FIVE tax tips to help you get your offshore tax strategy right - by Daniel Feingold

International tax and law specialist Daniel Feingold provides the first FIVE tips to help you make the right tax decisions when investing offshore.

1. Dealing with two tax authorities

You must remember that you will be dealing with two tax authorities. This means that you will need two sets of tax returns, one tax return in the country where the income is generated and the second tax return in the UK for that same income. This will of course cost you more in professional fees, as you will need two advisers.  

The good news is that generally speaking you will get a credit in the UK for any tax that you have paid overseas. So if for example you had paid the equivalent of £100 tax in a foreign country, then this would be deducted from any UK tax liability.

2. Ask the right questions about CGT

It is vitally important to consider how capital gains are going to be treated in the country where you make a qualifying investment. For example, if you have invested in property then you should know whether the country has capital gains tax on property sales, what rate is it levied at, whether it is a tapering rate of tax (which could diminish over time) and whether there is any kind of exempt amount.

Some countries, for instance, have an exemption after you’ve owned a property for say five or ten years. 

3. Consider country specific local taxes and wealth taxes

Always find out and take into account the local taxes, especially if you are investing in property. This may be an annual tax which is the equivalent of our council tax. You also need to consider the taxes on purchase, which generally in Europe are far higher than in the UK.  We have stamp duty at a maximum 4% and yet in other countries rates on transfer or purchase in effect, can vary at rates of up to 12%.  So they’re far higher and they need to be taken into consideration. 

E.G.: In Italy there is a 10% purchase tax on the contract value of the property.

Also, watch out for wealth taxes! In some countries, particularly France and Spain, there is a wealth tax which is basically paid annually on the value of property. This is a tax on people’s wealth. The idea is that people pay an annual tax based on the assets that make up their wealth. In France and Spain this tax can be applied at rates of up to 2.4% on an annual basis and can have a large impact on assets in that country that are generally subject to the tax.

4. Don’t rely on the agent for tax advice

Do not rely on the developer or agent for tax advice.  Remember, they are not tax advisors! A property developer or agent’s objective is to make the sale of the property or asset.  There have been some very worrying signs that I have seen, especially in Spain, where many investors have been given a leaflet or a sheet from the developer setting out the Spanish capital gains tax regime.

Unfortunately, it has been the old Spanish capital gains tax regime that was abolished in 1997, whereby after holding a property for 15 years a sale is totally free from any capital gains tax liability! Actually, Spain now has a system where non-residents are taxed at a 35% flat CGT rate on any capital gains. This is regardless of how long they’ve held the property.  So remember, the only person to take tax advice from is a tax advisor, not an agent or developer!

5. Be wary of the offshore tax company solution

Many people have been approached with solutions highlighting that if property is purchased through an offshore company, then lots of tax saving benefits are available. The claimed benefits often include no local capital gains tax, no local income tax, no local inheritance tax and no wealth tax.  Sadly, this simply isn’t true. 

The only tax that may be avoided by using an offshore company is wealth tax, but many Countries have enacted special rules that attack the holding of local property in offshore companies.

So, it actually ends up being a big disadvantage holding property through an offshore company.

The only time you should consider holding assets through an offshore company is when you have had specific UK and overseas tax advice that clearly demonstrates that this will be to your advantage.

That last comment is perhaps the most important tax tip of all.

Before signing up for an overseas property, invest in some specialist tax advice because the tax traps of overseas property will potentially cost you more than you can gain!