Benjamin Franklin once said, "In this world nothing is certain but death and taxes." And while, unfortunately, buying a home abroad won't save you from either, with a bit of careful planning you can at least prepare yourself for any taxes that lie ahead and possibly even save a bit of money here and there.  

Corporate Structure
Regardless of where you intend to buy a property, if you are a UK resident you should avoid buying the property through setting up a company (be it an offshore or a UK incorporated one) if it is for your personal use. There could be tax implications! The reason for this is that the UK Inland Revenue will then seek to tax you annually on the 'benefit in kind' of your staying in the property rent-free. If you were to use an offshore corporate structure, you should be aware that Spain, France and Portugal have penal taxes if the company is incorporated in a tax haven area such as Gibraltar or the British Virgin Islands. These penal rates of tax do not apply where the company has an accepted jurisdiction such as in the UK or Malta or the home territory where the property is located. If you intend to buy a property as an investment, and do not intend to use it yourself, then a corporate structure might be an advantage, but specific advice should be sought.

Rental Income
In each of the four featured countries, rental income is taxable in that country but is also taxable in the UK if you are still a UK resident. You will be able to deduct any tax paid overseas against any UK tax on that same rental income (but not against other income). In the UK, any interest on loans which can be shown to have been taken out for the purpose of buying or improving the rented overseas property can be deducted against the rental income, as well as the other expenses of letting, such as advertising, repairs, agent's fees, etcetera. However, the same may not be the case overseas. For example, in France, if the annual gross rental income is below a certain limit, a flat-rate deduction of up to 72 per cent may be available, regardless of the actual amount of expenses incurred. Meanwhile, in Spain, non-residents are taxed at a flat rate of 25 per cent on gross rental income received – in other words, there are no deductions for expenses. You should also note that in Spain there may be a deemed notional rental income of around one or two per cent of the value of the property if it is not your main residence. In Cyprus and Portugal, not all expenses of letting may be deducted.

Other Annual Taxes
Each of these four countries has different forms of annual taxes equivalent, more or less, to the UK community charge. Property taxes will also need to be paid in each one of these countries, providing the property is furnished and deemed habitable. You will be accountable for these taxes, whether you are resident or non-resident of that country and whether the property is inhabited or not. This tax can be split into two separate amounts – one for the building and one for the land. The tax for the land is payable whether it's built on or not.

Before you complete the purchase of your property it is essential that you check that there are no outstanding property taxes for previous years, as in some instances you will be held responsible for related taxes and debts – although you will be able to reclaim this tax from the previous owner, providing of course, you can find them.In France an additional residential or local income tax is also paid by residents. All overseas costs are in line with what one might pay in the UK.

Capital Gains
As a UK tax resident, if you sell your overseas property you may be liable to tax in that country on the capital gain. This gain can include any foreign exchange gains made on the property as well as mere increases of the property's value in the local currency. You may also be liable for UK capital gains tax on the overseas property gain, although you can deduct the tax payable in the other country against your UK capital gains tax (CGT) liability. If you wish to sell your second home in Spain, for example, the CGT rate is 35 per cent for non-residents, and 15 per cent for residents.

In France the CGT rate is 16 per cent, but for every year over five years of ownership you may reduce the chargeable gain by ten per cent (and so after 15 years there is no tax to pay). If you are resident in France, further social charges are due on any gain arising at a rate of 11 per cent. In Portugal, CGT is payable on just 50 per cent of the gain if you are resident. If you are a non-resident of Portugal then the whole gain is taxable at a flat rate of 15 per cent.

In Cyprus, there is an exemption of up to CYP10,000 against the gain where the property is not your main residence, with the remainder of the gain (if any) being taxed at a flat rate of 20 per cent. If the property is your main residence, then the exemption is CYP 50,000. Usually (although there are some exceptions) if you live as a tax resident in the overseas country, there is an equivalent of the UK's principal private residence exemption which will apply, hence there would be no tax to pay in the country where you own your property. The conditions do vary in other countries, and can require you to live in the property for a minimum period of time or to reinvest the proceeds in another property.

Transfer Taxes
When you buy your overseas property, you will have a variety of transfer taxes similar to the UK Stamp Duty and registration fees. These can vary, but you should budget for about ten per cent as they are usually greater than the equivalent UK costs.

Wealth Tax
Only Spain and France has a wealth tax which would be payable on the value of the property in the overseas country.  If you remain a resident of the UK, these can be avoided or mitigated by having mortgages against your UL property, since the calculation of the wealth tax depends on the net asset value after deducting such liabilities. If you own a very expensive property, it may be worthwhile taking out a mortgage simply to reduce or minimise the overseas wealth tax. Exemptions are available to residents of Spain or France.

Succession and Inheritance Taxes
Spain and France also have a tax charge payable on the death of an owner (or transfer by way of gift). Again, if it is an expensive property, or there are complicated family arrangements in owning theproperty, then you should seek specific advice. In Spain, matters are further complicated in that each region enjoys autonomy in setting succession tax rules and exemptions, and therefore the rules can vary significantly from region to region. UK inheritance tax may also be a factor to consider, whether you remain resident in the UK or move abroad, and even if you do not retain any UK assets. 

Succession Law
There may be problems over succession law in France because essentially French law states that you cannot cut your children out of your will (including children of earlier marriages). There are some methods of avoiding the French succession law, and depending on your circumstances, you will be able to make arrangements to leave the asset to whomsoever you please. Again, specific advice should be sought.

Jane Hayward is the manager of Blevins Franks Tax Advisory Service Ltd. Tel: 020 7336 1116, or email her:

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Article first published in October 2005