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International mortgages - Do I need one? One of the primary considerations, when purchasing property either domestically, or on an international level, is raising the necessary amount of money. Unless you happen to have enough ready cash just lying around (down the back of the sofa, for instance…), chances are you will need to take out a mortgage. There are several options: 1) Taking out a mortgage with a local bank. You may, however, find yourself constrained by exchange control rules (where they still exist). Even in jurisdictions where exchange controls have been lifted, such as Spain, you may find that domestic banks and building societies will charge non-resident foreign nationals higher rates of interest. 2) Taking out a mortgage or loan from a bank or building society in your country of origin. 3) Taking out the mortgage offered by the developer. Sometimes, with new complexes, developers will offer their own mortgages in order to increase sales 4) Taking out a mortgage with an international institution. Even if you are confident in your understanding of the processes involved in purchasing property in your country of choice, this is probably the most sensible option, for the simple reason there are likely to be issues involved in dealing with an expatriate client which a local provider may not have the expertise to cope with. There are a growing number
of international mortgage brokers and relocation specialists offering international
products tailored to meet the needs of expatriate property investors, and
although it is possible to go it alone, you may find that enlisting the
services of a professional company experienced in dealing with international
markets eases a purchase considerably, as they are likely to be well versed
in the processes and legislation applicable to non-resident purchasers,
and can often mediate between yourself and the local entities involved.
What sort of mortgage? There are several different sorts of mortgages available, so you should really shop around to make sure that the international mortgage broker or IFA you choose to handle your affairs offers a wide range of products, from a varied group of international providers. Below is a basic rundown of the different types of mortgage available, although not necessarily all for your country of choice, so you need to check: 1) Repayment mortgages. With this type of mortgage, you pay a little of the interest and a little of the capital off each month, so that at the end of the term, the debt has been repaid completely, and the property is yours. Although in the early years, very little of the capital is repaid, as the amount of capital owed decreases, so does the amount of interest which accrues, so towards the end of the term there is a kind of 'snowballing effect' in terms of the amount of capital which can be paid off at a time. This is generally considered the safest bet in terms of mortgage loans, although it is usually more expensive than an interest only mortgage. 2) Interest only mortgages. With one of these, your payments to the lender simply pay off the interest on the loan, and the capital is paid off at the end of the term. Monthly payments are (obviously) lower than they would be for a repayment mortgage, and the idea is that you put the money you save on repayments each month into an investment fund, so that by the time the term ends, you will have accumulated enough to pay off the mortgage. Or that's the theory. If your investments do well, you could be in a position to repay the mortgage early, or have some money left over at the end of the term. However, in order for that to happen, your investment fund needs to bring you returns which are higher than the interest you are paying on you mortgage, otherwise there will be a shortfall at the end of the term. 3) Endowment mortgages. These used to be used quite a lot in conjunction with interest only mortgages. They are designed to guarantee that if you die before the end of the term, the mortgage will be repaid, and to provide a means of paying off the capital owed at the end of the term. However, there is no guarantee that an endowment will repay the loan in full at the end of the term, and as with many pensions and life assurance products, there are high 'front-end' costs. Where there is preferential tax treatment for life assurance premiums they may still be of some use, but as the majority of expatriates are excluded from the benefits of domestic pensions investment, they are rarely suitable. Usually, international mortgage
providers will offer both repayment and interest only mortgages at fixed,
variable, capped and sometimes discounted interest rates, all of which
are fairly self explanatory, and have specific benefits and disadvantages.
