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In the United Kingdom, for all landlords, Income Tax is due on the rental income from a property on an annual basis and, potentially, Capital Gains Tax in the year the property is eventually sold.
The calculation of Income Tax for a non-resident landlord or overseas investor is broadly the same as a UK-based landlord.
However, there are two specific considerations – the Personal Allowance and, if applicable, the impact of a double-taxation agreement.
As it stands, you are entitled to receive a Personal Allowance if you are a British passport-holder, a citizen of a European Economic Area country or if it is provisioned in a double-taxation agreement between the UK and the country you are living in.
The key point as a non-UK resident is that you have to claim the Personal Allowance at the end of each tax year in which you have UK income by sending form R43 to HM Revenue and Customs (HMRC). The R43 form can downloaded here and the Guidance Notes here.
Whilst the government has mused on restricting the entitlement of a non-UK resident to a Personal Allowance, there is a commitment that no change would be made before the start of the 2017-18 tax year.
If you are eligible for a Personal Allowance, you pay Income Tax on your income above that amount. Otherwise, you pay Income Tax on all your income.
If you are also taxed on your UK income by the country in which you are resident, you may be entitled to a partial or full relief from paying tax twice depending on whether there is a double-taxation agreement in place between that country and the UK.
Each double-taxation agreement stipulates whether you can either apply for a relief before the tax has been paid or a rebate after you have been taxed. As a general principle, if the rates of tax are different in the two countries, you will end up paying the higher rate of tax.
If you would like more information on the double-taxation agreement between your resident country and the UK, please email us at tax@cooperfaure.co.uk.
Even if there is no Income Tax to pay, you are required to submit a Self-Assessment Tax Return for each tax year that you have UK income. The tax year runs from 6th April to 5th April.
The HMRC online filing service is not available to non-residents. As a result, the options are to send your tax return by post which must be done by 31st October or to engage an accountant to act on your behalf which extends the deadline to 31st January.
The rules for Capital Gains Tax are driven by whether you are UK tax resident when come to sell the property.
Take the scenario where you have bought a property as your home only to rent it out to pursue an employment opportunity overseas but subsequently return to the UK to sell property. As long as you have established a footprint that you have lived in the property as your main residence, however briefly, then you will be entitled to Private Residence Relief and Letting Relief.
Unless you have lived in the property as the owner, then the only allowance would be the Annual Exempt Amount that is currently £11,100.
Private Residence Relief exempts the period that you lived in the property and the final eighteen months of ownership, irrespective of whether you are living in the property, from Capital Gains Tax.
The remaining time as a percentage of the total period of ownership determines the amount of the Chargeable Gain against which Letting Relief is claimable at the lowest of:
There are a couple of key points to make about Letting Relief. It pertains to the person and not the property so, if the property is jointly-owned, each owner would be entitled to the relief on their portion of the chargeable gain. However, it cannot be applied to a Chargeable Gain made whilst your home is empty.
Finally, the £40,000 ceiling on Letting Relief has not changed since 1991 which has undoubtedly blunted its impact. However, for a Higher Rate taxpayer, it would have reduced the Capital Gains Tax payable by £11,200 in the 2015-16 tax year.
For overseas investors disposing of a UK residential property, Capital Gains Tax has applied on gains arising on disposals after 5th April 2015 but only on the portion of the gain accrued since 5th April 2015.
There are two main methods to calculate the portion of the taxable gain – rebasing or time apportionment.
For rebasing, you would need to establish the value of the property on 5th April 2015 and the gain arising between then and the date of sale would be taxable. This is difficult to validate retrospectively unless a valuation was undertaken at the time.
Therefore, time apportionment may be the better option. Here the overall gain is calculated and factored by the proportion of the time of ownership since 5th April 2015.
As a result, the dates of the purchase and sale form a central part of the Capital Gains Tax calculation together with the financial details around the purchase and sale of the property.
An important note is that there are no double-taxation arrangements in place for Capital Gains Tax resulting from the sale of a UK residential property.
Even if you have no tax to pay, you must notify HMRC that you have sold the property within thirty days of transferring ownership commonly referred to as conveyancing.
This thirty-day deadline also applies to the payment of the Capital Gains Tax due unless you are already submitting a Self-Assessment Tax Return. In which case you can choose to make the payment when your return is submitted or on the normal due date of 31st January after the tax year of the disposal.
We have prepared worked Capital Gains Tax examples for Private Residence Relief and Overseas Investors.
However, this is a complex area of taxation that we specialise in at CooperFaure. Please email us at tax@cooperfaure.co.uk if you would like an initial, free consultation to discuss your situation.
Next Monday, we will be publishing a newsletter that looks in detail at the rules for a Resident Landlord as HMRC looks to crackdown on collecting the tax due from Airbnb income.
