There are three great joys that come from owning property overseas – providing, of course, you buy the right property in the right place and you take proper legal advice when doing so.
The first of these is that, over time, the value of your investment tends to go up. The second is that, if you wish to do so and you manage your property well, you can let it and generate enough income to pay all or part of your running costs. The third is that you get the great perk of personal use of the property when it is not being rented out to somebody else.
As a result tens of thousands of British people have bought homes overseas.
Many of them have made money from renting it out and, quite properly, have paid the taxes that they owed on that rental income to the government of the country where the property is located. They will then (if they are UK tax resident) have also declared that same income as part of their worldwide income in the UK and they will have paid the British Government any tax they owed here - but they will have been allowed to deduct from what they owed to Gordon Brown the amount that they had already paid on the same income to the government overseas.
Many of them will have sold their properties and made capital gains and they will have paid tax on those gains to both the governments in question in much the same way as they did on the income.
Unfortunately, in some countries the only way in which a British person could buy a property was by owning it in the name of a local limited company. In other countries owning in that way solved a lot of legal problems and so became common. And in some countries, whilst there was nothing to stop the buyer owning in their own names, they just chose to buy through a limited company.
This caused a very large potential problem. Buying in this way could increase, dramatically, the buyers’ liability to pay tax in the UK. The UK tax authorities would still want to tax you on the money you generated from the property by way of income or gains – but, as the property did not belong to you (it belonged to the company you owned) you could not set off the tax that had already been paid against the tax owed in this country. Worse still, if you were a director of the company or if you were what is known as a ‘shadow director’ then you can face additional tax liabilities if the company allows you to use the accommodation for your own personal benefit. This is treated as a benefit in kind (in much the same way as if they gave you a company car) and so you could end up paying tax at 40% on the value of the time you occupied the property for your holidays. For this reason we had to be very careful when talking to clients about the possibility of owning property through a company rather than directly in their own names.
Last year the Chancellor announced his intention of helping to solve this problem. Provided that the company did nothing but own this property and provided that the shares belonged to one or more individuals then there could be a relief from having to pay these additional taxes. This was a great relief to people such as those who had bought property in France in the name of a special type of French company called an SCI with the only intent of reducing the restrictions that would otherwise have been imposed upon them when it came to the freedom to leave their property to whoever they wanted when they died. Saving tax was not on their minds but saving aggravation was and it came as a horrible shock for them to find that this simple step might cost them a small fortune in additional British tax.
Since then the exemption has been widened a little bit so that you can now also be excused the liability to pay tax if the company you own overseas is owned by a company you own in the UK instead of being owned in your own personal name.
If you are thinking of buying a property abroad and you are thinking about putting the legal ownership into the name of a company then it is very important to get good legal advice to make sure that you do so in such a way that you will not need to pay tax in this country on the income that you generate or when you use the property yourself for your holiday accommodation.
If you have already bought a property abroad in the name of a limited company then you should now take legal advice from a specialist international lawyer or tax advisor to make sure that the structure will be effective to prevent you having you any further tax liabilities in this country. If it is not then it may be possible to change it cheaply and simply to make it more tax efficient. Whilst you are getting this advice you might also want to ask your advisors to make a claim for repayment of any tax that you have paid in error to the British government. This could amount to quite a lot of money.
It is good to see the government coming up with a practical solution to an irritating problem that affected an awful lot of ordinary people who were not in any trying to get out of their obligation to pay the tax due from owning a property but who thought that it was grossly unfair for them to be taxed twice or to be taxed on the basis of the theoretical value of the accommodation they occupied on holiday.
Needless to say, if you would like any advice on this subject do not hesitate to make contact with me.
The International Law Partnership LLP
Solicitors & International Lawyers
Holborn Hall
193-197 High Holborn
London
WC1V 7BD
Tel: 020 7420 0400
Fax: 020 7836 3626
Email: info@LawOverseas.com
Internet: www.LawOverseas.com
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