International home-owning - The logistics… Several of the problems you may encounter if you decide to purchase property in a country other than that in which you are resident are likely to be logistical. Okay, so you can afford to take time off to find a property in your country of choice, and maybe even visit a few times a year, but that is likely to be all. This is where designated international organisations come into their own. For example, in Spain, the completion of a mortgage must take place in front of an appointed notary, and all parties to the purchase including the vendor, lawyers, the buyer, and a representative of the lender. However, if you are unable to be there due to previous commitments (or simply geography!) an international broker should be able to help you obtain a power of attorney, allowing someone else to sign on your behalf. Renting your property out when
you are constantly on the move can be a bit of a headache, but hiring a
letting agent qualified in dealing with international clients could take
the pressure off. They can help you find suitable tenants, prepare a letting
agreement, take the security deposit, deal with utilities bills, collect
the rent (the important bit!), visit the property on a regular basis, check
empty properties, and undertake property maintenance during a tenancy.
Costs Ignoring taxation (which we will deal with in more detail later), and quite apart from the cost of the mortgage itself, there are other expenses to bear in mind when arranging a mortgage for your investment property, and these vary considerably from country to country. For example, in France, the fee level can be affected by the age of the property (as newer properties attract lower charges), the number of people involved, and how many outside agencies (e.g. estate agents, lawyers, brokers, letting agencies) are involved. If buying a property in France, (over and above the broker or IFA's fee) you should be prepared to pay:
The tax implications of international property investment Capital acquisitions tax, capital gains tax, inheritance tax, gift tax, property transfer tax, VAT, stamp duty, tax on rental income, share transfer tax, land tax…no, wait a minute. Come back…sit down and take deep breaths - I didn't mean to frighten you. Although the majority of countries impose some kind of taxation on international property investment by foreign nationals, it would be a rare (and unpopular!) country which levied all of the above. The tax implications of your foreign real estate investment will vary in complexity and impact according to where it is located, and to a certain extent, what you intend to do with the property when you have purchased it. As a general rule, in the majority of countries if the tax authorities believe that the purchase was made as a 'commercial' investment (i.e. if you habitually buy, renovate, and sell on, or if you have bought undeveloped land with a view to building a housing complex or leisure facility), they will view you as a property dealer, and tax your investment accordingly at a higher rate. Where taxes are levied on international property investment, they will usually fall into the following categories: 1) Taxes on the purchase, acquisition or transfer of the property or land, such as capital acquisitions tax, inheritance tax, stamp duty and property transfer tax. 2) Taxes on the ownership of and/or residence in the property, such as local and national property taxes, and land tax. 3) Taxes on rental income. (If you choose not to live in the property, be aware that there may be additional taxes imposed on non-resident or foreign landlords. Not necessarily devastating, but still a factor to be considered if buying to let overseas.) 4) Taxes on disposal of the property, such as capital gains tax, gift taxes, and death duties As previously stated, property taxation regimes vary widely from country to country, and you may feel that low, or no-tax jurisdictions are the ideal choice for you. However, in some (although not all), due to limited resources and space, property investment opportunities are limited only to the very wealthy, who must be willing to contribute substantially to the local economy, and purchase luxury real estate. Other jurisdictions limit the number of foreign nationals permitted residence or work permits in order to maintain the standards of living, and protect the employment chances of existing residents. Governments in non-tax haven countries tend to impose fewer restrictions on property purchase for investment or residential purposes by foreign nationals. However, in such countries, the likelihood is that you will face more taxes on your investment. Some property investors choose to purchase international property via an offshore company or trust in order to bypass some of the taxes levied in high tax countries, and although this can be a valid option, it is not suitable in all circumstances. We will discuss this in more detail later. Where you decide to purchase property is, in the final analysis, a personal choice, and will need to be based on your circumstances, resources, and eventual goals. If you have your heart set on retiring to a beachfront house in the Bahamas, you are unlikely to be satisfied with a one-bedroom apartment in Cyprus. If, however, you are looking to subsidise your income by providing affordable housing to expatriates and other professionals, the latter would be ideal. It all depends… Although tax shouldn't necessarily be the most important consideration when choosing a property, there is no denying that it's certainly up there at the top of the list for most people. Probably the best way to illustrate the variety of taxes, and the way in which they are imposed, is to look at three countries with very different tax regimes: Greece Currently in Greece, purchase, inheritance, possession, use, and