Donald Simpson highlights some of the legal and tax issues which can arise when buying property abroad. The following lists ten issues to look out for.
Instruct local independent lawyers to carry out a full due diligence on the title to the land. Where plots are being bought from a developer for new-build apartments or villas, what guarantees are in place that the development will proceed?
In addition to the purchase price itself, what additional costs are payable such as legal fees, notary fees, transaction costs and purchase taxes? In certain countries the local equivalent of stamp duty can be much higher than the relatively modest rates in the UK. Be aware of all the costs up-front.
If you are intending to rent out the property to help cover costs or mortgage interest, make sure there are no local restrictions which would prevent you from doing so.
Annual taxes and maintenance
Find out the local rates, water, other utilities and service charges for the property. Does the jurisdiction have an annual wealth tax and will the acquisition of property bring you within the scope of that tax? In addition to maintenance costs on the property itself, if the property is part of a development, what are the annual service charges for shared facilities such as the upkeep of common gardens and the swimming pool?
Residency requirements and visas
How long do you intend to live at the property each year? While there are no restrictions on movement within the EU, you may still require to register locally depending on the length of time are in a particular country. Jurisdictions outside the EU may require you to apply for a residency visa if your visits to the property exceed tourist visits, and such a visa may not be granted automatically. Check the rules in advance, especially where visas are required.
The rules of the country where the property is situated will determine if you become tax resident in that country, and whether they will seek tax only on your local income and gains or on your worldwide income and gains. The statutory residence rules in the UK will determine if you are tax resident in the UK. Both the UK and the country where the property is situated could consider you to be tax resident under their respective rules and seek to tax you. While some relief should be available where double tax treaties apply, you would still need to deal with the compliance in two jurisdictions and claim relief under the relevant double tax treaty.
Where you intend to gift the property to your children at a later date, be alert to all the taxes that will apply. If you are still UK tax resident at that point, UK capital gains tax will apply on any gain in the property. In addition, there could be local capital taxes or transfer taxes that apply.
UK inheritance tax will apply to your worldwide estate if you are domiciled in the UK even if you live overseas. On top of this, local death taxes could also apply where the property is situated. Even where double tax treaties are in place between the UK and the local jurisdiction, they may not offer much relief if the incidence of tax differs. For example where the local country taxes a transfer on death to the surviving spouse there would be no relief under a double tax treaty as no UK inheritance tax would be payable in these circumstances.
Be alert to succession rules when buying abroad. The law of the jurisdiction where the property is situated will over-rule and govern succession to the property on death. Many continental jurisdictions have forced heirship provisions setting out who inherits on death which can over-rule a Will. It may be possible to use a company or other holding structure to prevent any forced heirship rules from applying.
Timeshare / Fractional ownership re-sales and surrenders
Buying a timeshare or fractional interest in a property can make sense where you intend to use it only for a few weeks each year. However, where the timeshare becomes an ongoing cost due to annual fees, what scope is there to sell it back or surrender the interest? More importantly, will the timeshare become a burden for your family and what will happen following your death if none of your heirs wish to inherit the property and costs associated with it?
It is essential to take advice – both in the UK from a lawyer with international experience and also locally – to ensure title to the property is purchased in the most effective manner for succession purposes and to mitigate future taxes. Taking early structuring advice and finding out about all costs, both acquisition and ongoing, is critical.