By Iain Yule
Many expatriates have property back in the UK which they have let out to tenants. But, according to tax experts at the Fry Group, your status as non-resident provides no immunity from UK tax on rental income. Because that income is clearly from a UK source, say Frys, profits remain liable to tax.
The first step is to work out whether there is a profit and then whether that profit is taxable.
Many people appoint a professional agent to manage property. Their charges are fully deductible in arriving at the taxable profit, as are accountancy costs incurred in the preparation of annual accounts. You may also deduct expenses such as water rates, repairs, maintenance and insurance, and some expenses incurred before the let was made.
For property let furnished, you may claim an allowance for the wear and tear of furnishings. This is calculated by taking 10% of the rental income paid for the year, less water rates and council tax (if you pay these). Or you can claim for replacement costs. But Frys reckon in most cases the 10% calculation is easier and more beneficial.
There is no restriction on the amount of borrowing on which tax relief is eligible when the loan was taken out to buy or improve a property. And any relief is given at your top rate of tax. It is also now possible to remortgage a property, but then the maximum amount of loan qualifying for tax relief is limited to the original purchase price of the property.
Having identified the expenses and set them against the rent received, a profit or a loss will result. Even if a profit is showing, there might not be tax to pay. This is because if you have UK source income then even as an expatriate you can still claim UK annual personal tax allowance (worth £5,225 in 2007/08). But the taxman will not automatically grant you this allowance – it is up to you to claim the relief and prove that you are eligible for it. Also, say Frys, any profits made from jointly-owned properties will be split between husband and wife, so two personal allowances may be applied to the profit.
When the personal allowance is more than the profit then no tax is payable
Even if you do not receive a self-assessment tax return, the onus is on you to notify the taxman if you have a tax liability on letting income. You will have to fill in a tax return and pay any tax due by 31 January each year, with any tax due ‘on account’ for next year’s bill payable by 31 July.
There is also an obligation to keep full records so that an accurate calculation of letting profits can be made. Records should include rental statements provided by letting agents and receipts for bills paid. Normally these records should be kept for five years after the 31 January following the end of the year of assessment. Failure to produce them if you are investigated by the taxman can lead to substantial fines.
If, like most expatriates, you use a letting agent, it is important to realise that the ‘non-resident landlord scheme’ obliges him to deduct tax from all rents paid, after deduction of some expenses. The agent will then account for this tax to revenue and customs and provide information about you, details of your property, the gross rent paid and tax deducted. The agent in turn will then provide you with a tax certificate to use with your own tax return. If there is no agent involved, this responsibility is normally passed to the tenant.
Alternatively, say Frys, you can apply to the revenue to receive your rental income without tax having been deducted at source. But this means that your tax affairs must be up to date, you have a good ‘tax history’ (i.e. paid your bills promptly) and you must complete self-assessment tax returns.