Kathryn Cooper/Times Online

The Inland Revenue is targeting people who buy property abroad through a company

MANY people who own properties overseas could be hit by unexpected tax bills running into thousands of pounds.
The Inland Revenue is threatening to crack down on Britons who set up companies to buy homes in countries such as France, Spain and Portugal. The strategy is often used to sidestep local taxes and inheritance laws, but could land homeowners with a painful UK tax bill.

Property companies are meanwhile encouraging people to buy abroad with claims that overseas property will be “tax-free” from April next year, when you will be able to hold it within your pension fund. But while you will then avoid UK tax, you could still be subject to tax in the foreign country.

Peter Esders of John Howell & Co, a law firm, said: “More and more people are buying abroad, especially as returns from buy-to-let in the UK are becoming lacklustre. But not enough people consider the tax implications, which can be extremely complex.”

Hundreds of thousands of people are thought to have set up companies to buy property on the Continent. Simon Rees of Price Waterhouse Coopers, the accountant, said: “There are an estimated 500,000 Brits with homes in France and another 400,000 in Spain. It is likely many own property through a company simply to comply with local inheritance laws.”

However, the Revenue has them in its sights. Following a recent tax case in the House of Lords, it can treat such buyers as employees of the company and can therefore tax the property as a “benefit in kind” — as if it were an employee perk.

And the tax bill could spiral. The benefit is based on the property’s notional rental value, which could be 8% of the market value. So someone with a property worth €150,000 (£103,000) would pay tax on a benefit of €12,000 — equal to €4,800 a year at 40% if they are a higher-rate taxpayer. If a group of buyers have set up a company, the Revenue is likely to split the bill among them.

Some homeowners have sold their second homes to avoid the tax. Rees said: “Two of my clients have already sold properties in France and another is considering it because he faces a tax bill of about £50,000.”

The benefit-in-kind tax is in addition to any levied by the foreign country. Last year, the Portuguese government clamped down on foreign buyers who were using offshore companies to avoid local stamp duty. It now levies a tax of 5% a year on the value of those properties.

Britons who own homes in France are likely to be hit hardest because they often set up a type of French company called a société civile immobilière (SCI) to get round inheritance laws. Under the law of “forced heirship”, your children have fixed entitlements to your property, no matter what your will says. If you own shares in an SCI, it is easier to bequeath the property to whom you choose.

In some cases, SCIs also sidestep France’s “wealth tax” of 0.55% to 1.8% on assets worth more than €720,000. However, SCIs do not escape corporation tax of up to 33.33% on any income and there may be tax of 16% on any capital gains.

Peter Horn of Blevins Franks, an accountant, said: “We generally recommend that British residents avoid SCIs, given the benefit-in-kind consideration. If they want to ensure their spouse inherits the property, rather than their children, they may be able to set up a ‘community marriage regime’. But this may not help unmarried couples.”

If you own a French property in your own name, rather than through a company, you must pay income tax of 25% to 48% on any rent. Any gains when you sell are taxed at 16% if you are an EU citizen and have owned the property for less than 15 years, but the gain is reduced by 10% for every year of ownership between 5 and 15 years.

Your heirs will also have to pay inheritance tax of 5% to 40% if they are blood relatives or 60% if they are “strangers”, including unmarried couples.

You must also declare any income or capital gains on your British tax return. France has a “double tax” treaty with Britain, so you get a discount for any tax you have paid on the Continent, but if the amount you paid in France is lower than the rate you would pay at home, you have to make up the difference. If you owned your property in a pension fund, you would escape your liability in Britain, but you would still pay tax in France.

Esders said: “Countries like France and Spain do not recognise UK trust law, so people who buy property with their pensions next year will still be liable for tax on income and capital gains in the foreign country.”

It has also been common for British people to set up companies to buy Spanish property, but they could also be caught by the benefit-in-kind tax.

If you own property in Spain in your own name, you will have to pay wealth tax on your Spanish assets, with a minimum of 0.2%. Income from Spanish property is taxed at between 15% and 45%. Even if you do not let the property, you must still pay tax on the notional rental value. When you sell, you may have to pay capital-gains tax of 35%, while your heirs face inheritance tax of 7.65% to 34%.