The Sunday Times 02.08

The Taxman is Turning his Eye...
(February 2008)

The taxman is turning his eye on the foreign property market, so make sure you're in the clear, advises Siobhan Maguire.
Rumours were rife at the end of last year that the Revenue Commissioners would be taking a closer look at the overseas property market and, in particular, would investigate buyers.

The latest move is an attempt to tidy up Irish investors' offshore tax affairs. Amid growing concerns that some properties overseas are being used to evade tax, Revenue officials petitioned the government for greater rights to track down overseas tax dodgers. Money owed could range from capital gains to rental 1 income, which may be backdated in some cases.

For many buyers, however, it is not a case of cheating the taxman. Some owners may not be aware of their obligations, which could spell double trouble if your home is in a country that has not entered into a double taxation agreement with Ireland, rendering you liable for a bill both at home and abroad.

People must realise when they buy I properties abroad that they will be liable to tax," says Tom McGrath, a Dublin solicitor whose firm specialises in overseas purchases. "There are annual taxes, municipal taxes, tax implications such as capital gains tax if you sell property and double taxation. With all clients, we insist everything is done in a transparent fashion, so there is no question down the line of money being underdeclared."

Although the taxman is staying tight-lipped on what the changes could mean for the average overseas buyer, there is plenty of speculation in the industry. This is part of a larger focus on the overseas sector and follows the decision to regulate the sector with a new ombudsman, the National Property Services Regulatory Authority, later this year," says Michael Bolger, a chartered accountant and a director of Dublin-based Empire Consulting.

With the Revenue's coffers shrinking from the reduction in Irish stamp duty, it is only natural they should turn their attention to the part of the property sector that is still doing well — overseas property.

It also follows concern over tax avoidance from the EU, which is backing national governments and has recently introduced regulations to make foreign banks disclose accounts opened by foreign nationals. According to Bolger, the Revenue is now willing to send tax inspectors overseas. A number of inspectors are based in Spain to check Irish homeowners there.

In Bulgaria, title deeds often lack transparency, which can subsequently push up capital gains tax for the owner when he goes to sell.

The problem is a lot of investors don't clarify their tax liability before they buy an overseas property," says Bolger. "If they are Irish residents, they are liable to the Irish taxman for income tax on their rental income and capital gains tax of 20%.

For many, this is where the problems creep in. Dubai, with its tax-free incentives, gives an impression to the amateur overseas buyer that it is without additional property levies. The truth, however, is that tax applies on any worldwide income.

For example, an apartment bought for €525,000 in Dubai and sold for €550,000 has a capital gain of €25,000, which is then liable to 20% tax. The overall tax liability on that property- is €5,000, if your personal CGT allowance has already been' used.

Double taxation, whereby tax has to be paid in two countries on the same asset, can cause contusion. Ireland has comprehensive double taxation agreements in force with 44 countries, which mitigate liability. These treaties or agreements generally cover income tax, corporation tax and capital gains tax.

For those renting out a place abroad, income tax is payable on the net profit realised on rental income after all allowable deductions. It pays to be informed and the Revenue website can answer many questions on the ownership of foreign property.

For letting agents and those working in the industry, the next year will be something of a learning curve as they find out whether these new regulations will work to their advantage. "Although Irish residents who own foreign rental property should declare their rental income, many have it paid into foreign bank accounts, thus avoiding paying Irish taxes," says Richard Spence, director of website Myoverseas-property.ie.

"Some use this money to fund foreign mortgages to buy more properties, or fund their holidays to these properties. Either way, the Revenue aims to stamp out this avoidance.

"This could have ramifications for Irish letting agents and could result in them losing business. Those overseas property owners who want to avoid their details being passed on to the Revenue by an Irish rental company will simply switch to a foreign letting agent."

But it's not all doom and gloom for property owners, according to Bolger. "Some investors who are not tax-compliant may be needlessly worried, where they have bought in countries such as Germany," he says. "Because of Germany's income tax system, liabilities here can be relatively small due to the high level of tax shelter available.

"Most investors are tax-compliant. A minority aren't, however, and these are the people Revenue are after. I have no doubt that they will get any evaders they are after and anyone trying to hide their affairs is being very naive if they don't expect to be caught."