Whether you have decided to move abroad for work or lifestyle reasons but keep your UK property or you have opted to buy a property in the UK as an investment, you need to be aware of the tax implications both if you rent out the property and when you come to sell it.
The rental income of the property is subject to UK Income Tax. The level of net income combined with whether you qualify for a Personal Allowance determines how much tax is due.
To protect the Exchequer, the HMRC introduced the Non-Resident Landlord Scheme to collect tax at source from overseas landlords either from the letting agent or the tenant, unless you receive a rent of less than £100.00 per week directly from the tenant.
This is also the case should the payment be made from the tenant to your UK representative, such as a friend or family member, who is not a letting agent.
Under the scheme, the rent, less any direct expenses incurred, is taxed at the basic rate of 20% with no consideration made of your entitlement to a Personal Allowance or the other costs incurred on the property.
As a result, in most cases, the landlord is grossly over-taxed and only has the chance to remedy the situation at the end of the tax year.
To counter this, as non-resident landlord, you can apply to have you rent received without tax deducted. Broadly speaking, the application will be approved so long as you are up to date with your UK tax returns and payments.
If your application is approved, HMRC will instruct your letting agent or tenant not to deduct tax from your rent. Instead, you will be required to declare your income through a UK Self-Assessment Tax Return.
It is important to bear in mind that if you intend to no longer live in the UK, it does not automatically follow that you are a non-resident for tax purposes and, if you are, there are absolute rules on the number of days you will be allowed to spend in the UK. This will be determined by the Statutory Residence Test. The HMRC provided an online Tax Residence Indicator but, given the Guidance Notes run to 105 pages, we would strongly recommend that you review this with a tax advisor.
Although you have the option of managing the rental of the property yourself or relying on friends or family, this can be extremely time-consuming and stressful. As a result, most commonly a professional letting agent is appointed to administer the property.
As a rule, the agency fee will be between 10% and 15% of your rental income. In exchange, the agency will ensure that the property is tenanted with as few breaks as possible, the rent is collected in a timely manner and the property is well maintained.
If you have a mortgage on the UK property that you are planning to rent out, it is vital that you contact your provider and notify them before you commit to the decision. It may be moving overseas and renting out your property violates your current loan agreement. This needs to be resolved prior to you embarking on the property rental.
Finally, it is critical to ensure that you have adequate landlord insurance in place not only covering the building and contents but also rent arrears, legal costs and damage.
This is easier said than done as the main insurers tend not to make it obvious whether they cover overseas landlords.
To save time on lengthy research, you could opt to contact a landlord insurance broker to advise on the providers and their level of cover and policy limits.
Emergencies tend to happen at the most inconvenient times so, as well as the cost of the premium itself, you should consider how contactable the insurer will be. For instance, an online chat facility would reduce the cost of phone calls.
Ideally, the policy will allow a disclosee to be nominated. This is a person authorised to act on behalf of the policyholder which can be especially useful where your time zone difference becomes a factor.
At CooperFaure, we are currently advising clients with both individual and corporate property portfolios and would be pleased to review your circumstances. Please email us at tax@cooperfaure.co.uk for an initial, free consultation.
We will be publishing an accompanying newsletter that looks in detail at the Personal Allowance, Income Tax and Capital Gains Tax implications for overseas landlords.
In the meantime, this BUTTON links to a free tax calculator to provide an indication of the Income Tax due for the 2015-16 and 2016-17 tax years.
The 2016 Budget included a clause on future measures to tackle the current and historic use ‘disguised remuneration’ schemes. These are generally schemes that involve individuals being paid in loans through structures such as an offshore Employee Benefit Trust (EBT) or Contractor Loans. In both instances, whilst the loans are theoretically repayable, the Loan Agreement is drawn up in a such a way to ensure that, in reality, these loans are never repaid.
The clause ended “…this will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5th April 2019.”
In the first step on this journey, individuals that have been remunerated through an EBT and who have not settled with HMRC by 30th November 2016, will no longer qualify for relief on investment returns.
Commonly under an EBT, an employer paid in funds to an offshore Trust to benefit an employee. At the moment, HMRC has been looking to settle based on the amount paid into the Trust by the employer whilst there is a relief against any gains made on these monies whilst within the Trust. From 30th November 2016, tax will be due on the full amount.
Contractor Loan schemes are still actively marketed on the basis that it will reduce a tax bill for a contractor. Ironically, running a contract through a Limited Company in a tax efficient and compliant manner can usually yield the same return.
Under these schemes, rather than being paid directly from the company that the employee is working for, the remuneration is via loans from an associated trust, partnership or company.
The employee is taxed on the Benefit in Kind of receiving an interest-free loan. For the 2016-17 tax year, this would be 3.00% of the loan and this continues over the length of the employment.
