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Could buying abroad result in a hefty tax bill?

With the UK housing market experiencing a reduction in prices many people are now considering buying properties abroad.

However before buyers set their hearts on properties in the sun they must think twice about all the relevant tax issues involved, warns Tracy Jenkins, tax director for HWB.

She says: “Recent research has shown that UK house prices have dropped in the region of 3.2% in the last couple of months – the sharpest decline in some years.

“As a result many people are a little nervous about investing in properties in this country and considering foreign homes as a safer investment option. However before buyers take the plunge they need to be aware of all the tax implications.

“Over 100 countries now have a double-taxation agreement with the UK. This means that tax paid in the local country will be deducted from the tax owed in the UK. However buyers should not assume the country they wish to move to has such an agreement in place and they should check before entering into any property purchase.

“It is also a common misconception that retiring abroad is often a way of avoiding inheritance tax. For tax purposes, ‘domicile’ is the relevant concept, which can mean that even if you aren’t living in the UK, you are still classed as UK domiciled, and therefore your worldwide assets are liable to taxation. It is possible to change your UK domicile, although it is very difficult.”

Spain, which is one of the most popular emigration or second home destinations, is not one of the countries with which the UK has a double-taxation agreement covering inheritance tax.

Tracy adds: “However, in certain circumstances the UK would give ‘unilateral’ relief for foreign tax paid. In the case of France, on the other hand, there is a double-taxation agreement which means that inheritance tax should not be paid twice. It does not mean it is not applicable at all.

“Under Spanish inheritance law, spouses are not exempt from inheritance tax and two-thirds of the estate must go to the compulsory heirs, who are usually the children. Under French jurisdiction spouses do not have an automatic right to inherit part of the estate, as do parents or offspring of the deceased.

“In the case of both countries, the tax is calculated by reference to the value of the property, the relationship between the deceased and the recipient and the age of the recipient.”

To avoid any confusion it is vital for people to have both their UK will and the will local to the foreign country updated regularly to ensure the estate is distributed as they wish. Trusts can also be set up and lifetime gifts can be considered to protect assets from the complex inheritance tax rules that are applicable both in the UK and abroad.”

PHOTO CAPTION: HWB tax director Tracy Jenkins.