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Costa living

Buying property abroad is becoming increasingly popular but the dream of owning a foreign home can quickly turn into a nightmare without professional advice which presents opportunities for IFAs.

It is estimated that up to two million Britons own overseas property. Nearly £60bn has been invested and some surveys say over three million Britons will have bought overseas homes by 2008.

Unsurprisingly, 75 per cent of properties have been bought in Europe, with the average price rising from £99,000 to £119,000 in 2004, according to Travelex.

Around 24 per cent of buyers chose Spain, followed by France (22 per cent), Portugal (9 per cent), Cyprus (8 per cent) and Italy (6 per cent).

One danger faced by purchasers is of buying land from property developers who do not legally own it. After spending three years building their dream home in Kyrenia in the unrecognised state of northern Cyprus, for example, Britons Linda and David Orams were confronted with legal action.

Constantis Candounas, a lawyer, has campaigned to stop land being sold where Greek Cypriots lived before Turkey invaded the island in 1974. A Cypriot court has ordered the Orams to demolish their home, return the land and pay rent for the time they occupied it.

Tax planning is also cruc- ial when buying abroad. The first thing to check is whether the country has a double-taxation treaty with the UK. Without a treaty, buyers may pay capital gains and income tax, as well as inheritance tax, in both countries. There are treaties with European countries and the US, which means tax will not have to be paid twice in these cases.

Buyers also need to check which country has priority when levying tax. Fiona Smith, a partner at law firm Forsters, says the US, for example, has priority for levying income tax on rent and CGT on pro- fits from the sale of a property.

Investors receive a credit from the Inland Revenue for the amount of tax they pay in the US. If US tax is less than the amount that would have been levied in the UK, investors have to pay the difference to the Inland Revenue. If investors pay more tax in the US than they would in the UK, however, the Revenue does not give them a refund.

Smith adds that purchasers have up to two years after buying a property abroad to declare it as their principal home. This means they will not pay CGT on it in the UK but Smith warns that the Revenue will then levy CGT on any UK property they own.

Investors have used offshore companies in the past to try to mitigate tax on foreign homes but they now need to be more cautious.

Some countries, notably Spain and Portugal, have introduced an annual tax for offshore companies that own property and are based in certain offshore jurisdictions, including the Channel Islands.

Nick Osler, director of private client tax services at Smith & Williamson, says legal cases in the UK suggest the Revenue will tax investors on the income received by the offshore company from the foreign property. He says: “Investors may end up paying more money in income tax to the Revenue than they save by setting up the offshore company.”

Unfamiliar taxes may confront investors when they buy homes abroad. In the US, for instance, there is federal and state income tax. Federal income tax is imposed on rent at rates of up to 35 per cent if an individual is “engaged in a US trade or business” or at a flat rate of 30 per cent if the owner’s activity is deemed not to be a trade or business. If the property is deemed to be a trade or business, expenses can be used to offset the income tax. There is a US gift tax if an interest in the property is transferred to a family member, including a husband or wife. This is imposed at rates of up 47 per cent.

Some European countries, including France, impose a wealth tax. This is based on the value of the property and can be worth more than 1 per cent a year. However, France has a minimum level below which the wealth tax is not levied, currently at around £400,000.

There are also forced heirship rules in countries such as France and Spain. These rules determine to whom property can be passed on death, which may be dependents from a previous marriage. Lawyers recommend that investors should draft a second will in the country of their new property. The new will should specifically exclude assets in the UK and the UK will should exclude the foreign property.

The easiest way to fund the purchase of a foreign property is by remortgaging an existing house in the UK. The attraction is that it does not require a valuation of the new property or reassessment of the buyer’s income.

Some lenders allow the borrower to remortgage without having to pay legal and survey costs. Furthermore, the loan to value allowed on the main residence may be higher than for a mortgage on a second property.

Another advantage is that the mortgage is in sterling so there is no currency risk.

It is also possible to obtain a mortgage in the country where the investor is buying the property. Some UK banks even have branches in some European countries. The attraction is the mortgage is in the same currency as any rental income and it can be easier to offset mortgage costs against the tax on rental income if you borrow locally.

Investors also do not put at risk their UK home by taking out a mortgage on their foreign property if they cannot maintain repayments.

But having a mortgage in euros means that investors are subject to currency risk if their income is solely in sterling. Travelex warns that the average buyer could add as much as £10,000 to the purchase price through foreign exchange movements between the time the price is agreed and contracts are completed.

It is possible to fix the exchange rate now for a completion date any time in the future. Alternatively, investors can use a spot transaction to transfer funds immediately to the agent in line with the exchange rate at the time.


Bond appetit

The collapse of the with-profits market in the UK is no secret and figures published recently by the ABI show how dramatic the shift away from WP business has been.

Boulger on Mortgages

Now the general election is behind us there is another important election, or rather referendum, coming up. I doubt that the gilt market would react very much to the result of the general election as the difference in macro economic policy between the two main parties, at least for the first two years after the election, is not big enough to generate wild swings in interest rates.


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