Clients returning from a trip abroad may think buying a holiday home is a great idea, but investors ...
Clients returning from a trip abroad may think buying a holiday home is a great idea, but investors need to be warned of the inheritance tax implications and similar pitfalls should they decide to buy in certain countries, says accountants and business adviser PKF.
Countries such as Spain and Portugal, which are popular with UK retirees and holidaymakers, impose some form of inheritance tax on the transfer of land and property on the owner's death, while countries such as France also have restrictive land ownership succession rules.
As a result, buyers are on occasions urged to consider owning the property through a company, to avoid local tax and legal problems, says PKF.
However, being a director of a company and using the company's assets might give rise to a unexpected taxable benefit in kind in the UK, even if the company is registered overseas.
Peter Penneycard, director of tax at PKF says investors could end up paying tax for using their own holiday home if they use their own company to buy the property.
"Many UK holiday makers get carried away by the comparatively cheap price of housing and idyllic surroundings when abroad. It can be a good investment but there are many pitfalls," says Penneycard.
"If [clients] are still serious about buying even after the sun tan has faded, they must consult a professional to review their tax position before signing anything. Buying the property through a trust instead of a company can get around this problem, but it is not effective in all countries," he adds.
The Inland Revenue has started to take a keener interest in such arrangements following the Regina v Allen case, involving a 'shadow' or deemed director of an offshore company, says PKF, which cast doubt on the tax efficiency of widely used property-owning vehicles.
One of the simplest details to point out to anyone looking to buy a second home in the UK, says Penneycard, is local authorities may be allowed to charge full council tax rates on second homes under plans being revealed by the Government earlier this month.
At present, second homes and empty properties are entitled to a 50% discount on the levy but the Local Government Bill will allow councils to abolish this and charge the full rate, making second home ownership an expensive business.
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