3 ESSENTIAL SERVICES
TAX: I
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 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.
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 35
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