UK and foreign issues can relate to income, capital gains and inheritance tax (or the equivalent).

Income tax

Income tax issues arise where the property is let or could arise where the property is owned by a company and is available for personal use. Letting income is taxable in the UK under Sch D, Case V, calculated under the Schedule A rules. Adjustments may therefore need to be made to the amount declared for local tax purposes, including the tax year (which is unlikely to coincide with the UK tax year), not forgetting the appropriate adjustments for personal use. Withholding tax may be applied to the gross rents in the local country to ensure that foreigners meet their liability to tax in the local jurisdiction.

Where the property is owned by a company, located in the local jurisdiction or otherwise, a charge to tax in the UK could arise if the individual is a director of the company or deemed to be a director under ITEPA 2003, s 67(1). If appropriate, ss 97 to 113 provide the method of calculating any benefit in kind charge.

A charge to tax could be avoided, but this is difficult if the individual wishes to retain some control of the property. For example, no accommodation benefit would arise if:

 

• the individual is not a director of the company and does not have any influence over decisions taken by the directors of the company;

 




 

• the company is to be regarded as a nominee company.

 

The first option is likely to be of little help as most individuals would want some control over the property and it would be difficult to argue otherwise.

The nominee route is also difficult. Separating legal and beneficial ownership is not, for example, recognised by the French system. So if accounts for a French company have been prepared for previous years showing the property as an asset of the company, it would be difficult to make this argument later. Various other reasons, such as the way in which decisions have been made or funds provided, could affect this argument too. It is possible to declare a trust at the outset of a new arrangement, stating that the property is to be held as nominee, but the way in which the property is managed should continue to support this. Equally, a declaration could be prepared in respect of existing arrangements, if the way in which the property has been managed can support this.

Where there is no chance of avoiding the benefit in kind charge, it may be possible to reduce it. Many owners of holiday homes cannot make full use of the accommodation, but the benefit in kind is chargeable if the property is available to them. In these instances, the company can limit the amount of time the property is available to certain individuals, e.g. directors or deemed directors, to, say, a four-week period each year. The charge would then be reduced to 4/52nds of the full amount. It can be further reduced if a husband and wife are directors or deemed directors and have the same period of use available to them.

The issue of an accommodation benefit in the circumstance of overseas companies and properties owned by them is not entirely fair. Many individuals have used companies to avoid local property taxes (Portugal), for VAT reclaim arrangements on new buildings (South Africa) or forced heirship purposes (France); whether that gives reason for a fair charge to tax in the UK is open to discussion. However, in other countries, such as the Czech Republic and Bulgaria, both of which are becoming popular holiday destinations and where property is still very affordable for Britons, local law does not allow foreigners to buy property directly and individuals are therefore required to set up a local company to make the acquisition. We have yet to see whether the Revenue will take a favourable view in these situations, even where the individual is an actual director of the company.

Where possible, the ideal position may be to purchase properties directly and suffer the local consequences (property taxes, etc). It is, however, likely that advisers will come across new clients who have existing property abroad, which they own via a company because the proverbial 'man in the pub' had told them that by doing so they will then not need to declare the rental income in the UK. The Revenue is likely to get its share of tax by one of two ways: either the company will be considered UK resident by virtue of management and control from the UK or the income becomes taxable by virtue of TA 1988, s 739. If on grounds of the latter, exemptions under TA 1988, s 741 may be possible where the individual was required to purchase via a company in countries such as the Czech Republic or Bulgaria as it would be a bona fide commercial reason for ownership via a company.

Relief should be available for any corporation tax paid in the local country against any income tax liability arising under TA 1988, s 739.

A brief comparison of the rates of income taxes and corporation taxes is given in Table 1 below.

Capital gains tax

The disposal of a property overseas would give rise to a gain in the local jurisdiction and in the UK, with double tax relief available in the UK for foreign taxes paid. The calculation for capital gains varies from country to country and it could be that the tax payable overseas is greater than the UK tax liability, restricting the double tax relief available. Indeed, the UK liability could be reduced due to available capital losses in the UK, which cannot be used overseas.

Individuals trying to remove themselves from the income tax consequences of ownership by a company, discussed above, should be aware of the issues that a sale or distribution by the company could present. TCGA 1992, s 13 attributes the gain realised by a non-resident company, which would be considered close if resident in the UK, to its members (shareholders).

The foreign company is likely to have paid a local corporation tax on this gain and Inland Revenue Statement of Practice D23 allows that an individual can use the overseas tax paid by the company as either a credit or deduction for double taxation purposes under TCGA 1992, ss 277 or 278 against the s 13 charge.

An additional gain could arise on the liquidation of the company. Normally, under most UK double tax treaties, tax is on charged on capital gains relating to moveable property in the country of the individual's residence, so no chargeable gain should arise in the local jurisdiction on this event. TCGA 1992, s 13(5A) allows for any UK tax paid on the attributed gain to be offset against any tax on the gain arising from the capital distribution of the proceeds, provided the proceeds are received within, broadly, a three year period.

Care should be taken here on the availability of double tax relief. Normally, double tax relief is available on like for like gains arising in two jurisdictions. As mentioned, the foreign tax paid by the company can be used against the s 13 attributed gain in the UK. This may have reduced the tax paid in the UK on the attributed gain and may therefore still leave a liability in the UK on the sale of shares.

Table 2 provides a summary of the CGT rates.

Inheritance tax

Where individuals are UK domiciled, their liability to UK IHT on worldwide assets remains. However, estate taxes are normally charged on immovable property in the foreign country; the foreign country normally has the first taxing right, with the UK giving credit for any foreign tax paid.

Table 3 gives an indication of the likely rates of estate taxes in various jurisdictions.

Miscellaneous

A foreign will is often helpful where overseas property is held, as the property is likely to be subject to local heirship rules. It should not be presumed that the local country will recognise the UK will. In France, the local law overrides any will with regard to immoveable property (hence the general use of a company) and advice should be sought for ways of dealing with this.

The pre-owned assets charge should also be considered. The contribution condition within FA 2004, Sch 15 is likely to have been met such that a charge could arise (in some cases the disposal condition may have been met, but this is probably unlikely). Sch 15, para 11(1) does provide an exemption where an individual's estate includes other property which derives its value from the asset and so, on the basis that the shares in the company fall into the individual's estate, no pre-owned asset charge should arise. However, there may be an issue where the value of the shares is less than the value of the property (maybe due to borrowings within the overseas company), so that this condition is not met. This may mean that the exemption is not available. As advisers get to grips with the new charge and regulations are produced, it is to be hoped that such anomalies will become clearer.

Finally, UK individuals may be completely unaware that other taxes, not found in the UK, exist in foreign jurisdictions, some of which can add significantly to the annual costs of property ownership. These include wealth tax, income tax on a deemed rental, various levels of council-style taxes and transfer taxes for both the purchaser and vendor. Table 4 gives an indication of some of these taxes.

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