Overseas rental income taxed?

kerrick

If you are a UK tax resident but have a property you rent out overseas. The double taxation treaty (DTT) with the UK says that the rental income is taxed in the country where the property is situated. 

1. Do you still have to enter that income on your UK self assessment tax return?

2. If it is your only source of income, and it is less than the personal tax free allowance £12,570, do you still have to file a self assessment? Would the income be tax free in the UK as it is less than the tax free allowance?

3. Broadly speaking is the basic tax calculation where there is a DTT as as follows:
If you are taxed overseas 18% on the net profit after costs, e.g. in GBP £15,000 rent, £5,000 costs and overheads (no mortgage interest), £10,000 net profit, tax paid locally £1,800, would you then pay tax in the UK on the same profit £10,000 @ 20% £2,000, less £1,800 paid under DTT, UK tax due £200. 

Is that maths correct?

Jeremy535897

If you have no UK tax liability, you should not need to file a UK tax return, and if HMRC issued you with one, ask them to withdraw it.

If you decide to complete the self assessment tax return, you would declare the overseas rental income, but if this is your only income, there would be no tax payable. If you had suffered 18% tax abroad, it would normally be deducted from the UK tax liability on that source of income, in the manner you describe, but if you pay no UK tax on it because of the personal allowance, you cannot ask HMRC to repay an amount equal to the overseas tax.

Read the DTT carefully. Most start from the premise that the country of residence (the UK in your case) has the right to tax all your worldwide income. In addition, the country in which your job is, or property is, may have rights to tax that income. Where both countries' domestic law allows them to tax that income, the country of residence normally allows a deduction for the amount of tax the overseas country is allowed to charge, up to the liability concerned.

As an example, the UK France DTT says:
1. Income derived from immovable property (including income from agriculture or forestry) situated in a Contracting State may be taxed in that State

So if France taxes income from French property on people wherever they live, a UK resident will pay both French and UK tax on income from the property, but the UK will give credit for the French tax paid, up to a maximum of the UK tax on that income.

kerrick

Thanks Jeremy, very helpful.

Where you say "you would declare the overseas rental income, but if this is your only income, there would be no tax payable." Do you mean:
No UK tax is payable overseas rental income is not taxable (tax exempt) in the UK? 
Or,
No UK tax is payable in this example, because the amount of profit is below the £12,570 UK tax free allowance and there is no other income?

If there was other UK source income, e.g. dividends, interest, UK source rental income, and total income exceeded £12,570, then the overseas rental income would be taxable at the UK marginal rate, but minus the tax paid on that income overseas?

silvercar

You have to be careful as things that would be allowable as expenses of your rental overseas may not be allowed here. There is also exchange rate considerations.

Jeremy535897

kerrick said:

Thanks Jeremy, very helpful.

Where you say "you would declare the overseas rental income, but if this is your only income, there would be no tax payable." Do you mean:
No UK tax is payable overseas rental income is not taxable (tax exempt) in the UK? 
Or,
No UK tax is payable in this example, because the amount of profit is below the £12,570 UK tax free allowance and there is no other income?

If there was other UK source income, e.g. dividends, interest, UK source rental income, and total income exceeded £12,570, then the overseas rental income would be taxable at the UK marginal rate, but minus the tax paid on that income overseas?

Overseas rental income in the hands of a UK resident is taxable in the UK, but if your worldwide income is less than £12,570, you have no UK tax liability. The first £2,000 of dividends and £1,000 of interest are taxed at 0% in 2022/23, and there is a starting rate for savings on top in certain circumstances. But say you had UK rental income of £10,000 and overseas rental income of £10,000. You would pay UK tax on the overseas rental income as follows:
UK rental income covered by personal allowance so no tax due
Overseas rental income £10,000 less £2,570 (balance of personal allowance) = £7,430 at 20% = £1,486, fully covered by the £1,800 overseas tax paid.
See https://www.gov.uk/government/publications/calculating-foreign-tax-credit-relief-on-income-hs263-self-assessment-helpsheet/relief-for-foreign-tax-paid-2021-hs263

If your overseas rental income is received in a foreign currency, you will have to convert the foreign currency into sterling, usually using the spot rate when the rent is received or the expense paid.

Speedbird676

silvercar said:

You have to be careful as things that would be allowable as expenses of your rental overseas may not be allowed here. There is also exchange rate considerations.

Indeed.

I do my partner's tax return for a property in Australia where he ends up paying very little tax due to the allowances for depreciation, most of which are not allowable here.

kerrick

Jeremy535897 said:

kerrick said:

Thanks Jeremy, very helpful.

Where you say "you would declare the overseas rental income, but if this is your only income, there would be no tax payable." Do you mean:
No UK tax is payable overseas rental income is not taxable (tax exempt) in the UK? 
Or,
No UK tax is payable in this example, because the amount of profit is below the £12,570 UK tax free allowance and there is no other income?

If there was other UK source income, e.g. dividends, interest, UK source rental income, and total income exceeded £12,570, then the overseas rental income would be taxable at the UK marginal rate, but minus the tax paid on that income overseas?

Overseas rental income in the hands of a UK resident is taxable in the UK, but if your worldwide income is less than £12,570, you have no UK tax liability. The first £2,000 of dividends and £1,000 of interest are taxed at 0% in 2022/23, and there is a starting rate for savings on top in certain circumstances. But say you had UK rental income of £10,000 and overseas rental income of £10,000. You would pay UK tax on the overseas rental income as follows:
UK rental income covered by personal allowance so no tax due
Overseas rental income £10,000 less £2,570 (balance of personal allowance) = £7,430 at 20% = £1,486, fully covered by the £1,800 overseas tax paid.
See https://www.gov.uk/government/publications/calculating-foreign-tax-credit-relief-on-income-hs263-self-assessment-helpsheet/relief-for-foreign-tax-paid-2021-hs263

If your overseas rental income is received in a foreign currency, you will have to convert the foreign currency into sterling, usually using the spot rate when the rent is received or the expense paid.

Thank you for the detailed explanation.

For overseas rental income taxed in the UK, do you have to use the same criteria as you would on a UK property to calculate the amount subject to UK tax (i.e. the amount due before any reduction for tax already paid overseas)?

So if overseas the income was taxed overseas as follows:
Rent received: £15,000
Standard allowable 33% lump sum deduction: £5,000
Mortgage interest: none
Actual expenses (repairs, fees, service charges etc.) £2,000
Taxable profit; (lower of rent minus actual expenses or standard 33% allowance: £10,000
Tax paid overseas @18% £1,800

In the UK self assessment return would you declare:
Rent income: £15,000
Allowable expenses: £2,000 (allowable are same as under UK rules)
If no Personal Allowance remains:
UK taxable profit: £13,000 @ 20% £2,600
Less tax paid overseas £1,800
Tax due in UK £800

Is that correct?

Jeremy535897

Yes it is.

nigelbb

The usual case in Double Taxation Treaties modelled on the OECD template is that for income earned by a resident of country A from property rental in country B then country B has first rights of taxation then country A gives a credit for tax that would have been liable on that income in Country B. Article 6 applies & the Commentary n Article 6 on page 170 gives a good explaination.

https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en#page35