Accountants are pressuring the HM Revenue to clarify rules that could result in thousands of owners of second homes abroad being liable for taxes of hundreds of pounds a year even though they make no money from their property.

Under the rules, for which guidance was due to come in January 2004 but which has still not arrived, many people who bought property in Spain, France and Italy through a company to avoid inheritance rules in the country of purchase could be liable for tax as if they were receiving payments equal to the notional rent on the property. In other words, use of the property would be taxed as a benefit in kind.

The problem has arisen because, unlike the UK, some European countries dictate to whom you canleave your estate in a will. French inheritance law, for example, requires certain proportions of an person’s estate to be left to their spouse or children.

The way to get around this has been to own the property through a company. The company structure most often used in France – where according to FPD Savills, 300,000 British people are thought to own second homes – is the Société Civile Immobilie`re (SCI).

“The principal benefits for the UK resident and domiciled individual is the ability to avoid the forced heirship rules which operate in France, which force owners to pass the property on to their children on death,” says Anita Monteith, an accountant at the Institute of Chartered Accountants for England and Wales. “With an SCI, the property can be disposed of in accordance with the owner’s wishes.”

She gives the example of someone thatwho bought a property in France with his wife without using an SCI. His wife died soon afterwards but he was not able to sell it because hethey had a six-month-old baby who, under French rules, had a share in the property.

The HM Revenue interprets the scheme to mean that the owner of the property becomes a director of a property company. As such, the owners of homes through companies are regarded as receiving benefits in kind from the company and taxed accordingly.

Simon Rees, senior manger of private clients at professional services firm PwC, says “The UK taxman will consider that your SCI is a ‘company’ and that it does what you and your wife and your friend tell it to do. Under this arrangement, you are seen as ‘shadow’ directors. As a shadow director the taxman thinks you are taxable on benefits, just like any other director.” In this case, the benefit in kind from your “employer” (the SCI), is the use of the property.

Rees explains that the benefit is based on the period for which the house is available for your use, calculated on its rental value.

The Revenue interpretation follows a case of tax evasion in the House of Lords in 2001, in which Brian Allen was deemed to be a shadow director of offshore companies from which he derived benefits. It made no difference that he was not appointed as a director, or that he had provided all the funds to the offshore company to buy the property. Criminal charges were brought against him, resulting in a prison sentence for failure to disclose the existence of the company.

The tax rules are unclear and accountants are calling for the legislation to be changed. “It’s unfair to tax ordinary holiday home owners,” says Rees. “This is potentially a situation whereby people who have no income and no gain are being asked to pay a tax charge.” The Revenue said: “The HM Revenue is still looking at the guidance. It is a difficult issue and we hope to issue an update soon.”He says PwC has asked the Revenue to clarify time and again, but is still waiting for final details.

The Revenue says that there has been no change in the law but that the accountancy profession has just been looking for clarification of the existing law.

The Revenue said: “The HM Revenue is still looking at the guidance. It is a difficult issue and we hope to issue an update soon.”

The problem at the moment is that few of those people who bought properties through a company are even aware that this could incur UK tax, so are unlikely to include it on their tax returns. Accountants advise people to put a note on their tax returns to tell the Revenue that they know about the possible tax liability and are not trying to avoid paying it.