Bloomsbury Financial Planning

Nearly 850,000 UK residents now own property abroad, according to the Office of National Statistics' Wealth and Assets Report 2008, and Bloomsbury Financial Planning estimates that 10-20 per cent of these owners will have been advised to buy through a company structure - purchasing shares in a company that, in turn, owns the property.

This enables buyers in France, Spain and Portugal to avoid the "forced heirship" rules in those countries, whereby local laws dictate who inherits a property irrespective of what is stipulated in the owner's will. It also gets past the restrictions on foreigners owning property in countries outside the European Union.

But owning a second home through a company technically gives rise to a UK tax charge, even if the property is only intended for personal use. That's because the owners are directors of the holding companies, and therefore deemed to be employees getting the benefit of free company-owned accommodation whenever they spend time in their overseas homes.

"Under tax legislation, they fall within the benefit-in-kind rules," explains Jason Butler, chartered financial planner at Bloomsbury. "These impose income tax liabilities on the cash value of services and benefits received. Here, the service received from the company would be the accommodation the director occupies, free of charge."

So, following decisions in two legal cases in 1999, owners have either had to incur a tax liability based on the market rent for their property, or struture their purchase as a loan to the holding company - offsetting the interest they forego on this loan against the value of the accommodation benefit.

"The classic structure for Spain has been to set up a Gibraltar company that owns a Spanish company that owns the property," explains David Heaton, partner at Baker Tilly. "You would lend, say, a million euros to the Gibralter company in retun for right to spend time in property for X weeks a year. It also meant that if you wanted to sell the Spanish property, you could sell your Gibralter shares instead and, as the transaction took place outside Spain, you'd pay no Spanish capital gains or land taxes."

However, an exemption is now being introduced in the Finance Bill to remove the UK 'benefit-in-kind' tax liability for people who have bought properties as a holiday or retirement home.

Under the terms of the exemption, owners will also be covered for renting out their holiday homes to third parties.

More importantly, property owners who have paid tax in previous years will be able to claim repayment, provided they can show that their holding companies did nothing other than own shares in the property. Butler says they will be able to do this by amending tax returns still under enquiry, or making a claim under whatever section the exemption comes under in the Finance Act. Shares in a property company owned by a family trust will not qualify, though.