Tax Issues When Owning Property Abroad
Tax and how to deal with it, is a complex subject and it must be stressed that each individual should take appropriate professional advice about their situation before entering into any transactions to do with foreign property.
Massive Field
There are five distinct areas where tax may or may not be applied with regard to foreign property, depending on where you live, where your money is, and where the property is:- Transferring money to the country of purchase
- Buying a property
- Running the property (local and regional government taxes)
- Earning from letting the property
- Bequeathing the property
- Selling the property
Then there are six distinct types of tax that can be applied, sometimes more than one of them, in some or all of those six situations. Those tax types are:
- Value Added Tax or the equivalent
- Property Transfer Tax / Stamp Duty
- Other transaction taxes (wealth duty, for example)
- Income Tax
- Local Services Taxes
- Capital Gains Tax (CGT)
This is of course complicated by the fact that the tax regime in one country will almost certainly be different to that of any other country. The situation will also differ depending on whether or not you are considered resident in the country where you have the property, and notice the use of the word ‘considered’ in that sentence.
Residency
Guidelines may well be published so that you can conform to and establish residency for tax purposes in a particular country, but in the end, if the taxman disagree with you, they are always right, regardless of what country they or you are in! This situation is complicated by the existence of bi-partite tax treaties between some countries, where an agreement to declare tax in one country is sufficient to allow the other country to accept that.Rental Income
Take the case of rental income earned on a property in France, for example. If you are resident in the UK, for tax purposes, the French authorities will accept that if you are paying income tax on that earned revenue in England, it would be unfair to request for tax to be paid for it in France. The same agreement works the other way round as well; after all, you do not want to pay twice.This has lead to some unscrupulous property owners, who should be discouraged of course, declaring to the French authorities that they pay the tax in England, and the English authorities that they are paying it in France, thus neatly avoiding the bother of having to pay tax in either country!
Loopholes Closing
Be warned, however, as the English and French tax authorities have embarked on a joint IT project over the last few years to link their taxation systems, in order to ferret out these wrongdoers and bring them to book.Check It out First
Tax regimes could also affect your choice of country to buy in. If you are looking at the Caribbean, for example, many of the countries there have no stamp duty, some no CGT (St Lucia, for example) and some no income tax. In Barbados stamp duty looks good at only 1%, but there is a 10% property transfer tax. So it could make a big difference to you financially if you were to select a country where the tax regime didn’t suit your personal circumstances.Another example is Greece, which has a tax regime which on the face of it looks relatively punitive, with 19% VAT on new building, a property transfer tax of 7-11%, and CGT starting at 20% then tapering off to zero after 25 years. But the benefit of these charges is that people looking for a quick buck won’t be buying there, so it is more likely to retain its character. And isn’t that a better reason for someone to be interested in buying there?
