Important factors to consider in residence planning
The acquisition of real estate abroad is an important component in residence and citizenship planning. However, it requires careful and professional attention. Every day, individual clients, as well as other law and consulting firms worldwide, rely on the advice and assistance of Henley Estates, an affiliated group company that is specialized in this area.
Wealthy individuals and families can enjoy considerable advantages, asset protection, and tax savings by intelligently structuring their international acquisition and holding of real estate. Henley Estates provides professional advice that is essential to the purchase, structuring, and sale of real estate worldwide. This involves national property law, tax law, and the highly complex area of international private law. These services are particularly relevant to clients who are resident or domiciled in one country and who would like to acquire real estate in another country.
Through Henley Estates, you have access to a unique, worldwide network of specialist lawyers, tax consultants, investment advisors, and other professionals who are experts in their fields. The combined expertise of these professionals will provide you with excellent advice and service.
Several important elements must be considered when deciding to acquire a house or apartment in a foreign country. With regard to tax and estate planning, the following points need to be considered in particular:
Since this is one of the most reliable ways of collecting taxes, almost all countries levy a real-estate transfer tax or similar taxes. The purchase price usually forms the basis for this tax, which is one of the main reasons why many buyers and sellers wish to declare a price in the official sale contract that is lower than the real purchase price. This is illegal but nevertheless widely practiced in countries such as Spain and Italy. Real estate is often transferred indirectly by transferring the shares of a real estate holding company in order to avoid paying real estate transfer taxes. While this is still possible in some countries, in most, the respective tax laws also subject such indirect transfers to real estate transfer taxes.
Again, annual taxes on immovable property are very common as they are easy to assess and collect. Most countries insist on an annual charge on real estate that is usually not very high but unavoidable. A notable exception is Malta, where there are no further real estate taxes whatsoever after the initial purchase.
One of the main issues associated with holding real estate in a foreign country relates to the taxes that may be applied on the basis of the value of the real estate in the case of an inheritance situation or a gift. While many countries have high rates of inheritance and gift taxes (for example up to 55% in the USA, up to 60% in France, and as high as 80% in Spain), there are also countries where these taxes are low or do not exist at all (for example 5% in Malta and 0% in the Bahamas and Bermuda). In some countries, it is still possible to use domestic or foreign structures to avoid such taxes legally, but this has become increasingly difficult in recent years as tax laws in many countries have become more sophisticated and tend to encompass all transactions affecting real estate. Look-through mechanisms often make it difficult to set up tiers of domestic and foreign entities in order to render the ultimate ownership of real estate by foreign persons more private.
Besides local inheritance taxes, which can be rather high, local inheritance laws and forced heirship rules may also be a nuisance. The international private law of France, for example, demands without exception that all real estate situated in France be subjected to French inheritance and forced heirship rules. Other countries are more open to allowing the application of foreign inheritance laws to domestic real estate, but one must always be aware of the pitfalls and possibilities involved in internationally conflicting inheritance laws.
Not only may a foreign holiday home be passed on to the next generation, it is quite often the case that the real estate is sold again several years later. One should therefore be careful to structure every purchase of real estate with an eventual sale in mind. It is, of course, impossible to foresee all changes in legislation that may occur, but the possibility of selling the real estate again should nevertheless be taken into consideration from the start.
Many countries restrict outbound capital movements, and the tax authorities in most cases insist on accurate reporting of their taxpayers' worldwide assets and income. However, well-known artists, celebrities, or others may prefer to maintain confidentiality not for tax reasons but due to security and privacy concerns. These and other factors heighten the sensitivity of many clients to maintaining confidentiality in their international real estate holdings. Unfortunately, many countries make it increasingly difficult or even impossible to structure foreign real estate ownership in a confidential manner without creating undesirable tax consequences.
By acquiring real estate in a particular country, one does not usually also acquire the right to reside there. While many countries place no restrictions on foreigners to buy real estate, immigration restrictions do apply. Even if you own a house in Florida, for example, you would not necessarily be guaranteed access to the USA. Indeed, it could even be deemed, in conjunction with other factors, that you had immigrant intent and you could be denied entry to the country on such grounds at a future visit. Citizens of certain countries may also face strict visa requirements and consequently suffer restricted travel opportunities and flexibility due to political circumstances. Nationals of Canada, Japan, the USA, and Western European countries for example, whose passports usually allow them easy access to many countries, can suddenly also find it impossible to obtain visas due to temporary travel restrictions applied during periods of trade sanctions or other economic or political disturbances.
Care must be taken as to the length of time spent in the country where the holiday home is situated and to ensure that the holiday home does not constitute the main center of one's life, unless of course one wishes to become tax resident there. Depending on the country of habitual residence, applicable double taxation treaties, the client's nationality, and other factors such as mere physical presence in the foreign holiday home may lead to undesirable personal tax consequences.