Revenue & Customs thinks that many families are using their overseas homes to dodge inheritance tax and has warned that people could face prosecutions and fines if they fail to declare them properly.
Even families that have settled overseas could face an official probe: while most imagine that once they have emigrated they are safely out of the clutches of the UK taxman, the truth is that many will still have to pay inheritance tax (IHT) to the British authorities.
Anita Monteith at the Institute of Chartered Accountants in England and Wales said: “If you have inherited foreign property and not declared it, the Revenue is saying we are coming after you. Even if you have failed to pay the tax accidentally you should be worried.”
About 250,000 British residents own property overseas, according to the Office for National Statistics, and a growing number are moving abroad permanently. About 200,000 Britons emigrate every year.
One in five of us — nearly 10m adults — is considering fleeing the country for a new life in foreign climes, according to a recent poll by researcher ICM, and Britain’s high taxes and soaring cost of living are the prime motivations.
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David and Susan Le Cuirot from Fleet, Hampshire, are typical. They plan to retire overseas after buying a three-bedroom villa near Paphos, Cyprus.
David Le Cuirot, 49, an IT consultant, said: “I’m disillusioned with Britain and don’t think it has anything to offer in retirement.
“I can run a house in Cyprus for £1,200 a year, which wouldn’t pay half my council tax in this country.”
There is widespread confusion about how British income, capital-gains and inheritance tax apply to foreign property, however, as shown by the government’s latest crackdown.
UK inheritance tax, which is levied at 40% on assets above £285,000, will apply to your worldwide assets, including your home, for as long as you remain “domiciled” in the UK.
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The law says you normally take the domicile of your father, and it is extremely difficult to revoke it even if you emigrate (see below).
Justin Rix at Grant Thornton, an accountancy firm, said: “It’s a common misconception that if you move overseas permanently you are no longer liable to UK inheritance tax.
“Even when you are living in a foreign country, your family may be subject to British inheritance tax on your death.”
And tax officials are getting tougher. In a newsletter to tax advisers last week, they warned: “For the remainder of 2006 we will be paying particularly close attention to foreign assets. Where it appears the accountable people have been negligent we will consider whether a penalty is appropriate.”
If a return has been filed, officials will check whether household contents have been included as well as the value of the property itself. They will also investigate whether the foreign surveyor has undervalued the property.
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Accountants also warn that British people who own property abroad through an offshore company also need to beware of the UK tax authorities.
In popular destinations such as France, Spain and Portugal it has been common to use offshore companies to avoid local taxes and inheritance laws. But the Revenue recently said homes owned by UK residents through a company structure may be taxed as a benefit in kind. The charge would be based on an assumed value for the property, and can run into thousands of pounds. If you want to avoid the tax, seek specialist advice from independent solicitors.
Accountants say it is easier to escape capital-gains tax on your assets by moving abroad because it relies on the more flexible concept of residence. You may be able to apply for tax residency overseas if you stay there for more than six months a year. You then pay local rates on most of your worldwide profits.
A popular ruse used by taxpayers about to make a large profit, say through the sale of a business, is to move overseas for several years. It used to be possible to do so for only a year, but now there is a minimum of five years.
It is not even necessary to move to a tax haven like Bermuda or Dubai; Canada and Australia are also potential destinations, because of the way taxable gains are calculated. Your gain is based on the difference between the value of the asset when you became resident and the value when it is sold. If you sell soon after you become resident, there will almost certainly be no tax to pay.
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If you are retiring overseas, there are plenty of countries with low local taxes on profits and overseas income. Several Asian and Central American countries, such as Malaysia, Belize and Panama, have created tax and residency breaks to attract affluent tax exiles.
Dubai, where there are no taxes at all for individuals, is also keen to attract wealthy residents from overseas.