It is important to seek UK and local tax advice before you buy, to ensure your dream remains a relaxing bonne vacance, rather than the holiday home from hell.
Buying a second home in the UK has its own additional expense and complications. There is an additional 3% Stamp Duty Land Tax for anyone who purchases a residential property in the UK, if they already own or part-own a property, whether in the UK or overseas. So, if you part own a holiday villa in Spain and look to purchase your first home in the UK, you will have to pay the 3% surcharge on the purchase cost. Happily however, if you already have a UK residential property and are looking to purchase a holiday home overseas, you will not be affected by the surcharge.
To help with the costs of maintaining your holiday home you may decide to let it out. Any holiday rental income received by UK residents will be taxable in the UK, no matter where the property is situated. You may however be able to deduct a proportion of the property expenses incurred from the rental income, as well as the interest paid on any loan or mortgage.
Income tax may also be due in the country where the property is situated. You may be able to get double tax relief in the UK for any foreign tax paid if HMRC accepts that the foreign tax is equivalent to the tax you have to pay in the UK. However, this depends on the terms of the double taxation agreement (DTA) between the UK and the country concerned, and not every country’s tax system is compatible.
When a UK resident sells a second or holiday home, any profit they make will be subject to UK Capital Gains Tax (CGT). Taking into account your annual CGT exemption - £11,700 at the time of writing - any remaining profit is taxable at the residential property rate of CGT, which is 28%. If you own the property jointly with others, the gain will be split between you and taxed in your relevant proportions.
As with income tax there may also be charges in the country where your property is situated. Again the tax position will depend on the DTA but typically relief will be given in the UK up to the level of the UK tax charged.
If you are UK domiciled or deemed domiciled, your entire estate, including all assets held worldwide such as a holiday home, is subject to UK Inheritance Tax (IHT). Again, you will also have to consider the tax issues in the country where your holiday home is located. In some countries you may have to pay an annual tax on the property, even if you do not rent it out. Many countries operate a form of death or gift tax similar to IHT, so a holiday home which passes to a surviving spouse may trigger a charge to the local equivalent of IHT in that country.
Usually, tax relief is available under either a DTA or the domestic provisions in the UK. However, this is not always the case in countries where the rules dictate that the property is left to the children. In these circumstances, the liability lies with the children not the estate, so no double tax relief would be due.
It is also important to seek legal advice when drafting a Will, if your estate includes overseas property and other assets. Having a Will executed in each of the jurisdictions in which you have assets will reduce probate costs, ensure your wishes are compliant with local rules and, most importantly, that your Will is valid in the jurisdictions concerned.
These issues can be simplified with the right advice, please get in touch with our private client team if you would like any help.
For more information on the tax issues around owning a holiday home, please contact your usual Crowe contact.