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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 email@example.com.
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 firstname.lastname@example.org 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.
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