How to buy a holiday home
We all know the feeling - it's the last day of your holidays and you really don't want to go home. You start to think how nice it would be to stay. More and more of us are acting on that feeling and buying properties abroad.
Currencies Direct reports an increase of more than 50% in the number of foreign properties bought by Brits last year. So if you're thinking about buying a home abroad what do you need to consider?
Buying in Spain
With sales up by 84% in Spain last year, according to Currencies Direct, it is once again one of the most popular places for Brits to buy. If you are considering it, here's what you need to know.
First of all, be careful who you buy from. "Buying a villa from an unscrupulous developer who has built on protected land could see your life savings vanish fast," says Marc Pritchard, sales and marketing director of Spanish builder Taylor Wimpey España. Such stories have hit the headlines. Brits have seen their dream holiday homes bulldozed by the local council because they didn't have the right building permissions.
"Do your research and find out how long the developer you are considering buying from has been in business. Find reviews on the internet from customers who have bought previously through it and grill it on any details where you require clarification," says Pritchard. "A reputable company will be happy to answer your questions, no matter how many you may have."
Whether you are buying a new-build property or an existing home, make sure the vendor owns the title deeds to the property, or land, you are buying. If it is a developer, make sure that title deeds actually exist.
Also make sure you know the history of the property you want to buy. "There are lots of distressed properties on the market, for example bank repossessions. These can offer great value but can have hidden costs, the main one being that community fees have not been paid and this responsibility can fall to the new owners," says Keith Mead, who bought an off-plan apartment in Spain.
Once you are ready to buy, you'll need to get a Spanish fiscal number. This allows you to pay all the necessary taxes. It can take up to six weeks to get this, so act fast. You will have to pay a whole host of taxes including:
Property transfer tax: 7-10% of purchase price, depending on the region on existing buildings that are up for resale.
VAT (known as IVA): 10% for new-build properties, 21% for development land and car-park spaces
Stamp duty: 0.5-1%
Local council tax (known as IBI): 0.4-1.1% depending on the region
Local tax on increase in value: 20-30% of gains when sold
When you start the purchase process, be aware that you will be entering a legally binding contract at the start; not the end as you would in the UK. So you need to have all surveys done and finance in place before you sign. During the purchase process, you will be in touch with a notary.
This person is not your solicitor – they work for the state and are responsible for making sure all documents are filled out correctly and all taxes are paid. "They make sure there is fair play on both sides," says Jason Porter, director of international tax and wealth management adviser Blevins Franks.
Make sure you also have your own solicitor to represent your interests. "It is vital that you employ an independent solicitor to oversee the transaction, who is fluent in English and the local language and understands property law in the country you are buying," says Mike Carter, head of conveyancing at Paul Crowley & Co Solicitors.
Make sure you also understand everything you sign. "Even though you are buying away from home, all contracts you sign should be in English," says Carter. "Sometimes, two versions of the contract are presented, one in English and the other in the local language – it is imperative that you ask your solicitor to check that the English version is a true translation before signing any official documents."
Finally, once everything is done and you are ready to pay up, be careful how you pay. "Do not be tempted to pay for part of a sale price in cash; the Spanish tax authorities now have sophisticated computer programs for comparing property values to catch this kind of tax avoidance," says Porter.
Buying in France
Around 200,000 Brits own property in France and many have suffered recently due to changes to French tax laws.
The buying process in France is very similar to the process in Spain. You enter a legally binding contract at the beginning of the process, so you need to do surveys and get your finances in place before you sign anything and you will also have the assistance of a notary. Again, the notary is there to represent the state so should be neutral and can often be very helpful.
"You don't have to be frightened of the notary," says Ian James, who bought a property in France 15 years ago. "In fact, make friends with them. We still know the one we dealt with and have asked his advice on selling the property."
You should also employ your own solicitor. Many locals in France don't bother and will purchase a property without any legal representation other than the notary. But given that you are going through an unfamiliar process where legal documents may not be written in your native language, it is vital you have an expert looking after your interests.
Your solicitor isn't just there to help you purchase your new home. Make sure they also help you sort out the legal complexities that go with owning property in a foreign land.
"Checking the inheritance and capital gains tax laws in the country where you are buying is an extremely important issue, which can be overlooked," says Carter. "For example, in France children inherit the rights to a house and may not automatically pass on those rights to a spouse."
To ensure your estate doesn't unravel if you die, make sure you have a will drawn up in the country where your property is located. But be certain that the will only covers the property and assets you have in that country and not anything you hold in the UK.
Get that wrong and "you could invalidate your UK will and make your dream holiday home a nightmare to deal with", says Carter.
