At this time of the year many people go on holiday and think “Wouldn’t it be lovely to own a wee place here?”
Some of those people will go the next step and purchase somewhere as a holiday home. Since it will be vacant much of the year it can make sense to let it out as a holiday home. What people sometimes ignore is that this has tax consequences both in the UK and often in the country the property is.
First I will dispel a few myths about overseas holiday homes. The right way of it is:
- You must declare any overseas rents to the UK HMRC.
- The tax authorities in the host country ARE interested in tax on rents there.
- The property remains part of your Inheritance Tax estate.
- You have to pay UK CGT if you sell.
- You cannot reinvest in another property and avoid CGT.
That may have left a few of you somewhat shell-shocked and depressed. Better that you learn it from me than in a letter from the tax-man – whether the tax-man is in the UK or overseas.
If you are a UK resident for tax purposes then your worldwide income is to be declared to HMRC. That includes rents from overseas property – even though you may feel you make no money at it. The rents must be declared but relief can be claimed for expenses appropriate to the rent – like a sensible proportion of mortgage interest, maintenance fees, heat and utility charges. Note I said a PROPORTION of the running costs. If you also use the property for family and friends you cannot claim a year’s expenses against the rent you receive from part of a year’s rent.
Also you can claim any managing agent fees and indeed the accountant’s fee back home for showing the rents on your Tax Return.
If you rent out a property in a foreign land then almost certainly the tax authorities in that country will want to know. You should check this out. Internet research can be helpful – though not guaranteed accurate – or you can check out the many books on buying homes abroad. If you have a local letting agent they can help too. Bear in mind that tax authorities share information across the borders more and more these days.
If you do make a declaration to the local tax people be sure to show the paperwork to your UK accountant. If you pay some tax overseas on the rents then you will probably get some tax relief in the UK as a result.
Just because the property is outside the UK it still counts as yours for Inheritance Tax purposes. It can be quite difficult to escape UK Inheritance Tax even by moving overseas, often requiring severing your ownership of links to the UK such as property here etc. If you live here then you are almost always caught for IHT on your assets anywhere in the World.
Capital Gains Tax
As a UK tax resident you will have to account for Capital Gains Tax (CGT) if you sell a holiday home. There may or may not be any tax payable after the calculation is done. So long as the proceeds exceed £43,600 (2013/14 year) then you will have to complete Capital Gains pages on a Self Assessment Return – even if you normally are not sent a Return. This applies even if in the end there is no tax due to be paid.
To the extent that your gains exceed £10,900 (2013/14 rates) then there will be CGT to pay. If the property is held by two people then gains for the year could be £21,800 before tax is payable.
Reinvesting in property
Contrary to popular belief you cannot reinvest the proceeds from selling a house into buying another and so avoid a Tax Return or bill. (That type of relief applies to certain business assets only). If you sell your Spanish home for a £30,000 profit then you have to pay tax on it – even if the entire proceeds were spent on another overseas property.
Having the overseas property in joint names will often reduce the CGT on its eventual sale.
Keep records and receipts for capital expenditure on the property – such as putting in a pool, building a garage, installing aircon etc. These will reduce the eventual CGT bill.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.