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Tax implications of property abroad

Harvey Jones / 22 July 2020

We look at the tax implications of owning property abroad, including capital gains tax, inheritance tax and income tax from rentals.

Terrace on property abroad in Spain
What happens to your IHT liability if you have a property at home and abroad?

It isn't easy to escape the long arm of the British taxman, even if you own assets that are physically outside the UK.

If you think that HM Revenue & Customs (HMRC) has no jurisdiction over your possessions in foreign territories, such as property, shares or savings accounts, then it is time to think again.

If you live in the UK and have a second home overseas, such as a sun-drenched flat in a Spanish Costa, or a restored farmhouse in rural France, you could be in for a tax shock unless you know the rules.

You may be liable to pay UK income tax on any income you earn from renting out the property to tourists or long-term tenants, capital gains tax (CGT) on any profit when you sell, and inheritance tax (IHT) when you die.

This may also apply to any business premises, land or inherited property you have overseas.

The same applies if you earn wages from a job overseas, or hold foreign pensions, investments and savings.

You do not need to fill in a UK tax return if your only foreign income comes from dividends totalling less than £300.

You may also have foreign tax obligations that you will have to meet as well, although thanks to international double taxation treaties you shouldn't have to pay the same tax twice.

Check your residency

The key word to look out for when judging your tax status is residency. If you are classed as resident in the UK for tax purposes, then you have to declare any “foreign” assets and income in the “foreign section” of your self-assessment tax return.

By foreign, this means any country aside from England, Scotland, Wales and Northern Ireland. Both the Channel Islands and the Isle of Man are classed as foreign, in this case.

Your residency is usually determined by how many days you spend in the UK each tax year.

You will be automatically resident if you spend 183 days or more in the UK, between 6 April and 5 April each tax year.

UK residency will also be automatic if your only home is in the UK, and you have owned, rented or lived in it for at least 91 days in total across the tax year, and spent at least 30 days there.

You will be automatically non-resident if you spend fewer than 16 days in the UK, rising to 46 if you have not been classed as UK resident for the three previous tax years. Similarly, if you work abroad full-time, averaging at least 35 hours a week, and spent fewer than 91 days in the UK, of which no more than 30 were spent working, you will be deemed non-resident.

If you are classified as non-resident, HMRC will still charge tax on any income and gains you generate in the UK, but will not go after your overseas assets or earnings.

Domiciles

If you are classified as a non-domiciled resident, because your permanent home, or domicile, is outside the UK, you may escape UK tax.

As a rule of thumb, your domicile is the country your father considered his permanent home when you were born, but can be more complex than that. For example, it will change if you have left that country, with no intention to return.

Paying tax on overseas assets

Income tax on a foreign property

You will pay UK income tax on the rental income from an overseas property, as you do when renting out a property at home.

Income from tenants will be added to your total earnings for that year, and could push you into a higher tax bracket.

You may also be able to offset allowable expenses such as mortgage interest, advertising or letting agency fees, utility bills and refuse collection, and maintenance and cleaning costs.

The overseas authorities may also charge income tax on your revenues, but you should be able to claim relief under double tax treaty measures.

Capital gains tax on foreign property

When you “dispose” of your property, you may be liable to capital gains tax in the UK, as well as the country where you make the gain. Again, you should be able to claim relief if taxed twice.

If you own more than one foreign property, you can offset any losses against your other overseas properties, which can even be carried forward to future years if you make a loss overall.

You cannot offset losses on a UK property, though, as you need to keep domestic tax issues completely separate.

Inheritance tax on foreign property

When you die, foreign assets including property, bank accounts and investments, will be added to the value of your estate, and may be liable to UK inheritance tax.

You could shrink your bill by passing on assets to your children, but larger sums are known as partially-exempt transfers, and will only be entirely tax-free of IHT if you live for at least another seven years.

You can make smaller gifts of £3,000 with instant exemption. Couples can double that to £6,000, or £12,000 if they use the previous tax year's unused allowance.

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Foreign tax demands

You must fulfil your foreign tax obligations, as well as those in the UK.

These may include local purchase taxes, such as VAT and stamp duty. You may also face ongoing charges, such as a municipal levy, property ownership tax, and an annual wealth tax, depending on the country.

Some countries even impose income tax on non-residents, typically at a low rate, which varies depending on whether you have rented your property out. Check with a local tax expert before you buy.

You may also face local death taxes in some countries, even if you are not resident there.

Some countries will also dictate who can inherit property, and this may be different to the UK.

Do not pay tax twice

Given the complications, there is always a danger that you will be taxed both overseas and in the UK.

Fortunately, the UK has signed up double taxation treaties with many countries, which should prevent you from paying tax twice, and allow you to claim back any double payments.

You cannot claim a rebate purely because the local jurisdiction charges tax at a higher rate than the UK. What you can do is shrink your British liability, possibly even to zero.

Overseas shares

If you hold foreign shares but are resident in the UK, you may be liable to pay income tax and capital gains tax on your returns.

Many countries apply a withholding tax to dividend income, which can be as much as 30%. This is automatically deducted before you receive the dividends and could reduce £1,000 to just £700.

If the UK has a double taxation treaty with these countries, should be able to claim a rebate, typically reducing this to 15%.

Holding assets into different countries is always complicated, so consider taking specialist advice from an international tax specialist.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.