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Wednesday, 3 October 2012

Tax on overseas property lettings

If you live and pay tax in the UK you must declare rental income from overseas property lettings on the foreign pages of your tax return. If you pay foreign tax on the income, you can usually get credit for this against the UK tax you have to pay on it.

Declaring income from overseas property lettings

You have to declare any income you get from overseas property lettings on the supplementary foreign pages of the Self Assessment tax return.

How much tax you'll pay depends on whether you're 'resident' in the UK and 'ordinarily resident' or 'domiciled':

Resident

  • if you're in the UK for 183 days or more in a tax year, you're a 'resident' for that year for tax purposes
  • if you come to live in the UK permanently or to remain for three years or more you're resident from the date of arrival
  • if your presence in the UK becomes part of the regular pattern of your life over a period of several years

Ordinarily resident

  • if you're resident in the UK year after year you will normally be treated as 'ordinarily resident' 
  • you're treated as ordinarily resident in the UK from the date you arrive if it's clear that you intend to stay for at least three years

Domiciled

  • your domicile is normally acquired at birth but domicile is a general law concept, decided by a range of factors

You can be more than one of these - or none.

If you are resident, ordinarily resident and domiciled in the UK

If you're resident, ordinarily resident and domiciled in the UK, you'll have to pay tax on any income from lettings. This applies whether or not that income is brought into the UK - this is known as the 'arising basis' of assessment.

Working out your taxable profit

As with income from a UK rental business, you work out the 'net profit' (or loss) for all your overseas property lettings as if it's a single business. To do this you:

  • add together all your rental income
  • add together all your allowable expenses
  • take the expenses away from the income

To arrive at your taxable profit, you can deduct certain allowances from your net profit. Your final profit counts as part of your overall taxable income, and you pay tax on it at your normal rates.

Expenses and allowances - what counts?

You can deduct the same expenses and allowances from overseas property letting income as from UK property letting income, including travel costs. The expenses must be solely for running your property letting business.

Profits and losses from different overseas properties

Because all overseas property lettings are treated as a single business, losses from one overseas property are automatically offset against profits from the others. And if you make a loss overall, you can offset it against future years' overseas rental profits.

But UK and overseas letting businesses are taxed separately - losses from one can't be offset against the profits from the other. If you have holiday lets in the European Economic Area (EEA) you need to treat them separately.

If you are resident, but either not ordinarily resident or not domiciled in the UK

If you're resident, but either 'not ordinarily resident' or 'not domiciled' in the UK, you can claim to be taxed only on your UK income. This is known as the 'remittance basis'.

What happens if you've already paid tax on the income abroad?

If you've already paid tax on your rental income abroad you can usually claim credit against the UK tax you'll have to pay on it.

Or you can deduct the foreign tax from your overseas rental income when you work out the profit you'll pay UK tax on.

Recording information on your tax return

If you’re claiming foreign tax credit relief, you’ll need to show separately:

  • the profit and loss for each property
  • the amount of foreign tax paid on each

If you’re not claiming relief add together all your income and expenses for your overseas property letting and show the profit or loss as a single figure.

What you do about exchange rates

When you work out your taxable income, you have to convert it into pounds sterling. Use the exchange rate that applied when the rent was due (or when you brought it into the UK if you're not living in the UK permanently).

Tax if you dispose of your overseas property

If you dispose of (eg sell or give away) your property you may have to pay foreign tax. You may also have to pay UK Capital Gains Tax. Where Capital Gains Tax is due you can usually get credit for foreign tax you've paid on the same gain.

If you are resident and/or ordinarily resident and domiciled in the UK

You'll be liable to Capital Gains Tax whether or not you bring the gains into the UK.

If you are resident and/or ordinarily resident but not domiciled in the UK

You may only be liable on gains you receive in the UK (whether the gains were made in the current year or an earlier year).

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