Financial Planning for Buying a Home Abroad
Unless you are simply using some spare money to buy a holiday home abroad for you and your family to use occasionally financial planning will be key to the success of your investment. And even if you are just looking for a holiday home, it’s still worth making sure you understand the tax implications of each different method of raising the cash for the purchase.
Complicated Web of IssuesThis is a complex matter, as finances, tax planning and inheritance all depend on you and your family’s circumstances, which country you are buying in and where and how you live. This means that direct independent advice will be the only way to ensure accurate advice that is relevant for each individual, but we’ve detailed some initial pointers here.
Check Your SituationThe first step is to be sure why you’re making the purchase. If you are in it purely for the return, then your purchasing decisions will be made purely on the facts and figures. These are the issues:
- Can you use cash or will you borrow?
- If you are raising a mortgage, should you raise it in the UK, or where you are buying?
- Will you be earning rental on the property?
- Will you be resident where you are buying, or can you be?
- Are you a tax payer, either in the UK or another country?
- Will the property be owned directly by you, a pension, or a company?
For the purposes of this article we will be ignoring the issues that arise when you sell the property and inheritance issues, restricting the topic purely to the issues surrounding buying. Whether or not you borrow is largely up to you and your financial situation. Even if you have the cash, it might be worth looking at borrowing if you can get a low enough rate, and keeping your capital to underpin another investment.
MortgagesMany people fund their overseas purchases by raising a mortgage on their UK property, releasing the equity created by house price rises in the UK. Others swear by borrowing in the same country as your property, so that your investment is protected from interest rate fluctuations. The US is a case in point here. After many years of house price inflation, the market is plateau-ing out and the dollar has dropped against the pound. So if a house was sold to bring the profit back to the UK, the lower exchange rate means that it may be worth less in sterling now. On the other hand, the low dollar-to-sterling rate enables Brits to get great value in the first place.
This is complicated by the fact that in many countries, you won’t be able to get a mortgage. Poland, although not explicitly refusing mortgages to foreigners, makes it very hard. Often the market in your target country is less sophisticated and the offers we are used to simply don’t exist. For example, most countries in the Caribbean will demand a 30% deposit, South Africa does not have self-certification mortgages, and Spanish lenders will not take predicted rental income into account when setting lending limits. These are just a few examples, there are many others.
What About SIPPS?Using a pension, probably a self-invested personal pension or SIPP, to buy your property can be tax-efficient but the changes made in 2006 to the expected format of SIPP’s made this option much less attractive. Even if this wasn’t the case, some countries, even in the EU, won’t recognise UK pension trusts, making it impossible for them to own property, although there are sometimes ways around this.
Tax Treaties Can HelpIt is vital to understand the tax regimes and the tax treaties between countries. This is particularly relevant to rental income from properties abroad as, if there is a treaty in place, you will not be required to pay tax in the UK if you have paid tax in the country where you bought (or vice versa). In order to pay tax in that country you may need to be deemed resident for tax purposes, and the rules for this are different in almost every country.
An illegal loophole exists where some people tell both the countries involved that they are paying the tax in the other country, but the Customs and Revenue department in the UK is getting very hot on this. They are using computer data to arrive at lists of people with earnings abroad that they can check up on. An amnesty for people who may have been, wittingly or unwittingly, not paying their taxes from overseas bank accounts (including rentals) expired on June 22nd 2007 and many analysts are now expecting an increase in investigations.
Costs of Transferring Money AbroadThere is one other area that’s worth investigating and that is looking at using currency brokerage services instead of banks to transfer the funds into the country of purchase, as they are usually cheaper. Some of these bulk your purchase up with many other investors’ so that they can then negotiate for a better exchange rate and lower commissions.
Others effectively bet with your money against predicted currencies movements, allowing you to fix your rate in advance so that you know the amount that your sterling will be converted too. If you think exchange rates are moving, this can be a bonus, there’s nothing more damaging than suddenly having to transfer an extra couple of thousands pounds quickly (and therefore expensively) just as you are trying to complete, because currency movements have eroded your stash.