Hot spots, cool buys

A great way of passing the dark winter months is considering in which hot country you would buy your holiday home. Then, if you are sensible and want a double whammy way to cheer yourself up, you can choose your holiday destination based on where you would live, and then you could even plan a sightseeing property trip during your vacation. But to bring yourself down to earth, before choosing a home, give some consideration to a country’s cost of living and tax laws.

The top five most popular places for Brits buying a second home within Europe are Spain, Andorra, France, Portugal and Italy. Within Spain, the Costa del Sol and Costa Blanca are the most popular areas, closely followed by Majorca, Minorca and Ibiza, along with the Canary Islands — timeshare heaven or hell, depending on your viewpoint.

The south of France attracts the largest proportion of buyers in France, while the Algarve is the favourite spot in Portugal. Brits buying in Italy head for Tuscany and Umbria, as well as the lakes. Fast catching up is Cyprus, which has seen a big boom in recent years with buyers snapping up properties in Paphos (Aphrodite Hills), Larnaca and Limassol.

“Although Spain is number one on the list of the nation’s top five EU hot spots, for purchasing a second home abroad, France is still the better option, pound for pound,” claims Stephen Herring, a tax partner at accountant BDO Stoy Hayward.

“French property will cost you less in local taxes, stamp duty and registration fees,” Herring says. “But if you are planning on buying a new-build property, where VAT is added, then it may be better to head for Spain. You would have to pay a hefty £14,700 VAT on a new build worth £150,000 in France, which is almost three times as much as the VAT for a new build of the same value in Spain.”

One thing is certain: buying abroad is, almost without exception, more expensive than buying in the UK, which has the lowest transaction costs in Europe. BDO Stoy Hayward reckons that total costs including local taxes, legal and registration fees, stamp duty (or equivalent tax), deeds transfer fees, VAT and wealth tax (Spain only) for buying a £150,000 property in France, Spain, Portugal, Italy or Cyprus range from £13,305 in France to £20,325 in Italy.

The BDO Stoy Hayward calculations are interesting and bring home to those considering buying a second property in Europe just how much cash you need over and above the purchase price to complete the transaction.

But they are only half the story. On top of taxes and fees, you will probably have to pay estate agents fees, which are much higher in Europe, often 10 per cent or more, although some agents may be prepared to negotiate if they think they might otherwise lose the sale. Very often both buyer and seller pay the agent.

Generally speaking, it will pay to remain resident for tax purposes in the UK, where income tax is lower than in most parts of Europe. French residents, for example, may be taxed at up to 52 per cent on income; capital gains tax is a consideration, too, as well as local “wealth taxes” and inheritance tax (IHT). For example, if a UK resident dies, he or she will be liable to inheritance tax on their worldwide assets — including any holiday home. However, Italy has no inheritance tax on assets left to a wife, children or other close relatives. So, if you start to feel a bit peaky, it might pay to sell up and move to Italy. You have got to survive three years in Italy to avoid IHT in the UK.

In France and Germany, IHT is paid by the beneficiary and relatives — including the surviving spouse — who pays 5 per cent on legacies above €137,000, rising to 40 per cent on legacies of €2.2 million or more. However, nonrelatives pay up to 60 per cent.