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UK Residents with Homes Abroad
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There are many UK residents living in the UK that own a property (house or flat) located abroad. The property may typically be used as a holiday home (Which may also be rented out when not in use). It could also have been purchased with a view of retirement overseas.
Capital gains tax
Regardless of the property being located outside the UK it still qualifies as a chargeable asset for capital gains tax (CGT) purposes, and on disposal (e.g. sale or gift) any capital gain arising will be subject to CGT charge at normal rates (i.e. 18% and/or 28%, subject to amendments in Finance Bill 2016 reducing rates to 10% and/or 20%, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief). It is not likely that any relief (such as private residence relief or lettings relief) from such a charge will be available (other than the annual exempt amount; £11,100 for tax year 2016/17).
In a situation where an individual spends (say) six months in their UK home and six months in their overseas property each year, it may be possible to argue that both the properties qualify as residences. If this was the case, then one of the properties would have to be elected as the main residence. This would need to be lodged in writing with HMRC within two years from the date of possession of the two residences.
New Rules; Post-5 April 2015
In order for the overseas home to qualify as a main residence then the individual must meet the so-called ‘day punt’ test. Which requires the individual to spend at least 90 days in the overseas home in the tax year concerned. This rule would mean that holiday homes are unlikely to qualify.
When leaving the UK to retiree abroad in an overseas homes, it is advisable to sell the UK home prior to emigrating, precipitating no CGT charge. If the sale of the UK property happens once they have left the UK (and the UK home no longer qualifies as a sole or main residence) a sale within 18 months will still avoid a charge, but any sales thereafter will be caught by the new non-resident CGT charge.
Inheritance tax (IHT) depends upon an individual’s domicile (not residence) status, simply retiring overseas will not remove any exposure to UK IHT on the overseas home. It is also likely that the country in which the property is situated will ‘levy’ its own ‘Inheritance’ tax.
In addition to a foreign ‘inheritance ‘ tax charge so-called ‘forced heirship’ rules may also apply (i.e. under which spouse and children of a deceased are automatically entitled to specified shares of the deceased’s estate). The deceased may therefore not be free to leave an overseas home by will to whomever they wish. Whether a separate will be needs to be executed dealing solely with the overseas property needs to be carefully considered.