The UK tax authority HM Revenue & Customs has issued another warning against hiding assets offshore, and this includes overseas property. Many British residents own property in c
The UK tax authority HM Revenue & Customs has issued another warning against hiding assets offshore, and this includes overseas property. Many British residents own property in countries like Portugal, but not all of them fulfil their tax obligations in the UK and/or here in Portugal. Both countries are now taking a closer look at property ownership to ensure they receive all tax due.
Tax obligations
If you own property in Portugal but are a UK resident, you need to comply with both the UK and Portuguese regulations.
As a UK taxpayer, you need to declare the rent on your annual UK tax return. Any gains on sale need to be declared and taxed in the UK. Overseas property must also be declared as part of your estate for UK inheritance tax purposes if you are UK domiciled.
Here in Portugal, rental income earned by non-residents is taxed a flat rate of tax. It is currently 16.5%, but under the 2013 Budget proposals it will shoot up to 28% next year.
If and when you sell the property, tax is due on the capital gain (properties acquired before 1989 are exempt). 100% of the gain is taxable for non-residents. The fixed rate of tax is 25%, but again, under Budget plans it will increase to 28% next year. It is possible for UK residents to opt to be taxed as a Portuguese resident. In this case, only 50% of the gain is taxable and taxed at the scale rates of income tax. Inflation relief is given after two years of ownership. In order to be taxed as a resident, however, you have to declare your worldwide income in Portugal so that the marginal rate of tax that will apply can be calculated. Income tax rates will be considerably higher next year, so seek advice.
If you still own the property when you die, it will be liable to stamp duty (inheritance tax). Spouses and children are exempt, and the rate for anyone else is just 10%.
Portugal and the UK apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
You do not however have to pay tax twice. In the case of rental income, capital gains and inheritance tax you can offset the Portuguese tax paid against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK. If the UK tax is lower, you do not get a refund for the difference.
It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated. You should seek professional advice from a firm like Blevins Franks which specialises in both Portuguese and UK taxation and how the two interact.
UK warning
Chief Secretary to the UK Treasury, Danny Alexander, has warned that the government is going after tax dodgers to make sure they pay their fair share. This includes those hiding assets offshore. It is targeting wealthy Britons who own property abroad as it has concerns that owners are failing to declare millions of pounds of rent.
Its team of tax investigators is looking through tax return records across different databases and public records, comparing them all and looking for ?oddities?.
In one example, HM Revenue & Customs recently launched a successful case against a UK taxpayer who owned and rented out over 10 properties abroad but had not declared any income. The case involved over ?100,000 of unpaid tax.
People who only own one overseas property could also be targeted, though HRMC is particularly focusing on those who own a few houses.
HMRC had announced that it was targeting wealthy individuals who own land and property abroad last autumn. It applies sophisticated data mining techniques to public information to identify people own property abroad.
It then uses risk assessment tools to compare the information to that supplied on tax returns. This highlights people who do not appear to be correctly declaring the income and gains, and those who do not have the means to purchase the property.
The internet plays a big part in the research. For example, most holiday rentals are advertised online. There have even been reports about investigators looking through Twitter accounts for people discussing their property and lifestyles. HMRC can use the internet to spot ?anomalies?, ?lifestyle indicators? and ?unexplained inconsistencies? ? in other words, any discrepancy between information provided on tax returns and reality.
Much of this work is being done by HMRC?s Affluent Unit. Its remit has been expanded to cover people with assets over ?1 million – previously the threshold was ?2.5 million. It is also hiring 100 additional staff.
For advice on Portuguese and UK tax law, and effective tax planning in both countries, speak to experienced tax and wealth management firm. Blevins Franks has decades of experience advising British expatriates in Portugal and helping them legitimately lower their tax liabilities.
2nd November 2012
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 should take personalised advice.
