A property abroad can be an investment, both in rental income and capital growth. It can certainly be a cost-effective way of enjoying spectacular holidays, not just for you and your family, but for friends, business contacts and even your employees. What it need not be, if planned correctly, is a drain on your cash flow or a reason to downshift in your normal life. There are mortgages available at reasonable rates, or equity release schemes that mean you don’t even have to part with the family home.
However you purchase your property overseas, it’s vitally important to have your finances organised from the beginning. It is also vital to consider potential financial risks around the purchase, such as currency risk. Lastly, there are tax implications of moving abroad. Where should you be paying tax?
Distinction at Property Guides can help organise any aspect of your purchase or financial life abroad. Contact us using the form (right) to be put in contact with recommended financial advisors, tax planners, equity release companies and mortgages providers.
What to know before you buy
You will have a number of key considerations before purchasing overseas. Firstly, there are several ways to finance your property abroad. These include a variety of mortgage products, including lifetime mortgages, a form of equity release. You can acquire a mortgage on a property, based on your earnings and ability to pay it each month, from a UK-based or overseas lender.
Equity Release/Lifetime Mortgage
Equity is the difference between the value of your home and the balance of all the mortgages, secured loans and charges on the property. For UK homeowners, especially if they bought decades ago, this can amount to millions of pounds.
Homeowners aged over 55 have the option of using this equity tax-free while retaining the use of their property. So how does it work?
The crucial elements are that, 1, you are 55 or over, and 2, that you are living in the UK property against which the money is lent, for at least six months of the year. You continue to own and use your home, while having the cash to spend as you wish. That you can continue to live in the state to which you’ve become accustomed without downsizing or losing the family home, is perhaps the greatest appeal of equity release.
There are several types of equity release to chose from depending on your circumstances and requirements. The levels of risk or commitment vary too. A ‘home reversion plan’, for example, means you sell all or part of your property in return for a tax-free lump sum, a regular income, or both. You then stay on in your home as a tenant, but paying no rent. These can work for some people, but they are viewed by the UK government’s Money Advice Service as a “high-risk product… with major implications for tax, benefits, inheritance and your long-term financial planning.”
A more popular type of equity release is a called a lifetime mortgage. With this you can withdraw a percentage of the property value from your home. You remain the full owner of your property, you’ve just borrowed against it. Of course within this there are many more options available, so do speak to your equity release advisor. Simply fill in the form on the right of this article. You can also choose variable or fixed interest rates.
The simplest option is a mortgage in the currency where you are buying the property, although this won’t protect you from currency risk if your income is paid in a different currency.
The normal minimum deposit for an overseas mortgage is 30% plus taxes and expenses. This will be subject to status, so it’s important to get an agreement in principle so you know not only if you’re eligible but also the maximum loan amount you might get.
The normal term would be up to 20 years for non residents for the acquisition of holiday/second homes in Spain, with a maximum repayment age of 75 years. This can vary from country to country, however, and longer terms of up to 40 years will be available in Portugal, for example.
Although you can find the property first, most buyers find it easier to get a decision in principle before they start looking. The bank will normally make a decision in principle merely based on income and liabilities. Of course if you do have a property in mind that will help the application.
Off-plan properties are a little more complicated, as they often cannot be financed until building works are complete. However, again, many banks will offer a decision in principle up to a year before the property is ready for completion.
Any decision will be based on your ability to pay. You won’t necessarily have to have paid off your UK mortgage unless existing financial liens in the UK (mortgages, personal loans, car loans, etc.) are greater than the bank feels you can manage. Affordability is based on your net (taxable) income as well as existing financial liabilities in the UK. You or your accountant will be asked to produce earnings records and possibly tax returns too, some bank statements and a credit history report. As a rough guide, normally you cannot be paying more than 20-25% of your monthly income on the house loan.
You cannot normally use potential rental income from the property in your calculations for affordability, unless you have a proven financial record in that country.
How can you safely transfer money?
Sending money overseas can be risky. The exchange rate is constantly changing and that can have a significant impact on the price of a property. For instance, if you put in an offer on a property valued at €800,000 with a rate of 0.88, you would expect to pay £705,000 for it. The rate will continue moving after your offer, and if it rose before you actually pay by just 0.01, your property would cost £712,000. It is perfectly normal for the sterling value to fluctuate by as much as 5% between agreeing the price in euros and paying for it.
