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Tax Implications of Purchasing a Property Overseas

Article written by Diarmaid Condon in 2008

As a nation we’ve been purchasing overseas property in some quantities for quite some time now. It is therefore strange that so many of us have no real idea of where we stand in relation to payment of taxes both overseas and here in Ireland. We don’t have space to cover all the overseas destinations but, in this issue, we’re going to go through some of the issues that will affect you here in Ireland when you purchase, rent or sell an overseas property.

In the main you will be liable for Irish tax on both Irish and foreign source income for any year in which you are considered an Irish tax resident. However, for any year during which you are resident but non-domiciled (you haven’t lived in the country for that year), or resident but not ordinarily resident (you are living here but normally live outside Ireland), you are still chargeable to Irish tax on your Irish and UK source income. All income from other countries is taxable only to the extent that it is brought into Ireland. This is what the Revenue refers to as the ‘remittance basis’ of taxation. This does not apply to rental income from properties situated in the UK. If you are taxed on the remittance basis you are taxable on the full amount remitted with no deductions allowable against that amount.

You are normally considered resident in Ireland if you spend more than 183 days here in that tax year or 280 days over a period of two years. You will not be considered tax resident until the second year in the latter case.

‘Ordinarily resident’ refers to your residence over a number of years. If you remain here for three consecutive years you will become ordinarily resident from the beginning of the fourth year. You cease to be ordinarily resident having lived elsewhere for three consecutive years.

Domicile is considered ‘residence in a particular country with the intention of residing permanently in that country.’

Tax Implications of Acquiring a Foreign Property

You are not required to notify Revenue if you buy a foreign property. However, you will normally have to open a bank account in the country where you purchase the property. This triggers a requirement for you to notify Revenue on your tax return in the year in which this account is opened.

According to Revenue; “In any year in which you open a foreign bank account you are a ‘chargeable person’. This means that you are required to file a tax return in which you must declare, among other things, the name and address of the financial institution where the account is located, the date on which the account was opened, the lodgement made to open the account and details of any intermediary (individual or company) in Ireland who assisted you in opening the account.”

There is also a legal obligation to ensure that any money used to purchase the overseas property has been, or will be, fully declared for tax purposes and that all due taxes have been paid whatever the source of the money. If you have borrowed money to buy the property, the money used to repay this loan must also be declared.

One of the most often asked questions is whether an overseas buyer can claim mortgage interest relief on a loan taken out in Ireland and secured on an Irish property, used to purchase a foreign property.

A common misconception is that you can claim mortgage interest relief on a property purchased overseas. This is the relief given for interest paid on a loan to “purchase, improve, repair or develop a person’s sole or main residence.” It is deducted by the mortgage lender under a system called 'Tax Relief at Source' (TRS). You can only claim mortgage interest relief on your sole or main residence, and only if it is located in Ireland, including Northern Ireland, or Great Britain. The residence can also be the sole or main residence of your former or separated spouse or a dependent relative who occupies the residence rent-free.

The Revenue states; “Mortgage interest relief via TRS cannot be claimed for interest on a loan used to buy a holiday home, an investment property, loan/debt consolidation or for any other purpose which does not qualify for the relief. If you make a false or incorrect claim for TRS, you will be liable to pay back the relief wrongly claimed, as well as interest and penalties.”

You can, however, claim interest as a deduction against income on a loan taken out to improve or repair a rental property wherever it is located. You should note, however, that the borrowed money must be used to directly purchase, improve or repair the property. If you purchase a foreign rental property through a company, which is a necessity to purchase a property as a foreigner in many countries, you will not be entitled to this interest relief. This is because you are purchasing an interest in the company rather than an actual property.

If you inherit an overseas property it is subject to Irish capital acquisitions tax (CAT). You’ll need an accountant to calculate the amount payable as it depends on your relationship to the person from whom you inherited, or who gifted you the property, and any previous gifts or inheritances will also need to be taken into account. The only Irish double taxation agreements (DTA’s) that cover CAT are those with the UK and the USA. The USA version only covers federal equivalents of CAT, any similar taxes imposed by individual states are not covered. If your gift or inheritance is subject to the equivalent of CAT in other jurisdictions with a DTA you can still claim a credit for the tax paid in that foreign jurisdiction, up to the amount of your Irish CAT liability. For inheritances in countries without a DTA the revenue will make an allowance for the tax paid, but not on a credit system, so you end up paying more tax than you would with a DTA country. Many countries do not actually charge inheritance tax but you are still liable in Ireland.

Because so many people now purchase their first property overseas rather than in Ireland, another common query is in relation to qualification as a first time buyer in Ireland for stamp duty purposes if you have purchased abroad. The Revenue says; “A person who has previously purchased a property, either in Ireland or abroad, is not entitled to claim first time buyer relief. If you make a false or incorrect claim for the relief, you will be liable to pay the stamp duty underpaid, as well as interest and penalties.”

Purchase of a property overseas often entails purchase through a company, as many countries will not allow foreign citizens to purchase property in their own right. Monies generated within a company are generally only subject to tax in the jurisdiction in which the company is based. When money is taken from the company, however, an Irish tax liability will arise. Depending on the nature of the company and the arrangements you have with it, money received by you from the company may be treated in different ways for Irish tax purposes. It may, for example, be treated as receiving distributions from the company rather than rental income from the tenants of the property. Distinctions such as this can be considerable as they can mean the difference between being charged 20% capital gains tax (CGT) or 41% income tax.  If you occupy the property rent-free or at a rent that is below market value, you may also be treated as receiving a benefit-in-kind from the company which may be subject to Irish income tax. It is advisable to consult a tax advisor if you have any queries about what liabilities you may have arising from ownership of a foreign company.

The Revenue has provided a significant document on the implications of overseas property ownership for Irish citizens, it can be found at www.revenue.ie/index.htm?/leaflets/foreign-property-ownership.htm. 

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Further Information:

For a selection of property from around the world click here. 

For a listing of agents selling overseas property click here.

For independent articles on overseas property click here.

For advice on purchasing property overseas click here.

For news on the world of overseas property click here.

For new releases and product updates from agents around the world click here.

For a list of upcoming overseas property exhibitions around the country click here.

You may also enjoy a visit to the OverseasCafe.com's topical blog at http://overseascafe.blogspot.com.

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