Buying land across the seven seas

Buying property abroad can be risky. Here's what you have to look into before you take the plunge.

I never pass a dinner invitation at Rajeev's home. Sheela, Rajeev's wife, is the most attractive and gracious host I have ever met. Hence, when he called me up one Sunday morning and invited me for dinner, I immediately accepted and then left home to get a shave, haircut, manicure, pedicure and a new pair of socks. Both Rajeev and I had courted Sheela in college, he being the “strong” type and I being the “silent” type.

Sheela married Rajeev and I became Sheela's bhai saab, a cross that I heroically bear till today. Come evening, I punctually presented myself at Rajeev's house and was shortly shown into his large living room. Rajeev and Sheela walked in, Sheela looking gorgeous in her trademark cotton saree (I just cannot recollect what Rajeev was wearing). However, what took my breath away was not Sheela but her image albeit twenty years younger who stood next to her smiling shyly at me.

Bhai saab, you remember our daughter Malini,” Sheela said. I quickly gathered my wits and stuttered “My God! I do not believe it. She looks exactly like you!”

Malini came forward and said “Hello Uncle”. The “uncle” hit as hard as Sheela's “ bhai saab”. I sank into the nearest sofa and grabbed the glass of scotch that Rajeev had prepared for me.

Living in London

Rajeev then spoke, “ Yaar, we needed some advice from you. Malini has finished her studies and wants to become a chef. We have got her admitted to Le Cordon Bleu in London where she will train for about nine months and then work there for a year or so before deciding what to do next. I wanted to buy a house in London where she could live. It will reduce our worries and also be a good investment for us. The property brokers there have sent me the details and photos of a few houses and we have liked some. What do you think?”

Rajeev's query, helped by the quick swigs of scotch and years of experience of thinking on my feet helped me focus on the subject at hand.

“First of all,” I said. “Congratulations to both of you to have brought up so lovely a daughter and for allowing her the freedom to choose her career. My fear was that you will make her an investment banker just like you.”

“With recent liberalisation in the FEMA regulations, it is no longer difficult to buy property overseas. However, you must exercise all customary caution that you exercise to buy property in India and a bit more since the property is in a foreign land.”

I glanced at Malini who was listening intently, hanging on to every word I was saying. I continued, “As Indian Residents, each of you can open a bank account overseas and individually remit upto $200,000 annually. That means you can remit $ 600,000 immediately. Even minors are permitted this facility. If required, Rajeev can make a gift in Rupees to Sheela and Malini in India which they can then remit overseas in their names. Your banker can help you with the finer details.”

Checks and balances

Rajeev said, “The properties we have liked are about $ 2 million. We can pay the amount over three years. What else should we worry about?” The dinner and scotch was clearly not coming for free tonight.

I said, “The most important thing is a proper investigation of the property. Is the title clear and transferable? Has the present owner cleared all his dues on the property? Is the property mortgaged or pledged to anyone? Is it a subject matter of any family or any other dispute? Does it have any tenants and if so, what are the eviction terms? What is the quality of construction of the property? How old is it? Has it been checked and approved by the fire department?”

“Remember, London is a mix of a lot of old and new buildings. It will be wise to appoint a good lawyer and an architect firm to give you the required comfort that the house you are buying will not become an albatross around your neck soon.”

“Recently, a friend of mine bought an apartment in New York, only to find out later that the previous owner had consistently been declaring the classification of the property falsely for property tax purposes and when the municipal department recently discovered this, they raised the entire demand for all the past years on my poor friend!”

Wealth tax angle

“You also need to consider Indian Wealth Tax which will be payable even though the property is situated outside India. India thankfully does not have inheritance taxes but UK does, although it is primarily applicable on persons who are residents of or domiciled in UK. You may want to take some professional advice on the applicability of UK inheritance tax laws and how to mitigate the same.”

“Last but not the least, if and when you sell the property, you will be taxed on the capital gains that you generate. If you give out the property on rent, the rental income would be taxable in UK. As an Indian resident, these incomes will be taxable in India as well. Any taxes you pay in UK will be available as tax credit in India as per the provisions of the double tax avoidance agreement between Indian and UK.”

Rajeev said, “ Yaar, I can't thank you enough. Here I was fully relying on the brokers and going ahead. I will surely get a lawyer and architect involved. By the way, why don't you stay back after dinner, we are watching an old movie, Lamhe by Yash Chopra. You will like it.”

I had no answer.

(The author is a tax partner at Ernst & Young. Views expressed are personal.)

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