After another cold, wet summer and with dull economic prospects at home, you might be thinking of buying a property abroad or even making a permanent move to foreign climes.
If so, as well as it being essential to take independent and high quality legal advice, there are several other considerations you should be taking into account.
It may be cheaper to get a mortgage in the local currency than in Sterling. Interest rates in the UK are traditionally higher than in most other countries. However, a foreign-currency mortgage carries an exchange rate risk which may be considerable. In August 2007, the Euro was worth 68p. In August 2008 it was worth about 79p and in August 2009, 86p. A €150,000 mortgage financed in August 2007 at 5 per cent would cost over £800 more annually at the exchange rate applying one year later and a further £500 a year later. The good news for purchasers is that the increase in the value of the asset offsets the increased cost of servicing local debt.
If the pound falls, the Sterling value of the foreign asset rises. Conversely, if the pound strengthens, the Sterling value of your foreign property falls.
You will need to consider the income tax implications carefully. If you remain UK resident, you will pay UK tax on your world income – no matter where you earn it. If you are not UK resident, you will normally pay tax only on income arising in the UK and will be able to claim double taxation relief. If you have rental or other income abroad, you may well have to prepare and submit a local tax return. The rules for deduction of expenses also differ widely from one country to another, so local professional assistance may be needed to deal with tax compliance.
Inheritance Tax (IHT)
In the UK, liability to IHT is based on your domicile. If you are domiciled in the UK, your world assets are included in your estate for IHT purposes. However, you may well also have an IHT liability in the country in which you have your second home. This is an area which requires very careful planning.
Capital Gains Tax
A UK resident who makes a chargeable gain in a tax year is liable for UK Capital Gains Tax on the gain. Second homes abroad do not qualify for the principal private residence exemption. Furthermore, in most countries such a gain will also be subject to local tax. Taking a foreign tax residence may also produce CGT consequences relating to any property you own in the UK.
In many countries, VAT must be charged on rental income. The VAT registration threshold in most EU countries is much lower than in the UK and penalties for non-compliance tend to be high.
Wealth taxes (specifically, taxes on the value of property) are common. In the USA, for example, the equivalent of local rates is generally charged based on the current market value of properties in the area – so, if a neighbour sells at a good price, your property taxes may well go up.
The main additional costs abroad are agent’s and notary’s fees, which are typically much higher than in the UK, and stamp duty, which can also be much higher. In some countries, these can add up to 15 per cent to the cost of a property.
There are many stories about disasters resulting from problems with the legal title to a property, from the failure by builders or contractors to complete property bought ‘off plan’ or where planning laws mean the loss of the property or its amenity value. However, more prosaic problems, such as intermittent electricity or water supplies, can also be an issue. Having high-quality, independent, local professional advice is essential if one is to avoid such catastrophes.
Taxes – check that there are not tax penalties attaching to non-resident or ‘holiday’ ownership. In 2012, France introduced a tax on homes of non-residents.
Also, if you are retiring, note that residence in many countries will disqualify you from increases in the state pension.
Lastly, one important aspect which is often overlooked is the local inheritance law. Although the Uk has opted out of the EU proposals to decide which country’s inheritance law will apply when a citizen of one country dies when resident in another, it is almost always worthwhile having a local will if you live or hold substantial assets abroad, but in some countries the laws governing who may inherit are far less flexible than here. One way of circumventing the difficulties this may cause might be to own a property through a company, but in some countries this will produce a tax penalty.