Advisers warn on non-declaration

Spain and France remain the most popular destinations for Irish people buying overseas getaways. Thus it is no surprise that the Revenue intends to focus on these two countries in its investigation into tax evasion by holiday-home owners.

Even before the Revenue's signal that it was to crack down on holiday homes, tax advisers had been warning clients to avoid the temptation of not declaring foreign income, as co-operation between tax authorities in the EU increased.

Tax liabilities rank alongside purchase costs, legal quirks, rental income statistics and scope for capital appreciation as one of the basic issues investors need to consider before they pick their holiday investment hotspot.

All holiday-home owners who are regarded by the Revenue as Irish tax residents will be subject to tax on any rental income from overseas properties in the country where the property is located.

They must also declare such income on their Irish tax returns. If there is a double-taxation treaty in place they may be exempt from paying the tax in one of the countries or granted a credit for tax already paid. Often it is the higher tax rate that is applicable.

Holiday-home buyers, often novice investors who are attracted to the idea of owning a place in the sun, must also pay a range of local taxes that do not exist in the Republic.

For example, wealth taxes may be charged. These are quite low in Spain but can be significant in France if the value of the asset crosses certain thresholds.

In many cases, owners of holiday homes in Spain and Portugal find it difficult to rent their properties and thus may not have any income on which to evade tax.

However, investors in Spain are taxed on rental income they are deemed to have earned, even if their property has in fact been sitting empty for the 50 weeks of the year that they are not there.

The existence of a double-taxation agreement might not cover all types of taxes. The treaty with France, which the Revenue is currently in the process of renegotiating, is so old that it does not cover capital gains tax, meaning owners of French gites or villas who want to sell up may face having to pay on the double.

In France, it is popular to use lease-back schemes where the investor does not own the property for 10-11 years, during which time it is rented out. When investors buy into these, they are automatically registered with the French Revenue.