It is important that the purchase of a foreign property is carefully thought out, both in terms of the practical considerations but also in terms of the tax and succession implications. It is therefore vital to take proper tax and legal advice, from both local experts where you are buying the property and also from advisers in the country of your residence and domicile.
There may be a number of tax issues to consider in both the country of the property and at home. A tax charge may arise in either or both of those countries on any of the following events:
- Disposing of a capital asset (e.g. property or investments) to realise funds for the purchase
- Transferring money to country where property is being purchased
- Buying the property (the local equivalent of UK Stamp Duty)
- Local service tax on the running of the property
- On any rental income earned from the letting of the property
- On the death of any owner
- On the transfer of the property
- On the sale of the property
UK residents are liable to UK income tax on all income, regardless of where this arises. UK residents who therefore rent out their overseas property will be subject to UK income tax on the rental income. There may also be a liability to pay tax in the country where the property is situated and where that it is the case, there is likely to be some double taxation relief granted but it is essential that proper advice is sought in both countries prior to purchasing a second home and prior to commencing any rental.
Capital Gains Tax
UK residents who own a property abroad which is not considered to be their main residence need to bear in mind that they will be subject to UK Capital Gains Tax on any profit made when the property is sold or transferred. There may also be a liability in the country where the property is situated so again, advice should be sought.
Individuals who are domiciled in the UK are subject to UK Inheritance Tax ("IHT") on their worldwide assets in the event of their death. UK IHT does not therefore just apply in respect of assets physically located in the UK if an individual is domiciled in the UK. The UK IHT rate is 40% and while the extent of the tax charge will depend on a number of factors, such as the beneficiaries and the availability of the "nil rate band," a substantial tax charge may arise in the UK on the overseas asset. Some double taxation relief will be afforded but if the death duty rate in the country where the property is located is lower than the UK rate, the relief may just be restricted the amount of the tax paid abroad meaning that there is a balancing payment due in the UK.
The process by which IHT is paid usually differs abroad from the UK. In the UK, IHT is paid by the executors of the deceased from the deceased's estate before the estate is distributed. In many other countries, the IHT is payable by the recipient of the gift. It is important to consider who therefore pays the tax, particularly if different people are receiving different assets.
It is essential to take advice on the succession implications of owning a property abroad at an early stage, both from a solicitor or notary in that jurisdiction and from a solicitor in your home country who is experienced with dealing with issues which arise when dealing with international assets or estates
As the succession to a property is governed by the law of the country where that property is physically situated, it is likely that a separate Will would be required in the foreign country, to ensure that this passes to your chosen beneficiaries after your death in the most tax efficient way. Some countries such as France have strict rules which govern what your children will receive from your French estate and advice is therefore essential to understand how these rules will apply to your circumstances.
Even if a foreign Will is not strictly required, your local solicitor will wish to confirm that your UK Will would be given effect to in the overseas jurisdiction in the event of your death.
Finally, when preparing an overseas Will, make sure that your two solicitors communicate with each other! This is vital to ensure that the work that is being done in one country compliments the other.
At Morton Fraser we can help with all aspects of Scottish estate planning and co-ordinate with your overseas advisers to help you understand the Scottish tax and succession implications of owning a property abroad. We can also advise on the Scottish probate process and UK IHT reporting which can be complex where there are assets in different jurisdictions.