If you are working under a Contractor Loan scheme, it is mandatory for the promoter to declare the scheme to HMRC. HMRC will issue the scheme with a reference number that the promoter must pass on to you for inclusion in your personal tax return.
However, any suggestion that the issuing of this reference number infers that the HMRC has approved the scheme is mendacious. The reality is that this is identifying you as a user of the scheme ahead of future investigation.
Even before the impact of the upcoming changes outlined later in this newsletter, HMRC is aggressively pursuing the users of these schemes.
For instance, under an investigation, HMRC could review your mortgage or other credit applications for evidence of a disparity between the income declared on these and that declared on your tax return. If loan receipts have been included as income for mortgage purposes, HMRC would have compelling evidence of a wilful complicity in tax evasion.
At CooperFaure, we have successfully negotiated settlements with HMRC for our clients working under a raft of these schemes. If you are concerned about your situation, please contact us at tax@cooperfaure.co.uk for a free and informal consultation.
Before looking at the impact of the proposed future measures outlined in the Technical Note published by HMRC, it is important to bear in mind the Brexit effect. A consultation on the proposals was due over the summer but, as yet, HMRC are unable to confirm when this will actually start.
In essence, the government is planning to introduce legislation to put beyond doubt that all loans and other income from a disguised remuneration scheme will be taxed as earnings if these have not been fully taxed or repaid by 5th April 2019.
Thereby, this would remove the necessity for HMRC to prove that a particular scheme was a method of tax evasion.
Within the Technical Note, there are some alarming proposals, the front and centre of which is that the notion of there being a time limit on how far back the HMRC can go to claim and collect tax on disguised remuneration is removed.
Legislation was originally introduced in Finance Act 2011 aimed at putting beyond doubt that EBT schemes in particular were not effective. This legislation came into effect from the date it was announced on 9th December 2010.
Now, HMRC are pointing to their Spotlight 5 published on 5th August 2010 to validate their view is that these schemes were never tax compliant.
Individuals that operated under an EBT scheme before 2011 have a powerful argument that tax was not payable under the law at the time when the loan was advanced. Participators in various schemes are seeking a tax tribunal hearing to make this case.
Even if the tax tribunal ruling goes in their favour, this will be overridden by the proposed new legislation. Moreover, it effectively allows HMRC carte blanche to pursue loans made all the way back to the first EBT schemes in the late 1980s.
The usual tenet is that the responsibility for the payment of PAYE and National Insurance lies with the employer that was party to the avoidance scheme.
Disturbingly, the proposals include an amendment to PAYE regulations to allow the Income Tax and National Insurance to be collected from the employee “where it cannot reasonably be collected from the employer.”
Given that many of the promoters are no longer around for the HMRC to pursue, the is putting the individual fore square in their sights.
Whilst it may seem grossly unjust to target individuals who have effectively been mis-sold schemes on the basis that they were tax compliant, public opinion is with the government especially in the light of the lurid cases of public figures and celebrities using such schemes to avoid tax.
What is beyond doubt is that the legislation scheduled for inclusion in the Finance Bill 2017 will be a game changer.
At CooperFaure, we will be actively participating in the HMRC consultation process. If you have any concerns from working under an EBT or Contractor Loan scheme either currently or historically, we would be pleased to have a candid and realistic discussion on this with you.
We urge anyone with an outstanding EBT enquiry to consider the implications of the direction of travel.
If you would like to arrange an initial consultation on your circumstances or to receive our free newsletters on this and other tax matters, please email tax@cooperfaure.co.uk.
In a widely anticipated move, the Monetary Policy Committee of the Bank of England has today cut the Base Rate to an unprecedented 0.25%.
As a result, borrowing will be less expensive. The estimated 1,500,000 households with tracker mortgages will see an immediate benefit and the expectation is that new property buyers will also gain from a reduction in long-term interest rates.
The rate cut is also aimed to encourage business investment in these times of economic uncertainty. This is reliant on the banks reflecting this reduction in their business borrowing rates.
Given the warning issued by the Royal Bank of Scotland to their 1,300,000 million business customers that they may impose charges on the deposit of funds should the Base Rate turn negative, there is a considerable doubt whether the rate cut will be passed on.
However, as part of the package of measures to support growth and to return of inflation to the target level, the Bank of England announced a new Term Funding Scheme potentially worth £100 billion to support bank lending to companies.
In any event, there is little evidence of businesses looking to borrow in the current economic climate. The uncertainty created by the Brexit vote is fast becoming a reason for inertia whereas it could be a time when fortune favours the brave.
The potential losers will be savers and those with pension annuities who are likely to see a reduction in their income.
This weekend, we will be publishing a newsletter reviewing of the economic state of the nation six weeks on from the EU Referendum vote.
If you would like to subscribe to our free newsletters, please email us at welcome@cooperfaure.co.uk.