Don't let your holiday home dream become a nightmare

Buying a property abroad can be a great investment – but you need to do your homework. By Kevin Rose
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The Independent Online

Holidaying Britons returning home with dreams of buying a property abroad could be risking thousands of pounds by failing to do their homework. Without thorough research and the right information at your disposal, you could soon regret your purchase. We've called on a panel of experts to explain key issues to bear in mind when buying a home overseas.

use your head

It's vital that would-be buyers think through the idea thoroughly before taking any action, says Louise Reynolds, who runs the independent property agency Property Venture, based in Weybridge, Surrey. "Generally, people can come to such a big decision while they are still in holiday mode and not always think things through properly. Some, for example, may have set their heart on a rural, peaceful setting, but then when they decide they want some income from the property and decide to let it out, their choice of remote location might not be the holiday renter's dream and it might end up difficult to let."

know your location

Spending two weeks relaxing in a hitherto unfamiliar location does not represent the exhaustive investigation necessary to make an informed decision about the area. Clare Nessling, operations director of the overseas mortgage broker Conti, says the first thing to do is to conduct thorough research about local facilities and transport. "People gravitate to locations with a nearby airport, especially if it is served by a budget airline," she says. "But remember there are no guarantees that cheap flights will continue indefinitely in one location. Proximity to such basic facilities as restaurants, shops and a beach is also important."

Your judgment of an area should also be influenced by what you intend to do with any potential property, according to Stuart Law, chief executive of the international property investment firm Assetz. "If someone is purchasing a holiday home just for personal use, then this should be in an area that they know well, love and enjoy," he says. "Investors looking for a holiday home they can use, as well as generate an income from, need a location that produces strong rental income over a long season."

check out the developer

If you are considering investing in a development, whether completed or "off-plan", it is important to establish that the developer is properly financed. Reynolds says it is vital to be wary of start-up developers. "Without a track record, it is difficult to know that they are who they claim to be, that the property is theirs to sell, or even that they will finish the property to the standards that you expect," she says.

"This has been an issue in Spain for lots of buyers of off-plan property. They have parted with deposits only to find that a developer has folded, as a result of the global economic crisis, before completing on the property."

get proper legal advice

Anyone serious about buying a home abroad needs to consult a lawyer, but do your research. "Seek specialist counsel from an independent English-speaking solicitor who is not connected to your seller, estate agent or developer," advises Nessling. "If required, you can also consult valuers, surveyors or architects. They should be proficient in your chosen country's laws and processes, and know the specifics involved in buying a property there. It is essential that they confirm that all required permissions, licences and planning consents have been obtained."

An advantage of taking out an overseas mortgage is that the lender does its own checks on the property, ensuring that a proper legal title exists, that the property is registered in the buyer's name, and that a valuation of the property takes place.

That said, Reynolds recommends getting your lawyer to double-check that you are buying a property with the correct title, and that you are being registered as the official owner. "There are cases in Cyprus where buyers have found it can take a long while to get their ownership registered properly, and this can leave buyers vulnerable," she warns.

paying for it

People often assume that buying a property abroad will be similar to buying one in the UK, including the mortgage deal. But while the front-end loan administration may be similar, this is only the start of what can be a lengthy and complicated process.

Katy Hepworth, of Assetz, says potential borrowers should apply early for finance and prepare for a long wait. "Overseas mortgage lenders do not use online application systems like UK lenders – everything is paper-based," she explains. "It takes time to process it all, so don't apply for finance at the last minute."

Overseas lenders generally do not offer "non-status" mortgages. They require proof of income, typically over three years, and missing paperwork will slow down the application.

gaining approval

Nessling suggests obtaining an "agreement in principle" for your mortgage before agreeing to buy a property, signing contracts or paying a deposit. "This will tell you exactly how much you can borrow and what price range you can realistically consider when conducting your property search," she says. "It will put you in a much better position with agents and developers, proving to them that that you are a serious buyer, and you will be better placed to negotiate price. It is tangible evidence that you can take along when house-hunting. It can also lead to your application being fast-tracked once you've chosen your property."

There are a number of tax implications for Britons buying a property abroad. A form of capital gains tax (CGT) will apply when eventually selling the property, presuming it has grown in value. Also bear in mind that any rental income is likely to be subject to tax. Where the tax is due depends on the location of the property.

Do your research on double tax treaties, which mean that you only pay tax in one jurisdiction. "Double tax treaties exist with virtually all counties in Europe for income tax, CGT and corporation tax," says Brian Murphy, a financial planning manager at AXA Wealth. "However, there are very few that cover inheritance tax."

The inheritance situation is very different in France – a popular location for Britons with second homes, says Murphy. "When you die, you have so-called 'forced heirship'. It is an old Napoleonic Code law, which means that you do not have total freedom in your will; certain people will get prescribed amounts, and only what is left can be distributed freely."

If you die and are survived by one child, for example, you cannot give away more than 50 per cent of your estate in your will.

Laws can change, though. French MPs have discussed taxing non-French homeowners more, although the idea looks unlikely to become law. So, even after you have bought a property, keep abreast of local laws.