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A few years ago, I inherited a holiday house in Provence. The house was purchased by my grandparents over 30 years ago and has a French bank account attached to it for administrative purposes. My family uses the house every summer for a couple of weeks but then we rent it out during the colder months. I have heard that the new requirement to correct legislation has the potential to impact individuals with any offshore connection — do these rules apply to me?
The short answer is, it depends, says Gary Ashford, tax partner at Harbottle & Lewis and a council member of the Chartered Institute of Taxation. The slightly longer answer breaks down where a tax issue might arise.
For example, you say you inherited a holiday house in France. If the person who left you the property was domiciled in the UK when they died, then there is a possibility their estate will have had to pay UK inheritance tax (IHT).
If IHT was due, and was not paid or declared, then the estate may have a requirement to correct (RTC), or face a 200 per cent penalty on the additional tax, plus late interest. It is also important to understand that the RTC can also charge a penalty amounting to 10 per cent of the value of the asset in certain circumstances.
Turning to the associated bank account, and assuming you are UK tax resident, if the account is interest bearing, then if the interest has not been included on your historical tax returns, then again RTC would require that the tax on the interest is now corrected, or again the penalties set out above could be due.
Lastly, rental income is also potentially taxable and may need correcting. If you are a non-domiciled resident of the UK, there may be the opportunity to be taxed on the remittance basis, limiting any UK tax to that only on income remitted to the UK. Otherwise you will be taxed on a worldwide basis.
It is important to point out that for both the interest and the rental income you may also be taxable in France. If this is the case, you should be able to claim relief for the foreign tax against any UK tax. To do so, you would need to declare the income to HMRC and make the appropriate claims.
Finally, many such properties are held in offshore companies and it is very important given the size of the penalties under the RTC that such structures are reviewed well ahead of September 30, to allow the opportunity to correct matters before the deadline falls.
John Cassidy, a partner in the tax investigations team at audit and advisory firm Crowe UK, believes you will be subject to RTC rules, assuming that you are a UK resident taxpayer.
If you have not included entries relevant to the property or the bank account on your UK tax return, you are squarely within the RTC regime. The facts will need to be explored in more depth but, on the face of it, the main tax issue relates to any rental profits made.
If you believe that losses have arisen, they should still have been reported on your UK tax return so that HMRC is made aware of them and has an opportunity to ask questions. Mistakes are relatively common, such as incorrectly including the entire mortgage cost as a deductible expense rather than only the allowable portion of the mortgage interest, so there is potential for any perceived loss to be a profit in reality, or for profits to increase. If there is a taxable profit then tax has been underpaid, hence you have a requirement to correct.
Other potential tax issues that need exploring are whether any interest has been earned on the French bank account and, if the property is owned through a company as overseas holiday homes sometimes are, the benefit-in-kind charge for using it personally. It may be that local tax advice in France is also needed.
If any irregularities are not corrected quickly, you will become liable to “failure to correct” penalties, which will be costly, as not only will you have to pay the tax plus interest, but also a minimum penalty of 100 per cent of the tax. That applies whatever the underlying reason for not declaring the income, whether that was human error, carelessness or a deliberate action. Under the current regime, the penalty should be much lower, assuming that you make a full disclosure before HMRC challenges you — possibly nil, depending on the circumstances.
The key date is September 30, by which time you will need to have disclosed the problem to HMRC, otherwise the new penalties will apply. We are still waiting for HMRC to confirm what level of detail will be needed by then, for example, a basic outline or a comprehensive disclosure. You should act now to minimise the risk by making sure that as much as possible is disclosed before the deadline.
Doing nothing is not advisable as there is a strong likelihood that HMRC will find out about the French asset. Under the Common Reporting Standard, financial institutions around the world are now required to disclose, and indeed are disclosing, the existence of financial assets to HMRC if the owner of those assets is a UK person. This could include the French bank account.
The strong message from both HMRC and tax professionals is that you should review the tax position now with a view to making any necessary disclosure before it is too late. An adviser who specialises in the resolution of past tax problems will be able to help you and minimise the penalty and the number of past years to include wherever possible.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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Our next question
I am buying a property in Spain for my wife and I to retire to. I have two sons from a previous marriage and she has a son and daughter from a previous marriage. I will buy in my name and, if I die first, I would like the property to pass to my wife. After her death, I want the property to pass to my sons, not to her son and daughter. Is this possible and would it create any difficulties for my wife? Would I need to do it via a Spanish lawyer?