HOW TO BUY - Target Markets- Global Property Investment

TAX:
THERE IS NO ESCAPE,
SO GET IT RIGHT
n this age of austerity, governments
are keener than ever to fi nd extra
sources of income – which essentially
I means raising taxes in addition to
cutting public services.
Second-home owners are inevitably going to be
targeted by such governments, and we are seeing
in Spain, especially, that authorities are suddenly
clamping down on regulations and tax obligations
previously ignored – with hefty fi nes the result.
So, as an overseas property-owner, are you
fully aware of your obligations? It is essential you
understand the difference between being resident
in a country and being tax-resident there. This has
implications for inheritance tax – and inheritance
issues should also be discussed with a legal/tax
expert so you can avoid heartache and expense
later down the line. In fact, it is worthwhile using an
overseas lawyer or accountant – or in Spain, a gestor
– once a year to ensure you pay the right tax - at the
right time.
In Spain, to be a tax-resident you must make an
annual tax declaration to the Spanish tax offi ce (even
if it amounts to a nil return). Unless you do this, you
won’t be eligible for tax exemptions.
But, wherever you’re buying, the initial dose of tax
you’re likely to pay is that associated with purchasing a
property, what we broadly term stamp duty in the UK.
Transfer tax/stamp duty
Overseas this is often called transfer, or purchase,
tax but it is essentially the same thing: a government
tax levied on the buyer in a property transaction
and calculated as a percentage of the value of the
transaction.
Transfer tax rates vary considerably by country and
often vary according to the value of a transaction,
with a sliding scale of rates (in the Balearics, for
example). It is usually minimal on new properties,
although new-builds will typically be liable for VAT
(IVA in Spain; TVA in France). For example, in Spain
transfer tax (or ITP) on a resale is seven or eight per
cent, but IVA on new-builds is currently at a reduced
rate of four per cent.
In an effort to stimulate the construction industry
in Spain, IVA was slashed in half, yet there are
rumours that it will be put up to 10 per cent in
2013. Take advice! In Europe, taxes for a property
transaction typically are paid via a notary and your
fi nal notary bill will include transfer taxes,
as well as fees for notary services.
3 ESSENTIAL SERVICES
Annual property taxes
Once you own a property abroad, you’re likely to
have an annual municipal real estate tax to pay,
the equivalent of council tax in the UK. In Spain this
is known as IBI, while in France there are two types
– taxe d’habitation (paid by the occupier, whether
they own the property or not) and taxe foncière
(paid by the owner).
Municipal taxes are based on a property’s rateable
or book value as recorded by the local government,
which tends to be much less than the market value
(although it depends how depressed prices are in
that location).
Income tax: rentals
If you rent out your property, you’ll need to pay
income tax on rental income locally and in some
countries, including Spain, even if you don’t rent out
your property, you’ll be required to pay what’s termed
“imputed income tax”.
In the US, non-residents pay tax on US-sourced
income – a 30 per cent withholding federal tax – and
some states (but not Florida) tax at state level too.
Capital Gains Tax
Finally, when you come to sell, you’ll encounter
Capital Gains Tax (CGT): a tax levied on the gain
between the purchaser and sale price of your
property (minus some renovation costs
if documented).
In some countries, CGT is scaled down
with time, while in others, like the Bahamas,
it doesn’t exist at all.
Note that in some countries, if the vendor is
not a resident, the buyer must withhold a percentage
of the purchase price and pay it direct to the tax
authorities – this is to cover any CGT the vendor
might be liable for.
As a tax resident in the UK, you’re taxed on
worldwide income, which would include capital gains
and income generated through an overseas property,
regardless of the laws local to that property.
The good news is that the UK has double taxation
treaties with more than 100 countries, including
most popular second home destinations, so you’ll
never pay the same tax twice.
AIPP CONSUMER GUIDE 24