Tax charge fear for owners By Lucy Warwick-Ching
Financial Times Published: October 22 2004 16:48
Thousands of Britons with holiday homes abroad could be forced to pay hundreds of pounds a year in tax even though they make no money from their property.
Many people who bought property in Spain, France and Italy through a company to avoid inheritance rules in the country of purchase could be liable for tax as if they were receiving payments equal to the notional rent on the property.
In other words, use of the property would be taxed as a benefit in kind.
The problem has arisen because, unlike the UK, some European countries dictate to whom you can leave your estate in a will. French inheritance law, for example, requires certain proportions of a person's estate to be left to their spouse or children.
"The way to get round this has been to own the property through a company," says John Endacott at the Tax Faculty of the English Institute of Chartered Accountants. "However, the problem is that this gives rise to other tax issues both in France and the UK."
The company structure most often used in France, where 500,000 British people are thought to own second homes, is the Société Civile Immobilière (SCI).
"The principal benefits for the UK resident and domiciled individual is the ability to avoid the forced heirship rules which operate in France, which force owners to pass the property onto their children on death," says Sheena Hay, senior tax manager at accountants Grant Thornton. "With an SCI, ?shares' in the property can be disposed of in accordance with the owner's wishes."
However, the UK Inland Revenue interprets the scheme to mean that the owner of the property is now a director of a property company. As such, the owners of homes through companies are regarded as receiving benefits in kind from the company and taxed accordingly.
The Inland Revenue interpretation follows a case of tax evasion in the House of Lords in 2001, in which Brian Allen was deemed to be a shadow director of offshore companies from which he derived benefits.
It made no difference that he was not appointed as a director, nor that he had provided all the funds to the offshore company to buy the property. The Revenue made an example of him and criminal charges were brought, resulting in a prison sentence for failure to disclose the existence of the company.
"As a result of this case, there is now the very real risk that the Inland Revenue may charge a benefit in kind for the property," says Simon Rees, senior tax manager at professional services firm PwC. "But many of those people who bought properties through a company were not aware that this could incur UK tax, so are unlikely to include it on their tax returns."
The benefit in kind is based on something known as annual value of the property and is calculated on the basis that the property is made available to you. But experts say that the definition of "made available" can be much wider than simply the time when you stay at the property. Hay says that, for a property worth £150,000 when first occupied and with an annual rental value of £4,500, the benefit in kind would be about £8,250 each year.
"You can deduct amounts paid for the use of the property," Hay explains. "Say the company might use £3,000 for the running costs and you end up with a benefit of £5,250, and thus in the hands of a higher rate taxpayer, a tax bill of £2,100 simply for using your own property." She says there is a way of reducing the tax liability. "You can restrict the amount of time the property is treated as being ?available' to you by drawing up agreements that mean you have to ?apply' to stay at the property. This should enable you to reduce the taxable benefit." The tax rules are still unclear and some accountants hope the legislation will be changed. "We believe it's unfair to tax ordinary holiday home owners," says Rees. "This is potentially a situation whereby people who have no income and no gain are being asked to pay a tax charge." He says PwC has asked the Revenue to clarify the situation, but is still waiting for final details.
The Inland Revenue says: "There has been no change in the law. The accountancy profession has just been looking for clarification of the existing law."
Accountants are advising people to put a note on their tax returns to tell the Revenue that they know about the possible tax liability and are not trying to avoid paying it.