UK tax on overseas property
On wetter days, it is no surprise that many Scots dream of owning a holiday home in warmer climes. But before you purchase that idyllic villa for your getaways, it is worth considering the less sun-soaked side of overseas property ownership: tax. This article outlines the key UK tax considerations, using the example of a Spanish villa, and touches on the potential tax exposure in Spain.
Renting it out?
With the Brexit 90/180-day rule, there is a good chance the property will be vacant part of the year. If you decide to rent it, the rental income is subject to UK income tax if you are UK resident. The profits or losses are calculated similarly to a trade, with allowable deductions for expenses such as repairs, letting agent fees, and mortgage interest (subject to UK restrictions).
Importantly, profits and losses from an overseas property business are kept separate from those of a UK property business. We cannot offset losses from the Spanish villa against UK rental profits (and vice versa).
Don’t Pay Tax Twice: Double Taxation Relief
Spain will also tax rental income from Spanish property. However, the rules ensure you are not taxed twice on the same income. You can claim a credit in the UK for Spanish tax paid on your rental profits, up to the amount of UK tax due on that income.
Selling Up
Upon an eventual sale of your Spanish villa, any gain is potentially subject to UK Capital Gains Tax (‘CGT’) if you are UK resident. The gain is calculated as the difference between the sale proceeds and the acquisition cost, with deductions for allowable costs such as legal fees and improvements. You may also be liable for Spanish CGT on the sale, but again, the UK-Spain treaty allows you to claim credit for Spanish tax paid against your UK CGT liability.
Declare or Despair (Reporting to HMRC)
UK residents must report the rental and disposal of overseas property on their Self-Assessment tax return. Non-UK residents are not generally taxed on overseas property gains, but must report and pay CGT on disposals of UK property.
Inheritance Tax (IHT)
Long-term UK resident individuals are subject to UK Inheritance Tax on their worldwide assets, including a Spanish villa. If you are not long-term UK resident, only UK assets are within the IHT net, although recent departees remain within the scope for up to 10 years. Spain also has its own inheritance tax system, with different rules, rates, and exemptions. The Spanish approach to forced heirship and succession law can also come as a surprise to Brits used to testamentary freedom.
Final Thoughts: The Dream Villa, with a Tax Footnote
Owning a Spanish villa can be a dream come true, but it is a dream with paperwork. From rental income to capital gains and inheritance planning, UK tax rules continue to apply, and the Spanish taxman has their bite of the paella too. Careful planning is needed to maximise reliefs and avoid pitfalls, especially if you intend to use the property as your main home or pass it on to heirs. Always seek professional advice to ensure compliance in both jurisdictions. With the right planning, you can enjoy your sangria and stay compliant.
If you need advice on overseas property tax, please email tax@thomsoncooper.com for a free initial consultation.