No Escape From Tax! UK Residents With Homes Abroad

It is not uncommon for a UK resident individual living in the UK to own a property (house or flat) located abroad. The property is typically used as a holiday home (which may also be rented out when not in use). It may also have been purchased with a view to retirement in the overseas country.

Usually such properties are located in warmer climes, or in countries where the cost of living is lower than in the UK. Countries such as Cyprus, France, Malta and Spain are extremely popular. 

Despite the property being located outside the UK it still qualifies as a chargeable asset for capital gains tax (CGT) purposes, and on a disposal (e.g. sale or gift) any capital gain arising will be subject to a CGT charge at normal rates (i.e. 18% and/or 28%, subject to amendments in Finance Bill 2016 reducing rates to 10% and/or 20%, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief). It is most unlikely that any relief (such as private residence relief or lettings relief) from such a charge will be available (other than the annual exempt amount; £11,100 for tax year 2016/17). 

However, should an individual spend (say) six months in their UK home and six months in their overseas property each year, it may be possible to argue that both the UK and overseas properties qualify as residences. In such a case, it will then be necessary to elect which of the two homes is to qualify as the main residence, and in respect of which private residence (and lettings) relief would then be available. Any such election would need to be lodged in writing with HMRC within two years from the date the individual possesses two residences (not just two properties). Whether electing for the overseas home to be the main residence for CGT purposes is advisable will depend upon the facts (e.g. values of each property, etc.) at that time.

It is also to be noted that any such election now needs to take into account the new rules which apply for the tax year 2015/16 (and later tax years) where a home is located in a country different from the country in which the individual is resident. In order for the overseas home to qualify as a main or sole residence for a tax year the individual must now meet the so-called ‘day count’ test. This requires that in the tax year concerned the individual must spend at least 90 days in the overseas home (broadly, a day spent in the home means being present in the home at midnight on that day). Thus, holiday homes are unlikely to qualify (as was also the case in the past) but, in the above example, where an individual spends six months (or a minimum of 90 days) in a tax year in each of the two homes, the 90 days’ test will be satisfied.

For those who leave the UK to retire abroad and live in their overseas home, it would generally be advisable to sell their UK home prior to emigrating (i.e. prior to losing UK residence), precipitating no CGT charge. If the sale occurs after having left the UK (and the UK home then no longer qualifies as a sole or main residence) a sale within 18 months will still avoid a charge, but any sale thereafter will be caught by the new non-resident CGT charge (usually levied on the difference between market value as at 5 April 2015 and sale value). 

Inheritance tax (IHT) depends upon an individual’s domicile (not residence) status, and simply retiring overseas (i.e. becoming non-UK resident) will not remove the exposure to UK IHT on the overseas (or indeed UK) home. It is also likely that the country in which the property is situated will levy its own ’inheritance’ tax. To avoid any foreign levied ’inheritance’ tax, purchase of the foreign home via an intermediary company may be an option.

In addition to a foreign ’inheritance’ tax charge so-called ’forced heirship’ rules may also apply (i.e. under which spouses and children of a deceased are automatically entitled to specified shares of the deceased’s estate). The deceased may therefore not be free to leave an overseas home by will to whomever they wish. Whether a separate will needs to be executed dealing solely with the overseas property needs to be carefully considered.

Any purchase or disposal of an overseas property should only be undertaken once both the UK and non-UK tax and non-tax issues have been fully investigated.