You may be able to easily absorb the cost of small movements, but, as we are in a period of such volatility, sudden drops or rises can come out of nowhere. As such, it pays to protect your budget. We recommend speaking to Smart Premier, part of Smart Currency Exchange who have over a thousand 5* reviews on Trustpilot. Smart Premier will assign you a dedicated Personal Trader, who can make use of techniques such as forward contracts to lock in an exchange rate.
What are the financial considerations after moving?
You will need to establish what to expect for your day-to-day living. Firstly, you’ll need a bank account in your new country of residence, to hold any transfers. In some countries, you’ll need to get a fiscal code to be able to do so.
Secondly, you’ll need to have factored in your living costs. Many people find that moving abroad is like a ‘new lease of life’, with higher outgoings – you might be doing more activities, trips or outings on your weekends than you do back home. Likewise, there may be aspects of maintenance that you’re not used to, such as the toll of the sun and sea on beachfront homes.
How can you draw your UK pension overseas?
You’ll have the choice to draw your pension, with it being directly paid into your account in our new country, or to have it paid into your UK bank account. The latter can make sense if you choose to divide your time between the two countries. In this case, it can be helpful to set up a forward contract to lock in an exchange rate across the year. If not, your pension amount will change value every time you send a lump sum over. Speak to Smart Premier about this.
Your pension will be taxed in the country of your tax residency. If you live overseas permanently, you’ll likely be taxed in that country.
Organising your tax when buying overseas
It is essential to take good advice when buying property abroad, even if you only intend using it as an investment or a holiday home. Taxes in overseas countries may appear to be the same but can be calculated completely differently. Then there are taxes that do not exist in the UK, such as a wealth tax.
Income tax rates can reach over 50% and there may also be sharply rising taxes for higher value properties. If your advisors understand the allowances and tax planning opportunities available, it’s often possible to reduce your taxable income and minimise exposure to the highest tax rates.
When speaking to your financial advisor it is also critical to discuss with them how long you will be spending abroad. Understanding where you are tax resident is important since normally the country of residence would tax you on your worldwide income and gains. It will depend on, for example, where you spend most time. You are normally considered to be a tax resident if you spend more than 183 days in a country during their tax year, or if your main professional activity or most of your assets are based there. Then there are “ties”, such as if your spouse and/or dependent minor children live in the country.
Who’ll pay income tax and where?
If you live in France, Spain, Portugal, Cyprus or the UK you'll have to pay tax on your worldwide income. This applies whether or not you bring the income into the country. So if you’re resident abroad and rent out a British property, say, you may be liable to tax on the UK rental income in your country of residence as well as in the UK.
Even non-residents may have to pay tax if income is sourced in that country. For example, UK residents are liable for Spanish income tax on any rent received from a holiday home in Spain.
Thanks to the double tax treaties between the UK and many other European countries, however, you should not pay the full level of tax twice on the same asset. Instead, you’re likely to receive a credit for tax paid in the other country.
While income tax rules shouldn’t be affected by Brexit developments, they can vary greatly between countries and sometimes even between regions. They can also change frequently, so it’s important to seek professional advice to make sure you get it right and only pay as much as you need to.
Most UK nationals living abroad remain liable for UK inheritance tax on their worldwide assets because they are still seen as a UK domicile, often without realising it. To make sure your legacy goes to the right place without leaving your heirs a hefty tax bill, you’ll need to understand the rules in the UK and your country of residence.
Many countries charge a tax on gifts given within your lifetime, although there may be some exemptions or time-based relief. In the UK, for example, if you survive for at least seven years from the date of a gift to an individual, it may fall out of account for tax purposes.
France imposes a ‘succession tax’ on residents’ worldwide assets. The tax is paid at a progressive rate by each beneficiary. Rates vary according to their relationship to you and can be very high for ‘non-relatives’:
- Spouses and civil partners are exempt from succession tax
- Rates range from 5% to 45% for natural children
- Stepchildren and unmarried partners face the non-relatives rate of 60%
Spain charges succession and gift tax on Spanish assets or assets passing to Spanish residents. State rates range from 7.65% to 34% but surcharges could increase this to 82% for wealthy recipients not directly related to you. In addition, each ‘Autonomous Region’ applies different reliefs and exemptions, and often different rates of tax.
Portugal charges a ‘stamp duty’ instead of inheritance tax, fixed at 10%. It only applies to Portuguese assets.
So it’s complicated! To avoid a costly mistake, ask to speak to a trusted financial advisor or tax specialist. Just fill in the form.
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