The number of people owning holiday homes or second properties has rocketed in recent years. Many have failed to appreciate the tax implications of owning such properties, particularly when they are situated overseas.
Whether it is a buy-to-let property or that dream holiday home, it could be subject to many different kinds of tax. For UK properties, income tax, capital gains tax (CGT) and inheritance tax (IHT) are the main issues.

Income tax The idea of a substantial income from second properties, whether through the buy-to-let route, or letting out the holiday home, is always one of the biggest attractions in buying a second property. But don't forget that lettings are treated as a business and any profit is taxable.
Married couples could consider putting the property in the name of the spouse with the lowest income, or in joint names, so that less income tax is payable overall.

Capital Gains Tax (CGT) If properties are sold, given to other members of the family, or transferred into trusts or companies, CGT will be payable on any rise in the value of the asset. There are ways of reducing a CGT bill but the right professional advice and action must be taken. You could make

substantial CGT savings through the use of trusts and gifts between husbands and wives before a sale is made.

Inheritance Tax (IHT) With the starting point for IHT at only £275,000 (2005/06), more and more people have become caught in the IHT net as property values have risen. For UK-domiciled individuals, IHT is charged on the total value of their assets anywhere in the world – so homes abroad would be taxed.
There are still ways of reducing a family's IHT bill, involving the creation of trusts to hold holiday homes and other assets. However, this kind of arrangement is becoming increasingly complex to put in place as the tax authorities continue to attack past and present IHT planning.

Trusts can be created during someone's lifetime or in the event of their death but there are implications for other taxes and many detailed conditions to be met for the arrangements to save IHT.

Overseas properties In addition to the above taxes, UK-domiciled individuals will also have to consider the impact of overseas taxes. These can include: income tax on rents, CGT on sale of the property, IHT, an annual wealth tax on the value of the property, local

stamp duty (which can be much higher than in the UK) and regional and local council taxes on the property.
Where income tax, CGT or IHT is paid in more than one country, tax paid overseas is usually deductible from the UK tax bill. The direct cost of other taxes can sometimes be mitigated if you plan the purchase and ownership of the property carefully in advance. Such planning arrangements should address the tax and legal peculiarities of the country and must be analysed carefully to ensure they do not trigger further tax problems in the UK!
There are many kinds of tax to rain on your investment or holiday dreams, but it is not all bad news. If you can resist rushing into a purchase and take specialist advice in advance on all the related areas, including your Will, we can help you map all the pitfalls.

If you would like to discuss your current plans, please e-mail or contact us for unbiased independent advice.

The Financial Services Authority does not regulate tax planning