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Tax Return Help and UK Tax Filing for People Living Abroad guide image

Tax Return Help and UK Tax Filing for People Living Abroad


For UK Expat and Foreign Nationals living abroad

What you need to know about tax on your UK Rental Income, UK Pension Income and UK Capital Gains Tax, etc. Allowable expenses you can claim, Tax Treaty Claims, complying with rules and completing a UK Tax Return.

When living abroad, the filing of a UK tax return is not straight-forward. For instance, you cannot use the .gov.uk online filing portal from outside the UK and will normally require the services of a registered tax agent, such as Taxeezy, who will file your tax return online through their own UK portal.

Tax on UK Rental Property

The majority of people who receive letting income from land and property in the UK are required to complete a tax return and there is also a requirement to inform HMRC that you are receiving property income by 5th October following the end of the tax year in which you first receive the income. The UK tax year starts on 6th April and runs to 5th April the following year.

For people living outside the UK, when you first become UK non-resident, or commence letting UK property from abroad, tax should correctly be deducted at source by the letting agent (or tenant if you do not have an agent), who should be made aware of your residence circumstances. This deduction can bypass the ongoing need for a tax return concerning this income, subject to the discretion of HMRC, however, can also be very tax inefficient being that your potential entitlement to UK personal allowance won’t be taken into account. Also, regardless of personal allowance, you may have other expenses not accounted for in the calculation of profit from which the agent deducts tax at basic rate. Filing a tax return will resolve this and often results in a reclaim of overpaid tax. The method of application and associated registration is different for non-residents and Taxeezy can advise you on all aspects of this when you Register on the site.

Generally, you should inform HMRC of the income as soon as possible, via the applicable method, regardless of whether you are making a profit, or a loss, on the property. Any calculation for tax is only on your net rental profit – that is, your rental income, less the allowable expenses (deductions) of letting. So, in it’s simplest form, if you have no profit, you will have no tax to pay on this element of income, however, the zero profit (or loss) must be recorded with HMRC, normally via a tax return. If you make a profit and have available UK personal allowance, there also may be no tax to pay (see paragraph below).

The UK Tax Return Property Pages

If your rental income is higher than your rental expenses, there will only be a calculation for tax on the difference (profit), subject to the availability of UK personal allowance. If personal allowance is available, this will offset the tax calculation to the extent of the available allowance and, particularly for non-residents, can result in no tax liability at all, even with a fairly substantial profit. Indeed, the majority of property based non-resident tax returns prepared by Taxeezy result in no tax liability .

When UK non-resident, the entitlement to personal allowance is subject to your Nationality and Country of Residence. Currently, UK and EEA Nationals are entitled wherever they are resident and there are many other combinations of Nationality and Residence that qualify. Taxeezy can specifically advise on this aspect if you Register on the site. You will then be asked, if proceeding to a tax return, to complete the easy ‘Non-Resident’ form.

If your rental expenses exceed your gross income, you have made a loss which can be carried forward to offset future profit. Losses made in prior years can be accumulated and carried forward, however, must be used to relieve first available profit.

On the tax return, profit from property is added to other applicable UK income of the same tax year (if any) and any tax generated is collected under self-assessment – usually a tax bill due by 31 January following the end of the tax year or, in some circumstances, via your tax code during the tax year ensuing after 31st January. The tax code collection may be particularly relevant to retired persons abroad receiving a UK private or employer pension (see ‘Pensions’ item below).

Generally, ‘Foreign Income’ is not relevant to the tax returns of UK non-residents other than in the year that they leave UK residence or arrive in the UK to become resident. If they are deemed UK resident in the transitional tax year according to the Statutory Residence Test, then ‘split year’ treatment may apply which bypasses the requirement to report foreign income received in the ‘non-UK’ part of the tax year. This is quite a complex area which Taxeezy can advise you on if you Register on the site.

UK Rental Income

This is the ‘gross’ income to be entered on the tax return and represents the total amount of rent money paid in the tax year by the tenant before deducting any expenses. This may be paid to you direct, or to an agent, so the timing of the payments (i.e. which fit into the tax year) can either be taken from your bank statement or the letting agent’s landlord statement, whichever is applicable. ‘Net’ rent received by a landlord from an agent after the deduction of expenses is not to be confused with the required ‘gross’ figure for the purposes of the tax return and the ‘net’ amount received in these circumstances will often represent the ‘profit’ as calculated on the return.

For example if the tenant pays £500 per month for the whole tax year, whether to you or an agent, the total rental income to be entered on the tax return is £6,000.

