Tax on overseas properties: which laws apply?

Tax on overseas properties: which laws apply?

Rebecca Sheldon of Old Square Tax Chambers provides an overview of some of the main issues that a UK resident needs to consider regarding the taxation of any overseas property they own, including how rental income and capital gains are taxed, the remittance basis and how to prevent double taxation.

If you would like advice on tax on overseas properties, please contact us.

What taxes am I liable for on overseas properties?

If you are a UK resident, then despite the property being located abroad, you will still be liable to pay capital gains tax if you make a gain on the sale of the property.

This is because the UK tax system taxes UK residents on their worldwide income and gains.

It may be possible to get private residence relief on the gain in certain circumstances. This relief is however unlikely to apply to holiday homes, as the conditions for this relief are not met by temporary visits.

If you are UK domiciled, then although the property is overseas, it will generally form part of your estate for inheritance tax purposes. It is also important to note that if the overseas property is in a forced heirship jurisdiction, you may not be free to leave it to whoever you choose in your will (as some jurisdictions require that a certain amount of your estate must pass to your spouse or children).

There may also be foreign taxes on foreign properties to be aware of, such as purchase taxes, income tax on rents, tax on sales and annual taxes related to the property value. There may also be local gift and death taxes to consider. It is therefore important to get advice on any local taxes from a tax expert in the jurisdiction where the property is located.

How is overseas rental income taxed in the UK?

If you are resident in the UK and receive rental income from an overseas property, you will be taxed on this in the UK in the same way as if the property was located in the UK under the income tax rules.

The first £1000 of your income from a rental property may be tax free because of the UK’s property allowance.

Allowable expenses should be deducted from the income, and any profit then declared to HMRC in your self-assessment return. Allowable expenses can include interest costs, but there are limits to how much tax relief is given for this.

Property expenses that are capital in nature will not be allowable expenses. However, they will be deductible when working out any gain on the overseas property if it is later sold.

If however your overseas property is a furnished holiday let, different rules apply.

What is the remittance basis?

If you are UK resident but not domiciled in the UK, then you may be able to opt to be taxed on the remittance basis regarding your foreign income and gains rather than being automatically taxed on your worldwide income and gains (the arising basis).

Under the remittance basis, you pay tax in the UK on foreign income and gains only if they are remitted (i.e. brought) to the UK.

You need to think carefully about whether you should opt for the remittance basis to apply. This is because it has a cost, as you will lose your personal allowance for income tax and annual allowance for capital gains.

Plus, if you are a long-term UK resident (basically UK resident for 7 of the previous 9 tax years), you will also have to pay a remittance basis charge (which starts at £30,000).

It should therefore be considered whether the remittance basis rather than the arising basis will be effective for tax purposes in each individual’s circumstances.

The remittance basis is only available if you are not UK domiciled. Since 6th April 2017, individuals can be deemed to be UK domiciled where certain conditions are met (in particular, if you have been UK tax resident for 15 of the previous 20 tax years).

If you only have very small amounts of unremitted foreign income and gains (currently less than £2000 per year), the remittance basis applies automatically.

How do I make sure I’m not taxed twice?

A UK resident that owns overseas property is at risk of being taxed twice on any income or gains – by both the jurisdiction in which the property is and by the UK (as the UK taxes worldwide income and gains of UK residents).

This is known as double taxation.

If available, the remittance basis outlined above may help to prevent double taxation in practice.

Fortunately, the UK also has double taxation agreements with many countries. A double taxation agreement contains a set of rules stating which country has the right to collect the tax in certain situations see Harriet Brown’s article on DTA’s for general information.

If a double taxation agreement gives exclusive taxing rights to the UK, then tax is only paid in the UK (and vice versa). This overrides the domestic UK law and the domestic law in the other country.

If there is no double taxation agreement in place in the jurisdiction where your overseas property is, then you may still be able to get tax relief for any foreign taxes you pay against your UK tax bill through a foreign tax credit (or unilateral relief).

The foreign tax credit is the lower of (a) the foreign tax paid on the income or capital gain and (b) the UK tax liability on that same income or capital gain.

In conclusion, this is a complex area of law potentially involving several different UK taxes, foreign taxes and reliefs.

In order to ensure that the right tax is paid (and not overpaid), it is important to seek specialist tax advice.
Old Square Tax Chambers has many combined years of advising on the taxation of overseas properties.

If you would like advice on tax on overseas properties, please contact us.

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