UK: Looking for a Home From Home?

More and more Britons are buying second properties. But whether you’re after a place in the sun or a buy-to-let venture (or both), you need to plan your ownership carefully to avoid unnecessary surprises. Here, we look at a few of the main points to watch.

You’ve seen the TV programmes – now perhaps you too are looking for a retreat of your own. Flying to the Continent is cheap and easy nowadays and, when you’re not there enjoying the sea and sangria, you can let the property out to earn a rental income. But people aren’t just looking in sunnier climes – second property ownership is also common in the UK. Whatever the circumstances, it’s important to be able to assess the costs – both at the outset and in the long run – before you take the plunge.

When you buy a property abroad, you’ll be subject to the local taxation regime. As well as taxes and fees on acquisition, there are likely to be annual taxes and costs. Generally speaking, you’ll be liable for income tax, capital gains tax (CGT) and inheritance tax (IHT) – where applicable – both locally and back in the UK. You may be entitled to a credit against UK tax for the tax you’ve already paid abroad in the year, but you might have to file tax returns in both countries.

Check the idiosyncrasies of each country. Forced heirship rules in countries like France, Italy and Spain dictate how immovable property is passed on at death, regardless of your wishes. For this reason, you may wish to consider ownership of the property through a company. This can also be beneficial for other reasons – perhaps as a way of avoiding local wealth taxes. However, there may be disadvantages back in the UK – such as a benefit-in-kind income tax charge – and it’s not appropriate everywhere (for example, Italy). The ownership structure will also depend on whether you intend to rent out or if you will occupy the property yourself.

Local wealth taxes are usually calculated on the value of the property after any mortgage – so consider borrowing against the property. And, following changes to the investment powers of approved pension schemes, you could soon use your pension fund to make the purchase, with the potential of some very substantial tax breaks. The panel below highlights some of the main points to watch out for in five of the most popular locations for holiday homes.

Whether your second property in the UK is an additional family home or an asset for producing income or capital growth, there can be unexpected tax consequences. When you sell or gift a property other than your main residence, any gain above your annual exemption is liable to CGT, reduced by taper relief at the non-business rate. But you can choose which property you elect as your main residence (within two years of acquisition) and you can vary your election later. An exemption of up to £40,000 is available if the main residence property has been let as residential accommodation at any time during your ownership.

You’ll have to report rental profits to the Inland Revenue annually, but expenses incurred in renting the property may be deducted. There are also deductions connected with capital expenditure. Special tax reliefs for income tax, CGT and IHT are available for ‘furnished holiday lettings’. To qualify, the property has to meet certain criteria – including actually being let for short periods for 70 days in a tax year.

On your death, IHT is charged on the value of all properties (minus any loan secured on them). If you gift a property outright to someone during your lifetime, it would not form part of your estate if you lived for seven more years. Another option is to transfer the property into an accumulation and maintenance trust for the benefit of your grandchildren but you must not retain a right to use the property or there could be tax consequences.

There are one-off document duties of 0.55 per cent of any loan on the property on purchase and estate agents fees can be as high as 6 per cent. Annual property taxes of 1.2-2 per cent are based on the current market value of your property. When borrowing in the UK to purchase property in the US, currency fluctuations can increase your debt – or work in your favour – but some companies allow you to fix your exchange rate at the outset or borrow in dollars.

Notary fees on acquisition are 6.5-7 per cent of purchase price. There are local property taxes – on both land and buildings, and occupiers – as well as annual wealth taxes on properties worth more than e720,000, but any loan on the property would reduce the potential tax charge.

When buying a second property here, registration charges can be 10 per cent – or as high as 18 per cent if agricultural land is involved. Along with additional Italian taxes and other charges, the bill could be 9-23 per cent of the purchase price (or VAT of 4-20 per cent if a new property is bought from a builder). There’s an annual property tax of 0.4-0.7 per cent of the market value.

Although there’s no IHT in Portugal, assets transferred on death are subject to 10.8 per cent stamp duty (although transfers to spouses, children and parents of the deceased are exempt). Other transfers by individuals are subject to 6 per cent stamp duty. Other taxes include public notary and real estate register costs paid on completion of the purchase, and local municipality tax. Portuguese VAT is payable at 19 per cent on any legal fees and on the construction costs of a new building.

Wealth taxes are calculated on the net declared value of the property (after any mortgage), and there’s a transfer tax of 7 per cent payable on the purchase value. Local municipal tax is payable at time of sale and many properties are subject to a local annual community charge based on floor area. When acquiring a property from a non-Spanish resident you need to withhold 5 per cent of the purchase price for the Spanish authorities as a payment towards any future CGT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.