By Lynne Gowers on 8th September 2017

Tax facts – UK residents with homes abroad

tax facts

Ever watch “A Place in the Sun” with a twinge of envy? Most of us dream about having a bolt hole in sunnier climes to escape to. But for those lucky enough to be in a position to make it a reality – what are the tax implications?

UK residents buying property abroad typically do so to have a holiday home, to make a rental income when they are not using it or in anticipation of retiring to their destination of choice. Among the most popular locations for Brits are Spain, Cyprus and Malta.

Capital gains tax

Although the property is outside of the UK, if you are UK resident, it still counts as a chargeable asset for capital gains tax (CGT) purposes, so any gain made on disposing of the property (eg. from sale or gift), will be subject to a CGT charge at the usual rates.
However, if someone splits their time between their home in the UK and their overseas pad, it can be argued that both properties qualify as residences. If this is the case you have to elect which of the properties is the main residence upon which private residence (and lettings) relief is applied. This election needs to be lodged with HMRC within 2 years of owning 2 residences (not just 2 properties). Your accountant will be able to advise you which residence will provide the most efficiency in terms of tax relief should you decide to dispose of it. This will depend on several factors including current value and any rental income.

It is worth bearing in mind that as of April 2015, you must spend at least 90 days in  your overseas home during the tax year for it to qualify as a residence. Therefore it is unlikely that a holiday home would qualify for any tax relief (unless you take a lot of holidays!), other than the annual exempt amount (£11,300 for the 2017 /18 tax year). This rule also now equally applies to a UK Cited property.

Retiring abroad

If you are planning to see out your autumn years in the sunshine, it is advisable to sell up your UK home before moving abroad, in other words, while you still have UK residence, so you do not incur any CGT charge. So long as you sell up within 18 months of relocating, you will still avoid this charge, but after that your UK home no longer qualifies as your main residence and you will have to pay a non-resident CGT charge.

If you have a second home abroad, then although it may be nominated as a main home and a reduction possibly obtained in the UK tax liability, the taxation position in the overseas country would also need to be considered.

Inheritance tax and wills

Inheritance tax (IHT) is based on domicile rather than residence status, so simply moving abroad will not remove UK IHT liability (on either the UK or overseas home). It is also likely that the country in which your property is located will also levy its own version of IHT. In addition to this, “forced heirship” rules may apply. This is where spouses and children of a deceased person are automatically entitled to a specific amount of shares in the estate. This means that you may not be free to leave property abroad  to whomever you wish in your will. You may need a separate will dealing exclusively with the bequeathal of the overseas property.

Best practice is to seek the advice of your accountant before buying or selling an overseas property.

Got a tax question? Find the answer in our knowledge base

Lynne Gowers Written by Lynne Gowers

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