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International tax and law specialist Daniel Feingold provides the first FIVE tips to help you make the right tax decisions when investing offshore.
1. Find out if there is a withholding tax
Some countries also operate a withholding tax. This is typically triggered when an asset i.e. property is sold. When you sell the property the purchaser is obliged to withhold, let’s say, 5% or 10% of the purchase price. This is handed directly over to the tax authorities in the country where the property is situated.
Examples include Spain where the purchaser must withhold 5%, and the US where the purchaser must withhold 10% of the purchase price and hand it over to the US tax authorities.
In both situations the only way to get money back is to file a local tax return.
2. Does your rental property attract a flat rate tax?
If you are buying into the booming overseas property investment market then you need to establish how any rental income will be taxed. For example, it can be taxed on what is referred to as a ‘flat rate’.
In Spain there is a 25% tax on rental income at a flat rate without any deductions at all. This means that you get no allowance in Spain for any kind of deduction including mortgage interest relief and all other property related expenses.
3. Inheritance issues could hit you where it hurts!
This is the one tax liability which is often forgotten. You really have to understand how it’s levied in a particular country. For example; is it levied when a person dies? When they make a lifetime gift? Or, on both and what rate(s) apply?
In many countries, the relationship between the person making the gift or leaving assets in their will to the person receiving the assets is critical. So, for example, a wife with a child will pay tax at a much lower rate but a partner who’s not married will normally pay tax at a much higher rate.
Many people assume that like in the UK a spouse, (or after December 5th this year), a partner in a civil partnership will get a total exemption from UK inheritance tax. However, this is rarely the case in other countries where a spouse only has a very small or limited tax exemption.
In Spain an unmarried partner is subject to Inheritance tax at rates of up to 81.6% compared to 34% maximum to legitimate children or a spouse.
4. Tax is ‘only due’ if you bring the money back into the UK
A common misconception that people have is that if they have paid taxes e.g. capital gains tax overseas, and then do not bring the money back into the UK there is no further tax to pay. This is sadly totally wrong. It is important to understand that UK residents are usually taxed on their worldwide income and gains whether the money is actually brought back into the country or not.
5. Watch out for taxes if you are an – off plan trader
Given the rapidly increasing property prices in many countries in Europe, investors are adopting a strategy of buying a property off-plan and then selling the contract before the property is actually built.
Many people have been advised (yet again by agents and developers in the country where the property is situated) that there simply is no capital gains tax at all on selling a property off-plan. Sadly, this is just not true!
Off-plan sales can be treated as either subject to capital gains tax, or sometimes income tax, if the local tax rules treat it that way. Either way, there is almost always a withholding tax liability (e.g. Spain 35%) and UK tax on any balance.
If its treated as income in the overseas country, it will usually be treated as income in the UK meaning that the total tax liability could be 41% UK income tax and national insurance!
Before signing up for an overseas property, invest in some specialist tax advice because the tax traps of overseas property will potentially cost you more than you can gain!
About Daniel Feingold
To learn more about Daniel click here.