Meg Saksida highlights distinctions in the tax treatment of UK and overseas rental income.
In the UK, when taxing property income, profits must be differentiated between property income generated from UK properties and property income generated from properties located outside the UK. Two distinct property businesses will therefore need to be declared for taxing. The UK business will comprise of normal letting and the letting of furnished holiday accommodation sited in the UK; likewise, the foreign letting business will include the same for those properties sited abroad.
There may also be other activity which generates income from land and other transactions that a taxpayer enters into connected with land, so the ‘rental income’ can include other income apart from rents. An example of this might be income from fishing rights in a river.
Rental losses
With the exception of furnished holiday losses, within both businesses losses made on one property can be offset against profits made on another property in the same business.
For example, a loss on an apartment in Bristol can be offset against a gain on a let property in London. A loss on a villa in Italy can be offset by a gain on a châteaux in France. However, between the businesses, this is not possible. The loss on the villa in Italy cannot be offset against the gain on the property in London, and an overall loss on the overseas property business cannot be offset against an overall gain on the UK rental property business (and vice versa).
An overseas property business is defined in the same way as a UK property business and is also taxed in the same way. The only difference is that the land exploited for the property income is located outside the UK.
However, how those profits are taxed on the individual taxpayer will depend on the residence status, domicile etc., of that particular taxpayer.
Residence status
The profits of the overseas business will only be chargeable to income tax in the UK if the landlord is UK resident. Non-UK resident landlords with rental income from properties outside the UK are outside the scope of UK taxation.
However, UK resident landlords will, by default, be chargeable to income tax on the arising basis. Profits are charged to income tax in the tax year they arise and are chargeable in the same way and at the same rates whether the property is sited in the UK or overseas.
Domicile status
If the UK resident landlord is non-UK domiciled, they may have the option of using the remittance basis. This is ‘an option’ so will need to be elected for every year that the taxpayer wishes to use it. The remittance basis allows taxpayers with overseas relevant foreign income, who are non-UK domiciled, to be charged to income tax in the UK only to the extent the profits are used or enjoyed in the UK. Any profits not used or enjoyed in the UK that are retained outside the UK are not charged to UK tax. Rental income is an example of relevant foreign income for which the remittance basis can be used.
The remittance basis is available for the first few years a non-UK domiciled taxpayer is UK resident without a charge. Once the taxpayer has been resident for seven out of the last nine years, there is a charge for the privilege of using the remittance basis, set at £30,000. Once the residence in the UK hits nine out of the previous 12 years, this charge rises to £60,000. When the non-UK domiciled individual has been UK resident for 15 out of the previous 20 years, from the 16th year of residence, the remittance basis is no longer available.
The subtle difference in charge
Once the landlord has chosen to use the remittance basis for their profits generated abroad, the legislation which covers the computation of those profits changes. Rather than being charged under the income tax legislation in ITTOIA 2005, s 268 as income from rental property, the profits are charged under ITTOIA 2007, s 832 as income remitted to the UK.
Under ITTOIA 2005, s 268, the rental income generated in the tax year is taxable. Under ITTOIA 2007, s 832, the relevant foreign profits are chargeable when they are remitted. This may well be in the year the profits are generated, but could also be in any future year that the profits are subsequently remitted, even if the arising basis has been opted for in that future year.
Rental income inside a trade
Where the landlord’s activity is a separate UK business in its own right, and the letting is being carried out as a part of their business, any rental profits are computed using the rules for the computation of rental income.
For example, within a legal partnership, the top floor of their building is let out to another business generating rental income; their trading profits will be calculated using the rules for trading business and the letting profits will be calculated using the rules for property income. If the business is carried on abroad, however, these rules are reversed. The letting part of the business’s profits is computed as if it were trading income rather than property income.
Rental income charged already abroad
The income from letting abroad is likely to have already been charged to tax in the country in which the property is sited. The standard OECD double tax treaty gives taxing rights to the country in which the property is sited. If there is such a treaty between the UK and the country in which the property is sited, relief will be given in the UK for such tax already paid through the treaty. If not, unilateral relief will be given by the UK. This relief will be the lower of the tax calculated as due in the UK on the doubly taxed income and the tax paid in the country in which the property is sited.
To calculate the appropriate amount of tax in the UK, the gross amount of the profits received before tax will need to be considered for each foreign source of income (if more than one). This may require a number of separate computations to establish the correct amount of double tax relief.
If losses are in point, these should be allocated to the source that has suffered the lowest amount of foreign tax. This will assign the source with the higher foreign tax rate to the profits. Although this sounds counterintuitive because the rules allow the lower of the UK tax and the overseas tax to be deducted, when allocating the sources associated with the tax by matching the higher tax rates to the rental profits rather than the losses, whilst the overall tax payable does not change it becomes more likely that the overseas tax is the lower, meaning full reimbursement of the tax paid is available.
Practical tip
Generally, profits from a letting business overseas are calculated and taxed in the same way as profits from a letting business in the UK. However, there are subtle differences which offer opportunities to ensure no tax is incurred on foreign lets in the UK (for a non-UK domiciled landlord, or where double taxation has occurred).
