Avoiding the tax headaches of overseas property ownership. Chartered tax adviser Geoff Collins looks at some of the issues.

Like thousands of your fellow countrymen and women, you are thinking of buying a property abroad. You are enticed by the images of sunshine and the sea, or maybe the winter ski slopes. Perhaps you have been on a property viewing trip or are interested in buying off-plan. You are almost ready to go ahead. But have you thought about the tax issues that can potentially turn your dream into a nightmare?

The first question you need to ask yourself is whether you are going to live abroad permanently. Or are you buying a holiday home or rental investment while staying in the UK?

If you are going to live abroad permanently, UK source income may continue to be taxed in the UK and in your new country as well. Another issue is capital gains tax on disposals while abroad. If you return prematurely to the UK, you may be hit with an unexpected tax bill. If you die while abroad, will you have done enough to avoid UK inheritance tax?

If you are continuing to be resident in the UK with your overseas property as a holiday home or rental investment, you may have to pay both local and UK taxes on any overseas rental income.

How you structure your purchase matters immensely. The simplest way is usually direct, personal ownership. This avoids the costs of setting up and operating a corporate or trust structure. There may however be disadvantages owing to increased local taxation and unfavourable succession laws.

As an alternative to direct ownership, there may be advantages in using a UK limited company, a local company in country of purchase, a tax haven company or an offshore trust. Indeed in some countries, you will have no choice other than a local company, such as in Bulgaria, if you are buying property with land attached. These arrangements all entail set-up and ongoing operation costs. They may achieve the objective of reducing the impact of either UK or local taxation, but this may not always be the case. Certainly, a UK company will be subject to UK taxes, but in addition, local and tax haven companies may not avoid them either.

As an example of an unwelcome tax charge, suppose you have bought a flat in Spain on the Costa Blanca through your own UK limited company. If you live in the flat rent free, then the Revenue will consider that there is a benefit in kind subject to UK employment taxes. The benefit in kind is based on the annual value of the property. You can avoid the benefit in kind tax charge by paying rent to your company, which will then pay tax on the rental income.

You will need to consider the impact of local taxes whenever you purchase a property abroad. These include VAT, property purchase taxes (similar to UK stamp duty land tax), ownership taxes, e.g. so-called wealth taxes, income taxes, capital and succession taxes. The impact of these taxes can vary depending on how your purchase is structured. In some jurisdictions, ownership through a non-resident company may result in higher taxes.

In summary, there will always be different ways of realising your dream purchase, each with different tax consequences. Before you go ahead, you need to be clear in your mind about what these are. There is really no substitute for paying for expert professional advice in the matter. A chartered tax adviser with experience of international tax planning should be able to produce an in-depth report for you setting out your options. In the words of the old adage, forewarned is forearmed.

This article first appeared in the Surrey Advertiser. Geoff Collins is a chartered tax adviser in practice in Guildford. The Geoffrey Collins & Co. website is www.gccta.co.uk.