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What a beautiful dream it would be to have your own holiday home – probably somewhere in the sun. If your dream is not to turn into a financial nightmare, you should make sure that you are well prepared for the potential pitfalls.
The first step is to consider whether or not you can afford another property. Some will be able to buy outright but most will need to take out a mortgage. If you have a mortgage then you will have repayments to make and, of course, these too will have to be financed.
So immediately you are faced with a number of decisions:
• Do you use your own home to provide security for the mortgage?
• Will you need to rent the property to provide an income to make the repayments?
• If the property is abroad should you borrow in sterling or in a foreign currency?
All of these are important practical issues and getting them wrong can be expensive; it can also have tax implications.
It will often be easier to release some of the equity of your home for the loan where the property is abroad but sometimes there can be local tax advantages in having the loan in the foreign currency secured on the property. This is often the case in France for instance. You need to offset any potential savings against the undoubted convenience factor. This is in addition to comparing interest rates and taking a view on exchange rates etc.
If you plan to rent the property, then there is likely to be income tax to pay; if the property is abroad it is not only British tax that is an issue. You will certainly have to account to the taxman in both countries even if there is nothing to pay. You will be able to claim most of the expenses connected with the letting against your tax and, in the UK at least, some of the mortgage interest even if you are using your home as security. It is important that you keep any receipts for expenditure you wish to claim. Remember that foreign rents are taxable here even if paid into a foreign bank account.
When you sell the property any increase in the sterling value is likely to be subject to Capital Gains Tax – even if there is no gain in the local currency. Sometimes you can take steps to minimise or even avoid this and it is best to discuss this when the property is being purchased.
Finally, there is always the unpleasant possibility that you may die owning the property. Inheritance Tax in the UK is an obvious issue. If the property is abroad there can also be foreign death duties. In addition foreign laws sometimes stipulate to whom property must pass on death – you may not have the freedom of action that exists here. It is usually possible to avoid those problems if the ownership is correctly structured.
Owners of foreign properties should also generally make foreign Wills and should certainly take local legal advice when they buy – do not rely on what the developer tells you!
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