THOSE buying property overseas are being warned to think twice about setting up offshore companies in a bid to reduce their tax.

Attempts can backfire for buyers with investors paying more - rather than less - tax, warn accountants.

Offshore companies are often used by foreign residents in a number of European countries as holding structures for their holiday homes.

But Grant Thornton Poole tax partner Rowena Marsh warned: "Depending on your individual circumstances, setting up an offshore company may actually increase your tax liabilities and could end up costing you a lot more than you expected.

"Prospective purchasers should be wary of local agents and developers who recommend the use of such companies, as they may only be taking the local tax position into account."

The principal risk for UK residents is that the Inland Revenue may seek to charge tax on the rent-free occupation of holiday homes owned through a company - invoking income tax legislation originally intended to tax the benefit conferred by the provision of living accommodation to directors and employees.

Whilst the measure of the benefit for UK properties is normally the old rateable value, for properties located abroad it is their annual rental value in the local market.

This will be reduced where the property is available for letting to third parties for most of the year - but not where it is at the disposal of the company owner at all times (even if only for a few weeks each year).

There may also be tax issues on the sale of a property owned by an overseas company, and on the extraction of the proceeds of sale by its ultimate owners.

But one possible advantage of owning a property through a company is that it can circumvent the forced heirship rules that are in place in many European countries, including France and Spain.

These can require that the deceased's estate is divided equally among his or her children, irrespective of the provisions of any will.

"Many people dream about owning a second home abroad and with rising property prices in the UK, this dream is becoming a reality for an increasing number.

"However, although property in many countries is cheaper than in the UK, there are often additional costs associated with buying and maintaining a property abroad - particularly if it is rented out for a proportion of the year."