Can we get tax relief on our French mortgage?
Financial Times 14.7.07 by Steve Lodge
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My wife and I are buying a leaseback apartment in France. We hear that new French mortgages will qualify for tax relief on 20 per cent of the interest payments. Can we qualify even though we are UK residents?
Miranda John, international manager at Savills Private Finance, says the tax relief you mention is for mortgages on main homes so as you are not resident in France this will not apply in your case.
But as UK tax residents you will need to consider UK tax implications. Rental income is liable to tax in both countries as the property is in France and you are resident in the UK. Mortgage interest is also tax-deductible against rental income in both France and the UK.
There is a dual French tax treaty so any tax you pay in France will be offset against the tax payable in the UK. Mortgage interest relief is also tax-deductible against any rental income and must be claimed on the appropriate tax return. You will, however, need to prove that you have taken out a French mortgage. If you have an overseas mortgage the charge is clearly registered on the French property and there can be no ambiguity, whereas if you release capital in the UK for the overseas purchase this may not be easy to prove.
Applying for a French mortgage is relatively straightforward and a specialist broker should be able to secure the same rates and terms for you as for a French national. Currently, interest rates are lower in Europe than in the UK with some variable rates under 4 per cent and long-term fixed rates under 5 per cent.
The main incentive for buyers of French leasebacks is that the VAT at 19.6 per cent is rebated. But once you claim back the VAT you enter into the French tax system and will have to submit tax returns. Many developers or management agents offer a tax service and your notaire or a specialist overseas tax specialist can also help.
Home is where the inheritance is
I run my own business which also provides me with accommodation. I inherited my parents' house 15 years ago and have spent periods in it maintaining the property, though it has not been let. I retire soon and am considering selling the house and buying elsewhere. I own no other property. What are the tax implications of the sale?
Tim Gregory, partner in the private wealth team at accountants Saffery Champness, says this situation is a very grey area and you may have a fight on your hands to pay capital gains tax of anything less than the full amount. But the fight is almost certainly worth undertaking.
The fact that you have lived in the inherited house for periods of time demonstrates that you have had two residences for the past 15 years. Generally, you can have only one house qualifying for main residence relief (known as PPR).
While your company will have to pay CGT on a sale of the house that it provides, you will never pay CGT on it, and so ideally you want PPR to apply to the inherited house for the entire period you have owned it.
Where you have more than one residence, you need to elect to HM Revenue & Customs which one you want to qualify for PPR, even if you do not own one or more of them. This election must be made within two years of an alternative residence becoming available to you, so it is 13 years too late to make that election. On its own, this would mean that you would have to pay CGT on the difference between the sale price and the value of the house when you inherited it (the probate value).
However, you may be able to demonstrate to HMRC that the inherited house has been your main residence. It is helpful that you have needed to live at your workplace, even though you own the company. If the reason for living there is the distance from the inherited house, then you may have a better chance of negotiating a smaller tax bill than if it is simply the nature of the work that requires you to live there.
It will be important to establish the dates during which you have lived in the house.
The work-related accommodation may also be helpful in increasing the proportion of your 15-year ownership that might qualify for PPR. Only up to around half of the 15 years could qualify for PPR, but an HMRC concession may allow anything up to the full 15 years to qualify. This could wipe out the whole CGT bill.
How to build up funds for a house deposit
I am a 23-year-old Indian national who has been in the UK for more than three years. I work as a trainee auditor and earn £18,000. I want to accrue funds, without paying unnecessary tax, to help buy a house over here. My current monthly expenditure is £400, I have £6,000 in savings paying 5.5 per cent and a regular saver account paying 8 per cent.
Your savings should be invested as tax efficiently as possible, but you should also consider for how long you can save before you wish get on the property ladder and how much risk you are prepared to take. It is important to have an emergency cash reserve - around three to six months' net expenditure. You should opt for Individual Savings Accounts first and I recommend investing £3,000 (to cover your emergency cash reserve) in a cash Isa. You should be able to get at least 6 per cent gross interest on such an account. Non-UK nationals can still benefit from Isas subject to being UK tax resident - which you are, having been in the UK for at least one tax year.
High headline rates of 8 per cent or so on regular saving savings accounts aren't quite as attractive as they might seem. Only the first monthly payment is invested for the full 12 months to earn the 8 per cent interest. The second month's deposit will be invested for 11 months and therefore earn 11/12ths of 8 per cent, the third 10/12ths, and so on. You can earn an annual 6 per cent-plus by shopping around for a conventional best-buy account.
If you are prepared to invest for five years or more then a stocks and shares Isa is a possibility but you must accept some risk for the potential additional reward.
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