donation of property are taxable. Greece has a unified inheritance and gift tax on property acquired as the result of a gratuitous lifetime transfer or death, with the liability resting on the transferee, or beneficiary of the property. Property situated in Greece, and moveable property situated abroad owned by both resident and non-resident foreign citizens is liable for inheritance tax. Non-residents may wish to reduce their tax burden by purchasing Greek real estate through a non-resident company, as then the asset held by them is a shareholding in a foreign company, which is not subject to inheritance/gift tax under Greek law. However, this solution will provide no protection for Greek residents, as the shares themselves would be subject to the unified tax. Property transfers are subject to a 9% tax for property up to GRD 4 million (approximately $10,262) and 11% for any amount beyond that. There is also a municipal transfer tax imposed on top of that equal to 3%. Ownership of Greek real estate by individuals is taxed at a rate of between 0.3% and 0.8% on the value of the property, but with a deduction of GRD 69,000,000 (approximately $180,000) plus a further 0.25-0.35% real estate duty known as the TAP, on the whole value of the property. Rental income is subject to Greek income tax (calculated on a progressive scale from 5% to 42.5%) and also stamp duty calculated at 3.6% of the actual rent, and payable on a monthly basis. However, no VAT is charged on payments, and there are no plans to introduce it while stamp duty is payable. There are no capital gains tax implications following the sale of a property, but the proceeds from a disposal of real estate which takes place 5 years or less before death are deemed to be part of the taxable assets of the deceased, although this presumption can be challenged by the beneficiaries of the estate. Tenerife Tenerife is the largest of the Canary Islands, which although they are autonomously governed, for taxation purposes generally fall under Spanish jurisdiction (although a great deal of autonomy is afforded to the regional governments). When the purchase, acquisition, or transfer of Spanish property takes place, one of two taxes will be payable. VAT is levied on the purchase of newly constructed property and land immediately available for construction. (In the Canaries there is an Indirect General Tax for the Canary Islands, but it is similar in many ways to the Spanish VAT). In situations where VAT is not levied, property transfer tax at a rate of 6% of the purchase price (Escritura value) is levied instead. When buying newly built property, stamp duty (IGIC) at a rate of 5% is also payable. However, there is an exemption for property investors who create employment, whereby transfer tax and IGIC are not payable. (Corporate income tax can also be very low in these cases). Liability for inheritance tax is dependent on residence status, and for non-residents is payable only on Spanish sourced income or gains. The level of the tax varies according to the degree of kinship between the deceased and the beneficiary, and the previous level of wealth of the beneficiary. There is an annual real estate tax of 4% of the Cadastral value of the property payable for both residents and non-residents, and as in France, a 3% tax levied on the purchase of Spanish property by non-resident companies (although there are certain situations in which this doesn't apply, and property purchased by a Spanish company, even if all of the shareholders are non-resident, is exempt from this). Non-resident property purchasers must also appoint a resident fiscal representative, and submit a wealth tax declaration. Resident property owners are exempt from wealth tax on Spanish assets below a certain threshold, but non-residents must pay a 0.2% wealth tax on the total value of their Spanish assets. Rental income from property obtained by a Spanish non-resident is subject to taxation at a rate of 25%, although maintenance costs and expenses incurred as a result of obtaining the income (for example interest paid on mortgages and loans) are deductible. Capital gains tax on the sale of a property is levied on a progressive scale of between 2% and 40% of the difference between purchase price and selling price, although the rate is usually 20% for residents and 35% for non-residents. The Cayman Islands At the other end of the spectrum lie the Cayman Islands. Other than import duties (imposed at various rates), and a stamp duty rate of 7.5% on real estate transfer and 1% on legal documents pertaining to valuable assets and transactions, there are no direct taxes imposed on Caymanian residents or non-residents. There are no restrictions on foreign ownership of real property in the Cayman Islands as such, and due to the lack of direct taxes, it is equally possible to buy a condo and rent it out for the majority of the year, or to buy an undeveloped piece of land, and leave it undeveloped until you have the time and resources to build your dream home. If you choose the former option, your rental income will be free from income tax (in Cayman at least), and the absence of property taxation, or of any rules stipulating the time frame within which land must be developed, means that the latter is in essence a 'maintenance free' investment until such times as you choose to develop the land. However, achieving residence
and/or a work permit can be problematic, as access to employment is fairly
restricted for foreigners. An expat wishing to apply for permanent residence
in the Cayman Islands on retirement should be prepared to invest at least
$180,000 in local enterprise or real estate. Caymanian status is usually
granted on a quota basis to citizens from the UK and British dependent
territories, and certain other countries including the United States, Eire,
Australia and New Zealand.
