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Tax Liability on Overseas Rental ?

Hi All,

With the great advice being shared I thought I may ask a question which may benefit quite a few people currently considering Overseas Investment. I am considering purchasing an offplan apartment in Eastern Europe (Bulgaria) as an investment with the cheap prices ... but as i have never bought a property for investment and rented one out both in the UK or abroad am a little confused to the tax implications. I would be most appreciative if someone could shed some light.

I have heard different versions such as ... as the property is abroad and being rented abroad with the rental being paid into a Bulgarian bank account, I don't have to declare the income and just pay the local taxes ? is this correct ? I don't want to do anything illegal, just want to be tax smart and reduce my taxes .... do i have to pay taxes in Bulgaria and the UK ?

Basically, i am hoping to purchase an off-plan apartment and either holiday let it or corporate let it to nearby city workers ... what is the best way to set myself up to pay the least tax and what steps do i need to take ? do i need an accountant ?

Many Thanks in Advance and Apologies if i am asking a question already discussed.

Comments

  • MJSW
    MJSW Posts: 171 Forumite
    If you are UK tax resident, then generally you have to pay UK tax on your worldwide income (regardless of whether the money is brought back to the UK or not).

    The main exception to this is if you are 'non-domiciled', in which case you are taxed on the remittance basis (ie you are only taxed when the money is returned to the UK). An individual generally acquires the domicile of his father ('domicile of origin'). The domicile of origin is retained unless he acquires a domicile of choice elsewhere. Long residence in another country in itself is not usually enough to acquire a domicile of choice there. You generally need to sever all ties with the domicile of origin and establish residence in another country with a clear intention that you will make your permanent home there.

    You may also be liable to pay tax in Bulgaria. However, if that happens you won't be taxed twice. The UK grants a deduction from the UK tax bill for foreign tax paid on the income. If the Bulgarian tax paid is lower than the UK tax, then essentially you would need to pay over the difference to the Inland Revenue. However, if the Bulgarian tax is higher than the UK tax then you should have nothing further to pay in the UK (but unfortunately you can't claim back the excess foreign tax from the Inland Revenue).
  • The UK will charge tax on income and gains on a worldwide basis if you are domiciled within the UK. If you are not domiciled within the UK (for example you are domiciled in the country or jurisdiction where your father was domiciled when you were born) then the UK will only charge tax on income and gains arising in the UK and Republic of Ireland or remitted to the UK.

    There will doubtless be local income tax in Bulgaria which will need to be paid. If the income (or gains on sale) are taxable in the UK then the UK will give credit for the Bulgarian tax on the doubly taxed income (subject of course to exchange rate fluctuations).

    Indeed if the property is let furnished you'll also be able to claim a wear & tear allowance. The main problem I can see here is what structure you will use to own the property. In many of the Eastern European states it is common to use a local company to own the property and you own shares in the company as against the property. This is done both for local legal reasons on ownership of real property and to avoid local inheritance laws on your death. If you own a company in Bulgaria then the company may be UK resident and increase your tax and filing obligations but not save you any money.

    Ask questions before you invest. The person selling will give you a rosy story but may not be a tax expert so seek advice on local and UK income tax and capital gains tax and inheritance tax before you invest if you are concerned.
  • I was reading in the Sunday Papers about SIPs (Self Investment Plans) whereby you DO NOT pay tax on capital gains on your rent + any capital gain made PROVIDED the income all goes back into your SIP.

    You can only withdraw from the SIP when your over 50 as I understand.

    Actually if anyone knows about these then I would be interested to here of any ways you could possibly withdraw before you are 50?

    Also looking to invest in Central Europe - more likley Slovakia / Bratislava as I have some local knowldege there.

    Would be good to share information acutally so PM if youre interested.
  • Assuming you can make enough personal pension contributions or transfer in sufficient from other pension plans and/or borrow (the limits on borrowing are going down in April 2006 then you could use your personal pension plan to buy commercial or residential property anywhere after April 2006.

    The growth and any income would be entirely free of UK income tax and CGT. However ---- you would have to sell the property (probably) if you want to cash in. And ---- you can only EVER get a maximum of 25% back as a tax free lump sum. And --- the earliest date for most of us you can cash-in will be age 55 from April 2006. And --- you MUST cash-in by age 75 at the latest. AND --- you won't avoid tax because the country where the property is located will still charge tax.

    I am thinking none the less that I want a second home in the US. Lets say my SIPP buys it (with some borrowing). What will happen is that whenever I stay there I must pay market value rent to my SIPP. When the property is rented out the rental income is tax-free. However the SIPP still has to file US tax returns each year. I will therefore need the property to be held by a company offshore so that there is no US estate tax on my death. While tax in Eastern Europe is lower than in the US and the UK (generally speaking) you'd probably end up needing a similar structure to minimise local taxes. Figure out the overall costs before you rush into what the Sunday papers were talking about.

    Surely a better and simpler answer (and better investment advice for your SIPP) if you want real estate in your pension plan is to invest some of it in a fund that specialises in Eastern European property so it is professionally managed?
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