Private Lives - Buying a holiday home abroad? Some pointers on tax and succession

09 July 2019

As we approach the holiday season, thoughts turn to trips abroad. For some, this might mean a holiday home bought in a favourite spot, as a base to return to again and again. In some cases, this might also be viewed as a potential retirement home.

So what do you need to think about if you are considering buying a holiday home abroad, or indeed if you already own one? Although it may seem remote, there are a few things that it is 
useful to think about as part of your estate planning.

How will you own the property?

Forms of and restrictions on ownership of property in different jurisdictions will vary. As a starting point it will be important to understand what sort of property interest you own. If you co-own (for example with a spouse), there will often be different forms of co-ownership available, and you should be sure to take advice on the best option for you and what this means in practice, e.g. can you leave this interest under your will, or will it pass automatically to the surviving co-owner?

It is also useful to understand the local tax regime, i.e. what happens if you sell, let the property, or on death? Are there local wealth or property taxes, and when are these applicable? If you are in doubt, your adviser in the relevant jurisdiction should be able to assist.

Is your will planning up to date?

It is important to reflect on the jurisdictions where your assets are located when preparing a will. It is not well understood that, when you prepare an English will, this will generally cover your worldwide assets, unless you instruct your solicitor that it should be otherwise. This means that, if you already have a will in place, then you potentially already have a testamentary document which covers your overseas property. However, that does not mean that it is necessarily appropriate. Even if your property ownership is such that the property will pass automatically to a co-owner on death, it is still important to consider what happens after that.

Historically, our UK-based clients have tended to have an English will for their worldwide assets, but with ‘carving out’ of the jurisdiction where an overseas property is located. They would then have a second will governing that property. This can still be a good approach, although careful drafting is required where you are to have two concurrent wills, to ensure that they dovetail properly. However, if carefully prepared by advisers in the two jurisdictions who work together, then this can be a good solution.

Another option is just to have one will governing worldwide assets. This is now more straight-forward than previously, due to the introduction of the EU Succession Regulation in 2015 (and it will still be possible to rely on this provision even after Brexit). The Regulation allows an ‘election’ into your national law (e.g. English law in the case of a British citizen), so that that national law governs succession to your European property. This can be particularly attractive in order to override an overseas system of ‘forced heirship’, whereby in certain jurisdictions you are obliged to leave a portion of your estate to certain classes of heirs.

The most appropriate approach to take will inevitably depend on personal circumstances, and we can discuss this with you in order to determine the best way forward. However, we would always recommend that will planning is undertaken, as otherwise your overseas property may be subject to the
intestacy rules of the relevant jurisdiction.

What about Inheritance Tax?

Assuming that the owner lived in the UK and had the UK as their main home at the end of their life, then a non-UK property will be included in their estate for Inheritance Tax. That is another reason why suitable will planning is important, as the local intestacy rules may not give rise to a position which is
Inheritance Tax efficient, e.g. if a portion passes to a child then your estate may lose out on some spouse exemption.

There may be local estate taxes to consider, although it is likely that these will be available to offset against UK Inheritance Tax, so that double charging does not occur. 

Letting out the property? Or maybe it’s time to sell?

If you intend to let out your holiday home when not using it, then this will generate income in the relevant country. In most instances, that income will be declarable and taxable primarily in the jurisdiction where it arises, i.e. the location of the property. That will be the case even where you have the rental income paid into a UK account, and regardless of the nationality of your guests.

You are therefore likely to need an accountant in the relevant jurisdiction to assist you with taking all necessary steps in relation to this income. Assuming that you are a UK taxpayer, you would then declare to HM Revenue & Customs that you had paid that tax in the overseas jurisdiction, so that account can be taken of it. Your UK accountant should be able to assist with this.

There may also be local tax on capital gains when you dispose of the property, and again it is likely that suitable advice will be needed in both jurisdictions.

Thinking of retiring abroad?

The position is little more complex where a person has decided to live in their overseas property long term, perhaps on retirement.

During their lifetime, this may mean that they become tax resident in that other country, and they may or may not cease to be tax resident in the UK (noting that it is possible to be tax resident in more than one country at a given time). Suitable advice should be taken so that the implications of this are fully
understood, ideally before the move is made.

There is also the matter of domicile, explored in more detail in Katie Hawksley’s article in this issue. If a person moves abroad, and intends to remain there permanently, then this has the potential to impact domicile, which in turn can change the Inheritance Tax and succession rules applicable to that person’s
assets. If such a permanent move is made, and there is no intention to return to the UK in any circumstances, for example on the death of a spouse or in the event of ill-health, then it will be important to understand the tax and succession implications of this. Again, advice is likely to be needed in both jurisdictions.

How can we help?

We are frequently asked to assist with estate planning for those with assets and other links abroad, often across multiple jurisdictions. Where planning has not been ideal during a person’s lifetime, we are also experienced in resolving cross-border matters for the family, where there are also UK links. We work with a range of advisers across other jurisdictions, and can provide recommendations if necessary; equally, we are happy to work with clients’ existing overseas advisers.

This article is from the summer 2019 issue of Private Lives, our newsletter covering the key legal and tax issues that individuals face. To download the latest issue, please visit the newsletter section of our website. Law covered as at July 2019. Please get in touch with Katie Payne or your usual Birketts contact if you require more information.

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