All your buy-to-let property investment tax questions answered
Property investment around the world has a downside: tax. Whether you invest in property in Australia, Singapore, Europe, or the United States, you’re going to pay tax. Collecting tax is just about the only thing that most governments are good at.
Here in the UK, the government has spent decades taking as much tax as possible from easy targets such as smokers, drinkers and drivers. Over the last couple of years, they’ve turned their attention to property investors.
We’ve put together this guide to demystify UK tax on the rental income from UK property investment made by non-residents. Here you’ll read all the information you need about taxes on rental income when you live overseas and invest in UK property.
What income is taxable?
All rental income is income tax liable in the UK, no matter where you live.
Are there any costs I can deduct from my income to reduce my taxable income?
Yes. You are allowed to deduct a range of expenses from your gross rental income. These include:
- Investment property management fees
- Accountancy fees
- Landlord insurance
- Maintenance costs
- The cost of repairs (but not improvements)
For a full list visit the government’s website, which details property investment tax deductibles.
Can I deduct my mortgage interest payments?
You used to be able to, but the rules changed on April 6th 2017. Now you must calculate the mortgage interest tax relief, and then deduct this from the income tax liability on your net rental income. The amount you can claim depends upon your tax position. By 2020, it will be limited to 20% of your mortgage interest. To help you, we put the following guide together:
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I want to make an improvement to my property. Can I deduct this cost?
Nope, I’m afraid not. It would be classed as a capital expenditure, and so can’t be deducted. But you should keep all the receipts because when you come to dispose of the property you will be able to offset it against the capital gain. It will reduce your capital gains tax liability.
In my country, I can claim depreciation. Can I claim that on UK property investment?
No. If you’re making an investment into commercial property, there may be certain items (plant and machinery) on which you can claim depreciation. On residential property, there is no such deduction or relief.
Can I offset the losses on one property against the profits on another?
When you calculate your tax liability, all your property incomes and expenses are amalgamated, so losses are automatically offset against profits. However, we would always recommend that you keep separate records, too. It will help you identify underperforming properties and turn them around or sell them.
What rate of tax will I pay?
It depends on your personal situation. Many overseas investors – particularly expats, citizens of EU countries, and citizens of some Commonwealth countries – will be able to claim the UK’s personal tax allowance against their income made on UK property investment. If below the UK personal tax allowance, you can earn tax-free rental income from the UK.
Will I have to pay tax in my home country on UK property investment income?
It depends on how your tax authority treats the rental income from the UK. A lot of countries have a double taxation treaty with the UK, and you may be exempted from paying tax in your home country. To find the answer, you’ll need to speak to your tax authorities.
How do I pay any tax due?
There are two ways to pay income tax on rental income in the UK if you live overseas.
The first is to complete an HMRC tax return. Any tax due will be calculated by HMRC and is often payable in two instalments: one by 31st January in the year and the second by 31st July following the year end. You must apply to be able to pay tax this way.
If you don’t apply or your application is rejected, the investment property manager must deduct 20% from your net rent and pay this to the taxman. If the tenant pays you directly, he must deduct 20% and pay to the taxman (unless the rent is under £100 per week, when no deduction is made). If you overpay tax under this method, you must make a claim for reimbursement by filling in a tax return.
Always seek tax advice from an accountant
The above property tax rules are general. While they determine the framework for income tax on UK property investment by overseas investors, how much tax you pay depends on your personal situation and other earnings.
So it’s vital that you get the advice of a good accountant who understands UK property investment. Of course, their fees can be deducted from your rental income to reduce any tax liability!
Contact one of our team today on +44 207 923 6100, and we may be able to recommend a good accountant who will ensure you pay the right amount of tax on your UK property investment, and not a penny more.
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P.S. Read the HMRC Guide to non-resident landlord scheme.