Are you a UK resident who owns property abroad? HM Revenue & Customs (HMRC) has announced its latest tax evasion crackdown, and this time the focus is on taxpayers who own prope
Are you a UK resident who owns property abroad? HM Revenue & Customs (HMRC) has announced its latest tax evasion crackdown, and this time the focus is on taxpayers who own property abroad. If you are a higher rate UK taxpayer, you could be affected if you own a holiday home, investment property or land outside the UK.
Specifically, the HMRC statement, which was issued on 31st October, states: ?Wealthy tax cheats with overseas property are now being targeted by a new 200-strong team of investigators and specialists?.
Provided you have been correctly following the tax rules of both the UK and the country where the property is located you should not have any problems. However, there are people who do not declare their overseas property and income to HMRC, so it is understandable why the authorities have decided to start this investigation.
HMRC?s ?affluent team? was set up to focus on the UK?s wealthier taxpayers and this overseas property initiative is just one of their projects to increase tax revenue for the Treasury and prevent tax evasion.
The team is utilising new and innovative ?sophisticated data mining techniques? to trawl through publicly available information to identify individuals who own property abroad. Computer programmes will search the internet for properties listed for rent in countries like Spain, France etc which are owned by British people.
Using risk assessment tools, it will then look for two particular things –
(1) People who have not been declaring the correct income and gains on their overseas property to HMRC.
(2) People who do not appear able to legitimately afford the property.
The first situation covers British taxpayers who earn rental income from overseas property which they do not declare on their annual UK tax return. It would also cover gains made on the sale of overseas property which would be taxable in the UK.
In the second situation HMRC will presumably look back over the property owners past tax returns and if the income they have been declaring is too low to support the purchase of the overseas property, it will probably want to know what funds were used; how they were earned in the first place and, if they had been held in an offshore bank account, if it had been fully declared.
Since overseas assets form part of an individual?s estate for inheritance tax purposes, if anyone has inherited an overseas property from a British domicile HMRC is likely to check if it had been listed as part of the deceased?s estate.
Exchequer Secretary to the Treasury, David Gauke, said:
?With HMRC?s increased capability and expertise, and its increasing success in tackling evasion both at home and offshore, the message is clear: there is no hiding place for tax cheats.?
Last December the government announced a major crackdown on tax evasion, with the aim of bringing in an extra ?7 billion annually by 2014-15 in revenue for the Treasury.
HMRC has already warned that its next targets will be commodity traders and offshore account holders. The coordinated actions will involve teams who deal with residence and domicile issues, trusts and estates and corporate entities. Further details will be announced later.
Offshore account holders must really feel they are under attack, since HMRC has launched various initiatives against offshore tax evasion over the last few years. It recently signed a landmark deal with Switzerland whereby Swiss banks will start to deduct tax for the UK Treasury and last month it wrote to 6,000 HSBC Geneva bank account holders giving them one month to come clean to the taxman.
So what are your tax liabilities on overseas property?
If you rent the property out at all, then as a UK taxpayer you need to declare the rental earnings on your annual tax return.
If and when you sell the property, the gains also need to be declared and taxed in the UK.
If you still own the property when you die, it must be listed as part of your estate for inheritance tax purposes. If you give the property away as a gift you still need to consider the inheritance tax implications in the UK.
Besides complying with the UK tax regulations, you also need to comply with those of the country where the property is located. Both rental income and capital gains would normally be taxable locally as well as in the UK, so you would need to review the terms of any double tax treaty to establish in which country you should pay tax, if you would receive credit for tax paid elsewhere etc. The same goes if the country imposes an inheritance tax. In countries like France and Spain you may also be liable for wealth tax if your local assets exceed the threshold.
This latest HRMC investigation could potentially lead to problems locally if you have not correctly fulfilled your local tax obligations and HMRC shares the information it finds.
Wealthy British residents with holiday homes may resent the fact that the HMRC seems to be presuming they are tax cheats, and they may have to go to the inconvenience of proving that everything is above board with their property. It is unfortunately a sign of the times we live in and this is a good example of how important it is to make sure you are fully aware of all your tax obligations, both in the UK and locally, and that you get your tax planning right. If you are in any doubt you should seek advice from an international tax advisory firm like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
4th November 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.