New holiday home tax rules explained
Thinking of buying a holiday home in the Dordogne? The taxman needs to know
HMRC plans to introduce new rules for taxpayers and intermediaries on cross-border tax planning, and which might affect British residents’ who buy overseas properties.
It is not uncommon for those buying this type of property to be offered alternative ways of holding the asset. If the main benefit is the avoidance of tax the details will need to be reported to HMRC.
HMRC acknowledges that one of the primary purposes of their proposals is to refine the requirement to report tax planning where cross-border transactions are involved.
The taxman is aware that historically UK residents have acquired overseas assets with undeclared income and have used offshore structures to hide the asset from the tax authorities. HMRC is concerned that unless they are informed at the time of the transaction there is a risk that tax could be lost.
HMRC is interested in the source of the funds used to acquire the holiday home, how the maintenance costs are paid, whether the letting of the property generates rental income or whether a capital gain is made when the property is sold.
If HMRC is told of the acquisition of the property, this will allow them to consider if there were any concerns with how the taxpayer funded the property and met the running costs.
HMRC also wishes to gather information on tax planning solutions offered to taxpayers to judge whether one of the benefits would be the avoidance or evasion of taxes. The government has undertaken to share this information with other EU member states to ensure that cross-border transactions are not used for this purpose.
Brits with overseas assets have been under the spotlight since the mid-noughties, as HMRC has continued to target offshore income and gains not previously reported. Starting in January 2016, data was gathered by banks under the OECD’s Common Reporting Standard (CRS) for the automatic exchange of information. This required the participating tax authorities to exchange information with the country in which the account holder was tax resident.
HMRC has also cracked down on marketed tax avoidance schemes, and the facilitation of tax evasion by professionals and intermediaries both inside and outside the UK.
The government is consulting on new legislation that will require the disclosure of cross-border tax avoidance arrangements. The requirement to report will apply even when the planning is not adopted, all that is necessary is that the promoter has made the planning available to or discussed it with the taxpayer. All parties involved will need to disclose details of the planning, with taxpayers required to report the planning on their personal tax returns.
Under the terms of the OECD Directive, the relevant tax authorities will use the information to target tax avoidance and evasion and, where appropriate, share the information with EU member states.
The consultation document makes it clear that there may need to be a report made, even where the planning may be in line with and in the spirit of the law. HMRC’s concern is that there is a risk that avoidance or evasion of tax could still be one of the main benefits of the planning.
The introduction of the new reporting requirement for cross-border transactions may lead to HMRC gathering up to date information on Brits who wish to acquire overseas properties. Remarkably, the transaction does not even need to take place. While the legislation is not primarily designed to track where, how and when UK residents acquire assets overseas, there is scope for the powers to be used in this way.
The scope of the new powers is a real concern. ‘Big Brother’ is watching.
John Hood is a tax partner and head of the Tax Dispute Resolution team at Kingston Smith