Tax on holiday home rental income

shrinkydink

Hi

Just to throw another spanner in the works, have you considered whether you need to pay tax in the country where the property is located? It is likely the other country has primary taxing rights on this income and will likely want their share of the tax due. It might even be possible that the UK has no right to tax the income at all. If you do need to pay tax in the other country you'll probably find there will be different rules on what expenses are allowable.

silvercar

shrinkydink wrote: »

Hi

Just to throw another spanner in the works, have you considered whether you need to pay tax in the country where the property is located? It is likely the other country has primary taxing rights on this income and will likely want their share of the tax due. It might even be possible that the UK has no right to tax the income at all. If you do need to pay tax in the other country you'll probably find there will be different rules on what expenses are allowable.

:beer:

Thank you, I hadn't thought of this.

It seems that there is a choice of taxation calculation, 10% of gross rental income and no expenses allowed or a tax rate that starts around 30% but you can set off expenses. If only the UK had such a simple option!

silvercar

jimmo wrote:

I have never done it, but given that the let property is outside the EU, I would feel justified in calling for your passport as well.

:eek::eek::eek::eek:

and there destroys the purpose of having a holiday home that you can't visit.

I hope it never comes to that!

shrinkydink

silvercar wrote: »

:beer:

Thank you, I hadn't thought of this.

It seems that there is a choice of taxation calculation, 10% of gross rental income and no expenses allowed or a tax rate that starts around 30% but you can set off expenses. If only the UK had such a simple option!

Unfortunately it can get a bit more complex now. You really need to have a read of the double taxation treaty between the UK and the country where the property is. Hopefully you will find it on the HMRC website - I cannot post links but just google "HMRC treaties in force" and the first result should take you there.

99% of the time these treaties are not written in user friendly language, you need to first work out where you are treaty resident (usually article 4) and then find the section about rental income, often called "income from immovable property".

It's possible your rental income is taxable in only the other country but it may also be taxable in the UK. If that's the case the same income is going to be getting taxed twice so you would need to look at ways to relieve this double taxation.

It can a little messy if you need to pay tax in both countries. If you want to let me know the country the rental house is in (PM if you want to keep it private), I can translate the relevant part of the treaty into plain English and you and give you a bit more detailed advice.

silvercar

There is a treaty agreement. I know that we would be classed as non resident unless we spent over 183 days there.

Does this bit mean that we would be allowed to deduct the overseas tax paid from our liability here:

"Country tax payable under the laws of country and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within country shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the country tax is computed; "

Does it mean that we calculate the tax due under UK rules then deduct from it the tax we would be charged in the overseas country? It looks to me like it does. If that is true, then it is easier to choose the 10% of gross income over there as a straightforward calculation (and no risk of disputes or investigations) and subtract it from the UK calculation.

shrinkydink

silvercar wrote: »

There is a treaty agreement. I know that we would be classed as non resident unless we spent over 183 days there.

Does this bit mean that we would be allowed to deduct the overseas tax paid from our liability here:

"Country tax payable under the laws of country and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within country shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the country tax is computed; "

Does it mean that we calculate the tax due under UK rules then deduct from it the tax we would be charged in the overseas country? It looks to me like it does. If that is true, then it is easier to choose the 10% of gross income over there as a straightforward calculation (and no risk of disputes or investigations) and subtract it from the UK calculation.

First minor point to note is that treaty residence is slightly different from domestic (tax) resident but provided you are only resident in the UK you can treat the two as being the same, but something to bear in mind for the future maybe.

You have correctly interpreted the part of the treaty you have quoted. You just need to remember you cannot take a credit in the UK larger than the UK tax due and you must make sure you have paid the tax due in the overseas country before taking a foreign tax credit on your UK tax return but other than that that sounds like you know what to do.

You will need to report the foreign taxed paid on the foreign pages of the tax return. I'm not sure if these are available when filing online at the HMRC website. If not, you'll either need to use a software package or paper file.