Forewarned is forearmed in many walks of life, not least in the realm of the taxman. Taxes are enough of a pain here in Britain, but they also need to be taken into account when buying abroad?something many people do not find out until it is too late.
?We found it horribly complicated, and ended up paying a great deal more than we expected to,? says Helena Frith Powell, author of More France Please, a book documenting her experience of moving to France five years ago. ?You must have an accountant and get as much advice as you can before you buy. It can save you thousands of pounds,? she stresses.
The French tax system is theoretically centralised, but location will ultimately determine how much you pay. Firstly there is the notaire?s fee when you buy, which will be 6 to 8% of the sale price on an old château, but you will be exempt from paying VAT, which is some comfort. There is a small land registry tax to be paid.
Once the place is yours, there are three annual taxes to pay. The first is the taxe d?habitation, a local tax. The amount you pay is determined from the cadastral value of the house, which is based on size and location rather than market value. This tax is generally held to be reasonable, particularly in rural areas. The taxe foncière is also paid annually by the owner of a property but is quite low, commonly about ?750 per annum. In France there is also a wealth tax (impôt de solidarité sur la fortune), which is paid by owners of property worth in excess of ?732,000. Income tax for non-residents does apply, but UK residents do not have to pay it, although principal residents of many other countries do.
The last tax worth mentioning in France is the impôt sur les successions, or inheritance tax. How you buy your property can have a huge financial effect on what happens to those to whom it is gifted. Bill Blevins, international tax specialist with Blevins Franks International, says: ?It is worth finding out about the best way to register your property, and good advice pays off in the end.?
In short, French tax law is a minefield. As Mr Blevins points out: ?I have a farm in France, and it is a wonderful country, but no one wants to be a tax resident there.? For further insights, Blevins Franks Living in Guides to France, Spain, Portugal and Cyprus are invaluable (020?7336 1007).
In Spain, things are rather easier. You must pay an income tax (impuesto de la renta), and a wealth tax, or patrimonio, which is organised on a sliding scale climbing to 2.5% on properties over ?10.7m. The base for the income tax is 1.1% of the cadastral value, which, like in France, is determined on size and location. Non-residents pay 25% of the tax base, so if the cadastral value is ?1m, the base will be ?11,000 and the annual income tax will amount to ?2,750.
If you are not renting a property out, these two taxes can be paid together. If you do rent the property, the tax rate you have to pay is 25% of the annual rent and you can deduct absolutely nothing, even if you spend money on renovation work. This figure is so high that it puts many people off.
Non-residents who sell their property are also subject to 35% capital gains tax in Spain, but they can detract the costs of improvements they made made while they owned it.
Spain also has a local tax, impuesto sobre bienes inmuebles, based on the cadastral value of the house, but rates are reasonable. ?Expect to pay around ?800 on a large rural property,? advises Mark Stucklin, whose website www.spanishpropertyinsight.com is an absolute goldmine of knowledge on property in Spain.
Across the Atlantic, tax is a difficult concept to get to grips with, as it changes wildly from city to city: ?In America it completely varies. Here in New York City, we pay one rate, but then in East Hampton it will be utterly different,? says Roberta Golubok from Sotheby?s International Realty (020?7495 9580). ?What we do with tax questions [from buyers] is refer people to their accountant or their lawyer, just to make sure everything is clear,? she adds.
A few examples may help to illustrate how different areas and states have different priorities. In New York City, you pay a mansion tax when you buy property in excess of $1.5m, but there is no stamp duty. The mansion tax is set at 1% of the closing price.
In East Hampton, by contrast, when you buy a property costing more than $250,000 you must pay an amount into the Community Preservation Fund, which is there to buy and preserve undeveloped land in the area. This is 2% of the closing price, and therefore steep at the top end of the market.
In Florida the rules change again: there is no income tax, and no mansion tax, but for non-residents there is also no cap on the percentage the state can raise from you in property taxes, making Palm Beach a potentially expensive choice.
Once a purchase is on the horizon, it is worth calling a law firms or a taxation expert?such as Twomey Latham Shea Kelley, which specialises on the Hamptons and New York, or Becker & Poliakoff in Florida?because agents do always have all the information on the ins and outs of what you need to pay.