The tax system in France is complex and you will have to pay a variety of taxes when you purchase your home. These include:
VAT on new property: 20% of purchase price Departmental tax: 3.6% Communal tax: 1.2% Expenses tax: 2.5% of the departmental tax
State tax: 0.2%
Taxe d'habitation (dwellings tax): 25% per square metre annually
Taxe fonciere (land & buildings tax): Varies regionally by region, property value, and potential rental value
Contribution economique territorial on rental income: Up to 1.5% of annual turnover (rental income)
Taxe de sojourn (tourist tax) on rental property: Varies regionally by region, property value, and potential rental value.
If you are thinking of buying a fixer upper in France, you need to be aware of 'property claw-back', a law that could see you handing your profits over to the previous owner.
"Property claw-back is where you sell a property for more than 2.4 times what you paid for it, within two years of your original purchase," says Porter. "In this case, the owner you bought from can cancel the sale to you retrospectively and take the property back for the price you paid. They can then sell it on for 2.4 times the price."
The French tax system for foreigners who own French property is currently under investigation in the European courts, so keep an eye on the news as it could change later this year.
Buying in Italy
As with buying in Spain and France, once your offer has been accepted you are in a legally binding contract in Italy. So make sure you are certain before you start talking money and have done the necessary legal and financial checks.
You'll also need some cash ready as typically a 20% to 30% deposit is required when an offer is formally accepted. You also need to budget for the estate agent's fees in Italy as the buyer is liable for these as well as the seller – it usually costs around 3% of the purchase price.
In order to complete your purchase, you will need an Italian tax code number (known as a codice fiscal). You will need to pay a range of property taxes, notary fees and agency fees, which will add around 10% to 12% of the sale price to your overall costs.
If you rent out your property, you may have to pay income tax. You'll also have to pay property tax twice a year. The good news is you'll have no Italian capital gains tax to pay if you hold on to your property for more than five years - but you may be liable in the UK.
There is a lot of illegal building going on in Italy so it is vital you get a good lawyer who can check everything is above board. This was something that Miriam Watson found particularly important when she bought her holiday home in Tuscany in 2008.
Despite speaking fluent Italian, she says the one piece of advice she would give anyone considering buying in Italy is: "Make sure all the documents are correct. We used a London-based international lawyer – not cheap but worth every penny."
Documents and proof of ownership can be a lot more complicated in Italy but it is worth taking the time to make sure everything is in order. "It took six months from paying our deposit to moving in," says Miriam, which was a lot longer than she expected, "but that was because we were determined to make sure we had all the correct documents as the previous owner had extended and converted the property."
Italian lawyers will also often recommend you get an Italian will drawn up, but it isn't strictly necessary. This is because if you were to die under Italian law, your property will be disposed of according to the inheritance law in your own country. So as a Brit, your property will be subject to British inheritance law. But make sure you have a British will - otherwise the UK government could get your house.
VAT (IVA) on new property: 10% for non-luxury properties, 20% on luxury properties
Purchase registration tax on existing homes: 10%
Tax on rental income: gross rent after expenses at a flat-rate of 15% of the gross income
ICI Imposta Comunale sugli Immobil (the equivalent of council tax): Varies by property type and region
Capital gains tax: 20% if you sell within five years of purchase
Purchase registration tax on existing homes: 10%.
Have you thought about the exchange rate?
As well as all the considerations you would make if you were buying a home in the UK, when buying abroad you also need to think about currency movements. A small shift in the exchange rate could have a massive effect on your budget.
"It's vital that buyers consider currency movements when purchasing property overseas because from beginning your search to completion can take six months or more, during which time the market could move against you in a big way," says David Lamb, senior dealer at foreign exchange specialist FEXCO.
"For example, the US dollar was trading at 1.7190 on 15 July 2014 and 1.51329 on 12 January 2015.That means the exchange rate has fallen by almost 12% in six months. If you made an offer on a $400,000 property in the US in mid-July 2014, and completed now, it would cost you almost £32,000 more."
To avoid this sort of unexpected expense, you should look at locking in an exchange rate when you first start looking at properties. Known as a 'forward contract', this means you will know exactly what you will be paying and not have to worry about exchange rates moving against you.
In order to take out a forward contract, you will need to deal with a foreign exchange specialist such as FEXCO or HiFX. It is also worth using one of these companies as they tend to offer more favourable exchange rates than the high street banks when it comes to moving large sums of money abroad.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An off-plan property is one sold to the buyer before it has actually been built and so the prospective buyer relies heavily on architect drawings, scale models and the assurances of the property developer in order to “see” what they’re buying. For investors or speculators, in a rising market, buying off-plan means you buy at this year’s prices and, when you take possession, the market value will have increased. The biggest risks with off-plan are the developer will go bust or not complete the project or that the market will fall and the completed property will be worth less that the agreed purchase price.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
The branch of law concerned with the preparation of documents for the buying and selling of property (or remortgaging), always handled by a qualified solicitor. The conveyancing process covers many of the legal aspects of the sale/purchase/remortgage such as land registry, local authority searches, freehold and leasehold status, title deeds and much more.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.