The amount, for a full tax tear of letting, will normally equal the annual amount detailed on the letting agreement, however, may vary if there is any form of dispute or issue of non-payment.

UK Rental Expenses

You can claim certain expenses against the gross rental income and the tax calculation is essentially based on the ‘net’ rental income (profit) after deduction of expenses. You may only deduct expenses that are incurred wholly and exclusively in the course of the letting business and there are special rules for some types of expenses – especially property repair costs.

The types of expense that you claim are:

  • Ground rent you have to pay
  • Letting Agents fees
  • Legal fees on renewing short leases (but not when they are first made)
  • Interest on a loan or mortgage obtained for the purchase of the property (see detailed notes below)
  • Mortgage arrangement fees charged by the lender (see notes below)
  • Other interest directly related to the business may be allowed
  • Cost of gas safety certificates or similar requirements
  • Insurance
  • Accountant’s fees
  • Repairs and maintenance (see notes below)
  • Telephone calls
  • Travelling expenses
  • Wear and tear allowance if the property is furnished. (see notes below)
  • Use of Home as Office (see notes below)
  • Advertising for tenants
  • Repairs and maintenance to the property (see notes below)

If you have several properties, all rental receipts and expenses can be lumped together, so expenses on one property can be deducted from receipts on another. For mixed ownership properties, you calculate your percentage share of income and expenses from the jointly owned property and add the result to the full figures from the solely owned property.

Notes Regarding Expenses

Mortgage Interest

The main property expense for most people is the mortgage payment and you can deduct only the interest component of the mortgage payment. If you have a repayment mortgage, the repayment component of any payments is not an allowable deduction. This means that the claimable mortgage interest will be less than the full monthly repayment you make, as your mortgage repayments will include the repayment of capital. If you have an ‘interest only’ mortgage, the total of payments made in the tax year (or in the period of letting within the tax year) are usually deductible.

If you remortgage the property to withdraw equity or secure the loan on a different property you may still be able to get relief for the interest, however, you should seek further advice as this is a complicated area.

Mortgage Arrangement Fees Charged by Lender

You can deduct mortgage application fees on an annual basis over the life of the mortgage loan for Income Tax purposes and it does not seem to matter if you paid the fee out of cash in one go instead of adding them to the loan.

In other words, no matter whether or not you add the fee onto the mortgage loan or pay it out of cash, you should still deduct over the course of the loan. So if the fee was £2,500 and the loan was over 25 years, that’s £100 per year you can deduct.

If you go on to clear the mortgage early – say because you sold the property or because you remortgaged it, then you can deduct the outstanding fee.

So, in this example, if you remortgaged after 5 years, (say because you found a better mortgage deal), as you would have only used up £500 (i.e. £100 a year for 5 years), the remaining £2,000 of the £2,500 fee could be claimed in one lump as a valid deduction in the tax year you remortgaged.

Changes to Relief for Interest and Finance Costs

From the 2017/18 tax year onwards, interest and finance costs are being restricted to basic rate relief. The transition is occurring over four tax years, at 25% per year, until fully restricted. Thus, in the 2021/22 tax year these costs will be fully restricted. Accordingly, if you are a higher rate taxpayer, you will be affected as the restricted amount is not used in the calculation of profit (i.e. not used as an expense).  The restricted amount is carried down in the calculation to purely relieve tax at basic rate and, if the full amount is not required in relief, it can be carried forward to the following tax year in a similar way to losses.

The Treatment of Repairs and Improvements

Ongoing repairs to the fabric and structure of a let property are expenses which can be deducted from your rental income. Examples of such repairs include:

  • exterior and interior painting and decorating,
  • damp and rot treatment,
  • mending windows, doors, furniture, cookers or lifts,
  • re-pointing
  • replacing roof slates, flashing and gutters.

But you cannot deduct expenditure on improvements, or expenditure needed to bring a property up to standard before the first letting. Expenditure on improvements can be added to the costs of the property and may reduce any capital gain when you sell the property.

The dividing line between improvement and repair can be difficult to judge. For example, if the windows needed replacing in the property you own, but you replaced single glazed windows with double glazed windows, is this a repair or an improvement, or a bit of each? In cases like this, you will be allowed the normal ‘modern equivalent’ – so double glazing is accepted as a ‘repair’ and you can deduct all the costs against your rental income.

Where there is a significant element of improvement – such as you replace the kitchen, then at least some of the expenditure is likely to be treated as improvement, as so you cannot deduct this from your rental income.

