My husband and I are hoping to purchase a doer-upper property in Italy that we can renovate and let out as a holiday home during the summer months for some extra income, as well as to use ourselves with our children during half-term breaks.
What is the most tax efficient way of purchasing a property overseas and running it as a holiday home, and how can we avoid being taxed twice in the UK and Italy, including if we were ever to sell up? We also own our family home here in the UK. MN
You’ll be taxable on any income from your Italian property and will need to declare it
MailOnline Property expert Myra Butterworth replies: Buying a property in this country can be a big undertaking, let alone attempting the process overseas.
If you are looking at buying a property in another country, you’ll be dealing with a different market that will include different admin and costs.
We speak to an tax expert about some of the financial factors you need to consider if you are thinking of buying a property overseas, specifically in Italy.
Mike Hodges, of accountants Saffery Champness, replies: Purchasing a property overseas is always an adventure, bringing new lifestyle opportunities as well as the potential of a new income stream if you do decide to let out your new holiday home, even if only to contribute to the running costs.
But whether purchasing just to use yourself, or as a business venture, it’s wise to have an eye on the tax implications as you don’t want to be worrying about the taxman while soaking up the Italian sunshine.
In the age of the automatic exchange of information between tax authorities, don’t fall into the trap of thinking that overseas is out of mind for the tax authorities.
You can assume that HMRC will receive information about your Italian investment, information about for example details of any Italian bank account you may have and any interest it generates.
Don’t let this be a worry, but do make sure that you remember to keep the taxman informed.
Assuming the UK is your permanent home, you will be classified as a UK resident which means that when you decide to purchase a second home overseas, you will be taxable on any income arising on your Italian property, and will need to declare it to HMRC via the foreign section of your annual self assessment tax return.
You will also need to make sure you are fulfilling your local tax obligations on top of those you have in the UK and it is worthwhile from the beginning taking local tax and legal advice – after all you are making a significant investment.
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Don’t worry that all of this means that you will end up paying tax in both this country and Italy. The UK and Italy have a double taxation treaty in place to ensure that you are not taxed twice on income and capital gains.
The way this typically works is that any income you have from your Italian property ends up being taxed at the higher of the UK or Italian tax rate. However, you will need to ensure that you apply for this relief. It is a good idea to use an accountant to steer you through the complexities here.
It is worth bearing in mind that you will also be entitled to the £1,000 a year property allowance which provides relief on any property income, whether in the UK or overseas, if your property income is £1,000 or less. If so, you will not have to declare this income on your tax return.
If you decide to sell your holiday home, you will be subject to capital gains tax just as you would if you were selling a property in the UK. Again, the double tax treaty will mean that you will not pay tax in both countries.
Your capital gains tax liability will be dependent on your UK tax status, ranging from 18 to 28 per cent. You will, though, benefit from the £12,300 Capital Gains Tax annual exemption – i.e. the amount of profit you can make on sale tax-free.
As you are looking at a doer-upper, do remember to keep track of everything you spend on the property as when it comes to calculating any capital gain, any capital expenditure will be deductible from the eventual proceeds, along with what you pay for the property.
Keep track of everything you spend on the property as any capital expenditure will be deductible from the eventual proceeds
One thing that sometimes takes people by surprise and just to be aware of, is the effect of exchange movements between the pound and the euro.
It is not uncommon for someone to make a loss in euros but, by the time what you paid for the property and what you sold it for, converted into pounds at the spot rates – the currency exchange rate on the day of the transaction – gives a sterling taxable gain.
And then there is a slightly bleak reality – but an important tax issue to consider nonetheless – which is inheritance tax.
According to UK tax rules, as a UK domicile then any overseas properties are included in the value of your estate, potentially making you liable to inheritance tax if its total value exceeds the £325,000 nil rate band (you may also benefit from the additional £175,000 allowance when passing on your permanent family home). Between the two of you, this equates to an exemption of as much as £1million.
The other practical issue are the legal rules that apply to determine what happens to the property when you die.
Don’t assume that the same rules will apply in Italy as we have here in the UK. Again, there is no substitute for good local advice, both on tax and legal aspects.
Clearly, there is a lot for you to think about before you embark on your new adventure. Certainly don’t be put off by the tax and other issues, but do invest in good tax and legal advice here and in Italy before you commit yourselves.
That way you will know exactly what lies ahead before you get there rather than only finding out when there is a problem that needs sorting out. That way you will be able to the whole experience without worrying about the taxman looking over your shoulder.
Worth buying through a company?
Is it worth buying the property through a company, be it registered in England or overseas?
Mr Hodges explains that setting up a company to hold and manage property assets can be an attractive option in some scenarios, particularly where multiple rental properties are held in a portfolio.
There can certainly be some tax advantages including, for example, any gains made on sale of the property being taxed at the much lower corporation tax level of, currently, 19 per cent versus the 28 per cent top rate of capital gains tax payable as a private individual making a disposal.
However, he says that incorporation should not be entered into lightly as there are significant ongoing compliance hurdles, including company reporting, and other practical considerations such as setting up company bank accounts.
‘A major hurdle many face when incorporating a property business is that the transfer of a property from an individual to a company will be treated as a disposal for CGT purposes – meaning a potentially hefty tax bill, though there are reliefs available – and most often an SDLT charge to boot,’ he says.
‘Meanwhile, high value properties owned by companies may face the Annual Tax on Enveloped Dwellings. It is highly complex to reverse the decision to incorporate – so while there certainly are benefits, a balanced long-term view is needed.’