Surprise Tax Demands Add To Holiday Home Woes

Buyers of homes in Cyprus have received surprise tax demands for the interest generated from cash locked in property developers’ escrow accounts.

Cypriot house builders demand stage payments rather than a deposit and final purchase of a property, so most buyers hand the cash to a lawyer or bank to prove they have the cash to fund the development.

The bank then releases cash from this escrow account when an architect certifies the work is completed at each stage.

The idea is that the borrower is compensated for the extra interest charged by taking the loan at the start of development by picking up interest while the money is held in escrow.

Under European Union Savings Directive (EUSD), the Cypriot banks then tell HM Revenue & Customs (HMRC) in the UK how much interest has been earned by British based borrowers on their escrow account  – which then triggers a tax demand.

Tax investigations

One of the issues is that HMRC is going back several years before the directive came into effect to claim tax on interest.

In some cases, home buyers are facing HMRC investigations resulting in a tax bills of several thousand pounds.

George Kounis, of London law firm Maxwell Alves, said Cypriot banks were being diligent in reporting the interest payments and added: “If only they were as diligent in other matters.”

He said: “HMRC are applying the rules correctly but they miss the point. The best way for these payments is for the bank to give an undertaking to the property developer and then add the stage payments to the borrower’s loan when the architect’s certificates are submitted.

“In addition, the account should be a non-interest bearing account with any interest earned credited directly to the loan which would then not give rise to the bank making a savings directive declaration.”

Misselling allegations

This is the latest unfortunate chapter to befall Brits who have invested in Cypriot property with several investigations in to misselling allegations underway.

Buyers who thought they could have a cheap home loan in Cyprus and generate high rents while their homes appreciated in value are instead paying home loans up to 40% more expensive than expected, poor rental returns and a property market that has seen prices crash by 70%.

Mr Kounis says: “The very last thing most of these investors need now is the taxman turning up demanding tax on interest they did not earn.”

The law firm has now written to HMRC asking it to review its procedures and to an all-party group of MPs investigating the Cyprus property misselling scandal urging them to intervene.