The joys of owning a second property abroad hardly need explanation, but the potential pitfalls really do; depending on the location and tax regime, you could be in for some serious complexity.
Owning a holiday home abroad is a common ambition, and a very achievable one with the right wealth planning strategy in place. Yet there are potential perils to be thinking about as well as myriad pleasures, as Charles Calkin, Financial Planner at James Hambro & Partners, explains.
There is a good reason why the UK is a green and pleasant land – the amount of rain that falls on it! And for at least three months of the year the average maximum temperature is just 9 degrees. It is not surprising that so many of my clients over the years have had second homes in sunnier parts of Europe.
Often, they were bought in preparation for retirement by couples on the brink of becoming empty nesters and dreaming of being free to run away for several months of the year.
It sounds idyllic and for many it has been. But the experience of others is worth sharing if you find yourself longing for a pretty Tuscan villa, an azure pool and vibrant pink, bougainvillea-clad walls. Yes, you can already feel the cool terracotta tiles on your bare feet in that rustic kitchen, but before you commit yourself, make sure you are prepared for all the additional considerations that come with owning property overseas.
Even before Brexit, it made sense to take advice before buying a second home in Europe. Tax rules vary from country to country and can come as a shock if you are not expecting them. In Switzerland, for example, they may assume if you have a second home you are renting it out all year. They then tax you on the income expected – even if you are the only ones using the place and only occasionally.
Now the UK is no longer part of the EU, there are additional issues to contend with. UK visitors to any of the Schengen area countries, which is most of Europe, cannot stay there for more than 90 days in any 180-day period.
Tax rules vary from country to country and can come as a shock if you are not expecting them. In Switzerland, for example, they may assume if you have a second home you are renting it out all year
This has caused issues for at least one client whose husband has dementia and is stressed and confused by change. Historically, the couple have spent six months each year in their Spanish holiday home and they are keen to keep the same routine.
In some countries you can apply for a Golden Visa to overcome the 90/180 day rule but it can be costly – you are expected to make a significant investment in the local economy. In Spain, for example, you must buy a property (one or more) worth a total of €500,000, make an investment in Spanish public debt of at least €2 million, buy shares in a company or make a deposit in a Spanish bank of at least €1 million. The visa covers your spouse, children under 18 and dependent elderly parents.
My clients have applied for this by depositing €1 million in a Spanish bank. That money is not in the markets, which may have been a blessing in recent months, but with inflation so high, it is not an ideal long-term solution. They also have currency exposure. Fees can be expensive too.
In some countries you can apply for a Golden Visa to overcome the 90/180 day rule but it can be costly – you are expected to make a significant investment in the local economy
Portugal’s Golden Visa scheme is fairly similar but there, in addition, the government restricts where you can purchase a property. It wants to encourage investment in interior and sparsely populated areas that can be run down and poor – not necessarily where you would ideally buy your dream second home.
When you buy any property, it is always worth thinking about how you will eventually sell it. Though the rules may have changed by the time that happens, it is worth being abreast of local practices.
In France, for example, agents are likely to charge between 5% and 10% commission and as the seller you may find yourself responsible for all of that. It is worth haggling but you also need to factor this cost into your financial assumptions – alongside potential capital gains tax liabilities.
When you buy any property, it is always worth thinking about how you will eventually sell it. Though the rules may have changed by the time that happens, it is worth being abreast of local practices
Habits differ from country to country. In the UK the buyer would generally commission a survey, knowing it is their responsibility to unearth any issues in the property – caveat emptor and all that. In France the seller must provide several technical reports prior to the sale and is legally obliged to reveal any issues that might cause serious problems for buyers.
Another practice worth knowing is that if someone offers the full asking price you are legally obliged to accept it. If you do not then the agent can sue for breach of contract. So, you cannot put the house on the market to “test the waters”. You may find yourself having to move out more quickly than planned.
The rules around inheritance can also be an issue in some countries, so it is important to check the requirements for a local will
The rules around inheritance can also be an issue in some countries, so it is important to check the requirements for a local will.
Many of my clients do not own individual properties but are invested in timeshare schemes. These were very popular and heavily marketed 30 or 40 years ago. Those who want to dispose of these have often struggled, including several clients who inherited them on the death of parents as part of their estate.
Others who are happy to keep their timeshare options have a different problem. Because of the way these schemes work, maintenance, administration and other costs are shared across the owners. If some owners cease their payments and default, this builds an increasing debt against the property.
Timeshare owners can collaborate to make a disposal, but these additional challenges on top of the normal complexities of selling property overseas are not to be underestimated
Timeshare owners can collaborate to make a disposal, but these additional challenges on top of the normal complexities of selling property overseas are not to be underestimated. If the original owners have lost capacity there can also be the complication of having UK Powers of Attorney recognised in a different jurisdiction.
If I sound like I need a holiday myself, I am sorry! The truth is that lots of my clients love their second homes and count them among their best investments. But I hear enough tales to want to ensure that you go into this acquisition with your eyes open – leave those rose-tinted sunglasses at home until the deal is finalised!
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