Do you have a booming overseas property business but are not sure how to account for the income that you receive? The tax rules are predominantly similar to those applied to managing rental properties here in the UK but with a few new ones to keep you on your toes!
Most people who live in the UK and who earn income from renting out property overseas will have to pay tax on that income. Under UK tax law, a person who is resident, ordinarily resident and domiciled in the UK is liable to UK tax on income arising anywhere in the world, regardless of whether it is remitted to the UK. This rule applies equally to rent derived from letting property overseas.
Overseas Property Business
The rules for taxing income from overseas property largely mirror those governing the letting of property in the UK. In the same way that the idea of a UK property business is central to the tax treatment of lettings in the UK, the concept of an overseas property business is central to the tax treatment of income from overseas property. For tax purposes, a UK property business and an overseas property business are effectively separate entities.
The profits and losses of an overseas property business are not combined with the profits of a UK property business. Instead they are taxed separately, This also means that it is not possible to set the losses from one against the profits of the other or, indeed, to set the losses from a house let in, say, Manchester, against the profits of, say, a flat let in Paris.
An overseas property business comprises every business that a person carries on for generating income from land outside the UK, and every transaction which the person enters into for that purpose otherwise that in the course of such a business.
The ‘single business’ concept only applies to properties owned by the same person in the same legal capacity. This means that if a person owns some overseas properties in sole name and some in joint names, the ones owned in joint name would be part of a different overseas property business to those owned in sole name.
Different rules apply to lets in the EEA which qualify for the furnished holiday lettings treatment, detailed consideration of which is outside the scope of this article.
Taxable Profit
An overseas property business is assessed to tax on its net profit. The profit figure is worked out for all overseas lets as if they are part of a single business. The net profit for the overseas property business is found by adding together the rental income from all the let overseas properties (other than any within the EEA that qualify for the furnished holiday lettings treatment) and deducting all allowable expenses. If the net result is a profit, this is taxed as part of the taxpayer’s overall taxable income and tax is payable at the taxpayer’s marginal rate.
Income from the overseas property business will include rent paid by the tenant, any separate sums paid in respect of the use of furniture and fittings, any deposits paid and suchlike.
Allowable Expenses
A deduction is given for allowable expenses when working out the profits of the overseas property business. Broadly, an expense is allowable if it is incurred for the purposes of running the overseas property rental business.
The general rule is that the expense must be incurred ‘wholly and exclusively’ for the purpose of running the business and must not be of a capital nature. However, relief may be available for some capital expenditure in the form of capital allowances.
Examples of items that may be deducted in computing the profits of the overseas property business include
- letting agents fees;
- legal fees;
- accountant’s fees;
- buildings and contents insurance;
- maintenance and repairs;
- utility bills;
- ground rents and service charges;
- cleaning, gardening and similar services;
- advertising costs; and
- costs incurred in letting the property, such as administration costs, stationary, phone calls, travel etc.
Interest on loans to purchase the property is also deductible, but not any capital element of the repayment. As with UK properties, interest is allowable on a loan to the value of the property when it was first let.
The loan does not need to be secured on the overseas property. This means, for example, that if a property was purchased in Spain for £50,000 with a view to being let out and was funded by increasing the mortgage on the taxpayer’s UK home, the interest pertaining to £50,000 of that mortgage is deductible in computing the profits of the let Spanish property.
As with UK properties, a distinction is drawn between repairs (which are of a revenue nature) and improvements (which are of a capital nature). Only expenditure relating to repairs and maintenance, and not to improvements, is deductible.
Furnished Lettings
Where an overseas property is let furnished, the landlord has a choice as to how relief is obtained for the cost of replacement furnishing and fixtures. The simplest method is the wear and tear allowance.
This allows the landlord to deduct 10% of net rents to cover the cost of replacing furniture, furnishings and fixtures when working out the profit of the overseas property business. Net rents are simply the rent received in respect of the furnished let, less any amounts that are paid by the landlord but which would normally be paid by the tenant, such as council tax.
The alternative to the wear and tear allowance is the renewals allowance which provides a deduction for the cost of a replacement item. This is the cost of replacing like with like, less any proceeds received from the sale of the replaced item.
Capital Expenditure
As noted above, it is only revenue expenditure that can be deducted in computing the profits from an overseas property business. However, capital allowances may be available in respect of some capital expenditure incurred in relation to the overseas property business.
In the main, capital allowances will be those for plant and machinery, i.e. assets used in running the business which are not part of the property itself. Items that may qualify for plant and machinery capital allowances would include air conditioning units, lifts, computers used in running the business and suchlike. Where the annual investment allowance is claimed, the capital cost can be written off immediately against profits. Otherwise relief is given over time by means of the writing down allowance. The annual investment allowance limit is currently £100,000.
Losses
The rules on losses incurred in respect of an overseas property business mirror those for a UK property business. Although the singe business concept means that losses from one property within the business are automatically set against profits on other properties, where the business as a whole makes a loss, the loss can only be carried forward and set against future profits of the same overseas property business. It is not possible to relieve the loss against other income in the same tax year.
Practical Tip
Income from overseas lets need to be worked out in sterling. Items not in sterling should be converted using exchange rate applying when the rent was due or the expense incurred and any gain on sale is charged to UK capital gains tax in accordance with normal rules.
When filling in a tax return, income from an overseas property business is returned on the foreign supplementary pages of the self-assessment tax return, rather than those dealing with income from property. Guidance on completing the pages is available in the guidance notes for the foreign pages of the return (see here).
Further guidance on the tax treatment of income from overseas property can be found on the HMRC website and on the Gov website.
By Sarah Bradford
