Under UK tax law, a person who is 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. However, 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.
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 their sole name.
Different rules apply to lets in the EEA which qualify for the furnished holiday lettings treatment, which will be reviewed in a future Blog piece.
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 your overall taxable income and tax is payable at the your 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.
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, discussed below.
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.
- replacement items of furniture
Interest on loans to purchase the property is no longer tax deductible just as with UK properties. Instead a basic rate tax credit is given in respect of mortgage interest paid.
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.
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 etc 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.
The rules on losses incurred in respect of an overseas property business mirror those for a UK property business. Although the single 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.
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.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.