Offshore Companies and Trusts As you can see from the two examples above, the country in which you choose to locate your property (as well as your country of residence if different) will almost certainly have an impact on the amount of tax payable by your estate in the event of disposal of the property, or of your death. In order to alleviate some of the tax consequences involved in the ownership of foreign real estate in high tax countries, some investors may choose to purchase property through a non-resident company or trust, often established in a low tax jurisdiction. Trusts in particular can sometimes be effective in protecting the investors and their beneficiaries from punitive estate and death duties. In countries such as Greece, where there are no provisions in the country's tax legislation to facilitate the taxation of the underlying assets of a foreign company, an offshore company can often be a tax efficient and effective vehicle in which to hold property investments. However, although in some countries (for example Spain, Portugal, and Australia) non-residents are encouraged to make their real estate investments through an offshore company, this form of tax planning may not be effective (or even possible to implement legally) everywhere, so again it depends on your chosen location. In France, for example, legislation was enacted in 1983 to prevent property investors from avoiding registration and wealth taxes. The tax authorities complained that when French real estate was purchased by legal entities in offshore jurisdictions, it was impossible to levy the aforementioned taxes on the sale and transfer of shares within these entities because they were unable to discover the identity of the shareholders, due to the stringent secrecy laws in place. They therefore demanded that a 3% tax be levied on the fair market value of real estate in France owned by these companies. The tax was later ruled by the supreme court to have violated the non-discrimination clauses contained in some of France's bilateral tax treaties, however, and so was modified. As it stands now, foreign entities which own real estate in France (either directly or indirectly) are only subject to the 3% tax if the value of such real estate represents 50% or more of their French assets. French residents and foreign companies registered or resident in countries with which France has a double tax treaty are also exempted, provided they furnish the French tax authorities with the identities and addresses of the shareholders on an annual basis. Although double tax treaties are of more interest to corporate and commercial international property investors, they can sometimes have an effect on the amount of taxation that an individual's real estate investment income is subject to, especially if they are resident in a country which taxes world-wide income, or are planning to purchase property in a country which does this. Certain double tax treaties may enable you to claim tax paid on rental income from overseas against your domestic income taxes, or to receive dividends at a lower rate of withholding tax. However, the number of different tax treaty models, and the sheer volume of treaties in force on a global level make it impossible to give a comprehensive picture of the likely consequences of a double tax treaty in any given circumstances. We would therefore strongly recommend that you take advice as to the potential implications from a qualified professional before making a decision as to the location of your investment property. So- Is it worth it? The answer to this question will depend on your personal circumstances, what you hope to achieve by investing, and how much you can afford to spend. There is a vast spectrum of opportunities available within the property investment field, ranging from the ridiculously expensive to the nicely affordable, and with the help of an international broker or IFA, you should be able to find something suited to your tastes and pocket. Investing in a 'real' asset,
as opposed to an intangible one can sometimes provide more stability, and
property tends to hold its value better than other commodities. You do
need to be aware that the overall liquidity and health of the property
markets, and possible fluctuations in interest rates and inflation can
affect the value of your investment, but generally it is possible to achieve
a very healthy return on your investment.
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This
article by by Caroline Maxwell first appeared in the June 2001 issue of
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