Your definitive guide to UK non-residents tax
As you can imagine, here at Gladfish we receive a large number of calls and emails from UK overseas investors about UK non-residents tax . These include ex-pats and foreign nationals. The interest from abroad has increased since Brexit – with the fall in the value of the pound against foreign currencies, and UK property became an even better value in the currency of the investor. Property investment UK opportunities have indeed increased for these UK overseas investors.
However, in this article I’m not going to discuss the effects of Brexit – I’ve done that already when in my investment blog. Instead, I’m going to examine a question that most UK overseas investors based offshore ask:
“When I invest in property in the UK, how will I be taxed?”
This article will give you a sound knowledge of what taxes you’ll be liable to when you invest in UK property. I’ll cover both income and capital gains taxes, and also look at what costs you can deduct to reduce your tax liability. And I’ll do this in plain English, avoiding the technical accountant’s speak that most people find hard to decipher.
Invest in property – UK income tax calculation
Whatever your residential status, if you take advantage of investment property opportunities in the UK and then receive rent from them you will be liable to income tax. However, your income tax liability isn’t based on the total rent you receive – you’re allowed to deduct certain costs and expenses first.
Broadly speaking, these are the costs and expenditures that you can deduct:
· Property Management
If you have a property management company to look after your UK investment properties (like the majority of UK overseas investors), you can deduct this cost from your rental income.
· Repairs and maintenance
Typical day-to-day repairs and maintenance costs can also be deducted. For example, if a water pipe bursts, a boiler needs replacing, or redecoration is required, the costs of doing so can all be deducted from your rental income.
· Wear and tear
The rules on wear and tear have recently been updated, and they cover any items or furniture that are included in the property as part of the rental package on fully furnished properties. (A tip here is to make sure these are detailed in the property inventory.) Before April 2016, you could claim 10% of the rent annually as a wear and tear allowance against your rental income – whether or not you spent that amount on repair of replacement.
Now you can only claim the actual expenditure you make on items affected by wear and tear issues. This include:
- White goods such as fridges, freezers, and washing machines
- Curtains and linen
- Movable furnitures such as sofas, beds, and wardrobes
- Crockery and cutlery
Your property and landlord insurances are all deductible from your rental income.
Ground rent, council tax, and utility bills
If you own your UK investment property on a leasehold rather than freehold basis, any ground rent that you pay will be deductible.
When you rent out your property, it’s most likely that your tenant will pay utility and council tax bills. However, if you pay these on behalf of your tenant, you can then deduct these from your rental income before calculating your tax liability. This facility is especially valuable during void periods when you don’t have a tenant – you’ll still have to pay any utility costs and council taxes, but can claim them against your rental income for the year.
You can make a deduction for the mortgage interest that you pay, although this is being restricted to the basic rate of tax, in a four-year phased transition that starts on April 6th, 2017. See our investment blog “UK property tax: how mortgage interest tax relief is changing” for more information about how this will work and how it might affect you.
A word of warning here: if you receive a loan from a connected person, the HMRC will base the tax relief on commercial mortgage rates and not the rate at which you are paying.
A little advice here, too: it’s often tax efficient to borrow when you invest in property. UK mortgage rates are particularly low at the moment, and you might do well to take advantage of the investment benefits of using a buy-to-let mortgage broker even if you have the capital to invest without borrowing.
As you can see, there are plenty of tax deductibles you can use to reduce your income tax liability.
However, you can’t claim for improvements to the property. Any capital expense that is made to improve the property cannot be used to reduce your tax liability. For example, if you spend, say, £10,000 to convert a three-bedroom house into a four-bedroom house, or to add another bathroom, you cannot deduct this from your rental income. Instead, the way this is treated is as a capital expense and as an additional cost when calculating any capital gain you make on the sale of the property.
Always keep comprehensive records
The HMRC are likely to check the validity of your claims against tax liability. For this reason, it’s important that you keep comprehensive records of all your costs and expenses. Detailed records are the key to tax efficiency on your UK property investment.
The rate of income tax
As a non-resident individual, you’ll be taxed on your rental income after deductibles at a rate starting at 20% and rising to 45%. However, you may be able to claim the personal tax allowance before paying any tax (this is currently around £11,000 per year).
If you do fall into the bracket of paying higher rates of income tax, it may be worth considering setting up a limited company for your property investment, because limited companies get charged a flat rate of 20% on their profits (and if corporation tax rates are reduced further, which looks possible after Brexit, this rate could fall further).
Will you have to pay tax on UK income in your country?
UK overseas investors that invest in property also ask us if they will have to pay tax on their rental income on their UK property in their home country. The answer to this is that it depends on your country’s tax agreement with the UK. If it benefits from a double taxation treaty with the UK (and most countries do), then the answer is no. However, it’s best to double-check this by contacting your tax authority.
Taxation of property portfolios
The UK tax authorities amalgamate all your properties and treat it as a single entity when calculating income tax. It means that losses from a poorly performing property can be offset against profits from others automatically.
How do you pay income tax in the UK?
As a foreign UK overseas investors, you could apply to be treated in the same way as UK resident landlords. If this is the case, you’ll include the calculation of rental income (and deductibles) on an annual tax return, which you’ll need to send to the HMRC. The tax year runs from 6th April one year to 5th April the following year. Payment is then made in two instalments: on January 31st in the year and on July 31st following the end of the tax year. Sometimes a final payment will be required on January 31st the following year.
If you don’t apply to be treated in this way (or your application is denied), your property manager/lettings agent will have to deduct 20% from any rent (net of expenses) they collect and pay this to the Inland Revenue. If the tenant pays you direct, he must also deduct tax at basic rate from the rent. If you overpay tax because of this method, you’ll need to reclaim the overpaid portion from the HMRC by filling out a tax return.
Your liability to capital gains tax
When you sell your property, any gain you make may be subject to capital gains tax. Most commonly this will be calculated by deducting the property’s value at 5th April 2015 (or at the date of purchase if later) from the sale price.
The amount of capital gains tax that you will be liable to pay is also decided by your income tax status. Currently, if you pay income tax in the UK at the higher rate, you will be liable to capital gains tax at 28%. If you pay at the basic rate, then capital gains tax will be charged at 18%.
You might be subject to inheritance tax in the UK. Most UK overseas investors who have never had any other connection to the UK will only be liable to UK inheritance tax on their UK assets. Inheritance tax is charged at 40%, though some reliefs and exemptions will reduce this:
- The first £325,000 is tax-free
- You can also use certain trusts to reduce inheritance tax liabilities
Most of the services and other costs incurred when renting out property in the UK will incur a VAT charge. However, residential property letting is not a VATable activity, and so you cannot claim back any of the VAT charged to you.
Stamp duty land tax, or SDLT, is charged on all except the cheapest properties. The rate charged depends on the price you pay for the property. The highest rate is 12% for properties valued at more than £1.5 million, although a 3% surcharge is levied for second properties.
The UK tax system doesn’t have to be a minefield that’s difficult to negotiate. If you follow the above guidelines, you’ll reduce your tax liabilities and maximise your profits when you take advantage of investment property opportunities in the UK. The key takeaways are:
- Claim all the tax deductibles you can
- Keep detailed records
- Submit tax returns in a timely fashion
- Always take expert advice
Live with passion,