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The scope of this guide
This guide deals only with the very simple question of who should be the legal owner of any house or apartment that you might want to buy – or, for that matter, of any boat or business or other asset you acquire.
See our various other guides to buying property in various countries, inheritance planning and tax planning for related information.
The question of who should be the legal owner of any assets that you buy is important for two main reasons:
- If you put the property in the wrong peoples’ names, the wrong people may inherit it when you die
- If you put the property in the wrong peoples’ names you will – almost certainly – pay vast amounts of totally unnecessary fees and taxes during your lifetime and on your death.
Getting this question of ownership wrong is probably both the most common and the most expensive mistake people make when buying property in another country.
Making the right choice can, in some cases, completely eliminate inheritance tax on the later passing of the property after your death and/or greatly reduce the taxes on any income from the property during your lifetime.
What are the options as to ownership?
There are many ways to purchase a property. These include:
- In your name alone
- In your name and the name(s) of your spouse or other co-purchaser(s)
- Wholly or partly in your children’s names
- In the name of somebody who you would like (eventually!) to inherit the property from you
- Via a local company
- Via a company based in your country
- via a company based in a tax haven
- Via a Trust
Each of these methods has advantages and disadvantages. The one that will be best for you will depend entirely on your individual circumstances.
So, who should own the property?
As we have said, there are many people who could be made the legal owner of the property or, possibly, the shareholders in the company that owns the property. The best choice is often not obvious.
The one that is best will also vary depending upon the country where the property is located, your nationality and the country in which you are tax resident.
In this guide we cannot take into account all those factors, so we are looking only at the general principles involved and giving you some understanding of why the decision is so important.
The choice is not obvious. Just because a husband and wife are buying the property does not mean that the best choice is always to put it in both of their names. Just because your neighbours bought a property in their joint names does not mean that this will be the right solution for you.
When it comes to making your own plans, ask your lawyer for advice. It will be time and money very well spent.
Some local lawyers will be unable to help you make this decision as it involves an understanding of both the local and your own legal, tax and inheritance systems. In this case, there will be lawyers in your own country who will be able to help, possibly by working in conjunction with your local lawyers.
Let’s assume that John & Janie – an unmarried British couple – are thinking of buying a house in Andalusia, Spain.
They are going to pay €500,000 for it. They are going to rent it out and will generate about €15,000 net income per year.
Janie is 20 years younger than John.
Solution 1: Put the property in John’s name alone
The income will be John’s.
There will be some Spanish tax on that income: 19% (€2,850), but it will be less than the tax payable in the UK.
He is a higher rate taxpayer and will pay UK tax at 40% of the rental income: €6,000 per year, less the tax already paid in Spain: payable in the UK. €3,150.
Unless he makes a Will valid in Spain, on his death the property will pass to his children, not to Janie. He wants it to go to Janie, so he makes a Will leaving it to her.
If he makes a Will leaving the property to Janie, she will pay Spanish (Andalusian) inheritance tax on it and – because they are not married – it will all be taxed and at a high rate: about 30%. Say €150,000 tax.
Total tax bill over 10 years: Income tax €60,000. Inheritance tax: €150,000. total €210,000.
Solution 2: Put the property in both names
The income will belong to both of them. €7,500 each.
There will be some Spanish tax on that income:19% (€1,425 each).
John is a higher rate taxpayer and will pay UK tax at 40% of his rental income: €3,000 per year, less the tax already paid in Spain (€1,450) = €1,575.
Janie has no taxable income, so will pay no UK tax on her share of the rental income.
Unless they make Wills valid in Spain, on his death John’s share in the property will pass to his children, not to Janie. Janie’s share in the property will pass to her children, not to John.
The children will have to pay no Spanish inheritance tax on the value of the property.
Total tax bill over 10 years: Income tax €44,250. Inheritance tax: €Nil. total €44,250.
Solution 3: Put the property in Janie’s name alone
The income will be Janie’s.
There will be some Spanish tax on that income: 19% (€2,850).
Janie is a lower rate taxpayer in the UK but has no other income and this rent will be below her UK tax threshold, so she will pay no UK tax on it.
Unless she makes a Will valid in Spain, on her death the property will pass to her children, not to John.
If she makes a Will leaving the property to John, if he survives her he will pay Spanish inheritance tax on it and – because they are not married – it will all be taxed and at a high rate: about 30%. However, if he does not (and she is 20 years younger so this is perhaps likely), the property will go to her children His children will be excluded from benefit.
Her children would benefit from 2018 changes to the Andalusian tax law and pay no inheritance tax because their inheritance was less than €1 million each.
Total tax bill over 10 years: Income tax €28,500. Inheritance tax: €Nil. total €28,500.
These are grossly over simplified examples and the numbers applied are, in the interests of simplicity, not quite accurate but they illustrate the huge savings than can be made by thinking about ownership structures: in this case over €180,000.
There are, of course, other structures that could have been applied. Facing these facts might even have persuaded John & Janie of the sense of getting married!
Have you got experience with deciding who should own property? Tell us about it by emailing firstname.lastname@example.org.
It’s up to you. You need to decide what you want to happen to your assets after your death and how best to deliver that result. Each choice will have a different mix of advantages and disadvantages. Some will save you a lot of money.
Please contact the author if you would like any further information. See the sidebar for their contact details.