Taxes and Your Home by the Sea

Thinking about buying a holiday home abroad? It's an exciting prospect—but not one to approach on impulse. Before purchasing a holiday property in another country, it is essential to carefully assess the tax implications.

Many people dream of owning a holiday home overseas. It represents greater freedom, a better quality of life, and, for some, the possibility of retiring somewhere with a warmer climate. Because buying property abroad is a long-term commitment, it is important to consider not only the purchase costs but also the financial and tax consequences over the years ahead.

Initially, attention naturally focuses on the taxes and charges payable when purchasing the property and during its use. However, tax implications also arise later when the property is sold or passed on to the next generation.

Tax rules and rates vary considerably from one country to another, so every purchase should be assessed individually. Nevertheless, there are several general considerations that apply regardless of the chosen destination.

The Purchase Price – And What Else?

Many countries levy a property transfer tax when real estate is purchased. Depending on the jurisdiction, this tax can amount to as much as 10% of the property's value.

New-build properties are often exempt from this tax but are generally subject to value-added tax (VAT) instead. Across Europe, VAT is typically around 20%, making it particularly important to establish whether the advertised purchase price already includes VAT.

In addition, many countries charge notary and land registration fees. Notary fees are often calculated as a percentage of the property's value and can therefore be substantial.

Legal fees may also apply—either because you choose to appoint a lawyer to handle the transaction or because property transfers are legally required to be carried out by lawyers in certain countries.

Ongoing Taxes

An annual property tax is common in many countries, although the amount can vary significantly—not only between countries but also between regions within the same country.

If you intend to rent out your holiday home, any rental income will generally be subject to local income tax.

Some countries also tax the imputed rental value of owner-occupied property, similar to the former Swiss system.

In addition, certain jurisdictions impose an annual wealth tax on real estate.

Unlike the one-off taxes incurred when purchasing a property, these are recurring annual costs. It is therefore important to understand your future tax obligations before signing a purchase agreement.

Tax Declaration in Switzerland

Taxes on a holiday property are generally payable in the country where the property is located.

Nevertheless, Swiss taxpayers must declare both the property and any related income in their Swiss tax return.

Although these foreign assets are generally exempt from Swiss taxation, they are taken into account when determining the applicable tax rate. In other words, your worldwide income and assets influence the tax rate applied to your taxable income and wealth in Switzerland.

Inheritance Can Be Complex

Passing a holiday property abroad on to your heirs can be both legally complex and financially significant.

Inheritance law is one important consideration. In some countries, such as Italy and Spain, Swiss inheritance law may apply. In others, such as France, the local inheritance rules generally take precedence.

Equally important are the country-specific inheritance and estate tax rules that apply when ownership of the property is transferred. Where applicable, double taxation agreements between Switzerland and the country concerned should also be taken into account.

Source: Treuhand | Suisse