Furnishings

If you are letting a furnished property and it has sufficient furnishings for the tenant to be able to live there without providing anything more, you are allowed a deduction for the cost of the furnishings and equipment. The methods are:

a) Wear and Tear Allowance (2015/16 and prior tax returns):

This is an amount you are allowed to deduct each year to cover the cost of the equipment and furnishings. Rather than work out exactly what you have spent, you simply deduct a ‘round sum’ each year. The ‘round sum’ is calculated as 10% of your gross rental income, less any charges and services that would normally be borne by a tenant but are, in fact, paid by you as the landlord (for example council tax, water and sewerage rates etc) . For example, if the annual rent was £6,000, and you did not need to pay the council tax, water and sewerage rates etc, then the annual wear and tear allowance would be taken as a £600 deduction each year.

b) Domestic Items Allowance (2016/17 tax returns onwards):

Using this method, you are not allowed to deduct anything you spend on equipment and furnishings when you first let the property. But you may deduct the costs of any replacement item in full in the tax year that you replace them. The replacements apply to furniture, furnishings, kitchenware and certain other items.  The replacement must be ‘like for like’ and not an improvement in facility.

For example, you spend £700 on a bed when you first let your property out. You are not allowed to deduct any of this cost from your rental income. After 6 years, you replace the bed, getting nothing for the old one, and spend £800. You may deduct the whole £800 in the year you replace the bed.

If you need a vehicle or equipment, such as a lawnmower, for use exclusively in your rental business, you may be allowed to make a deduction for the costs by way of ‘capital allowance’.

Private Use

If you use your own let property when you return to the UK for holidays, family visits, etc., you need to work out the percentage of use. This percentage is then applied to the overall expense claim, effectively reducing it. The percentage calculation will be approximately 2% per week of use.

Record Keeping

If you receive property income, you should keep records and it is advisable to store them for 6 years. A simple single entry cash book or computer spreadsheet/accounting system is enough – but it must be kept up to date. You will need to keep all the necessary paperwork to back up your entries. It is sensible to have a copy of essential information in case your entries, regardless of format, are damaged or lost. This includes bills you pay and copies of the rent receipts/invoice you send to your tenant. If you use a letting agent make sure you keep all the statements and other documents that they send you. For jointly owned property, the owner who is the ‘record keeper’ of the property has their name and address entered on the tax returns of all the owners.

Jointly Owned Property

There are special tax rules for jointly owned property and particularly for married couples and civil partners. The rules mean that you can’t simply decide between yourselves how you want to be taxed or, for example, just give the rental income to the partner with the lower income. The rules say that income from jointly owned property must be split according to the percentage share of ownership. Only in exceptional circumstances can a different split be used, such as when the property is legally owned in unequal shares and income (profit) is accordingly divided in the same proportion. Also, there are legal agreements that can be made concerning a different split of income, which then have to be ratified by HMRC before being applied to a tax return.

Therefore, in an entirely 50/50 property ownership, the property pages of the individual’s tax returns are normally identical. The only variation to this, other than a ratified legal agreement, may be where one of the partners has applied for exemption from deduction of tax and the other has not applied, or applied at a later date. This can involve a variation to the tax liability generated and, where partners are eligible for UK personal allowance and have it available (i.e. not ‘used up’ by other UK income), the partner who has applied will normally pay less tax on this particular income. Owners are required to apply individually for exemption and, in most cases, all partners do apply at the same time. In some circumstances, identical property pages can produce a variation in tax liability between partners of different Nationalities living together. This is caused by an eligibility to UK personal allowance for one partner and not the other.

Tax Treaty Claims

As tax concerning immovable property is principally chargeable in the Country of location under most tax treaties, there is no automatic provision for Tax Treaty claims concerning this income on a UK tax return, however, if there has been a tax calculation on this income in another Country and you have already paid UK tax on it, the treaty claim might apply there and you would need to seek local advice.  Tax treaty claims can be applicable to UK pensions, subject to the treaty in place specific to the Country where you are resident (see ‘Pensions’ item below).

The Non-Resident Landlords Scheme

The Non-resident Landlords Scheme is a way of collecting tax due on the UK rental income of non-resident landlords (those who own and rent out property in the UK, but do not live in the UK).

If you are moving abroad and are letting out your former home, or any other UK property, it is important to realise that you remain liable to UK tax on those rents and may still need to complete, or commence completing, self assessment tax returns.

Equally, if you purchase UK property for the purposes of letting while resident abroad, the same situation applies.

You will need to consider if you want to apply for exemption from deduction of tax at source on form NRL1i. In most cases the application is approved and precipitates the filing of tax returns (if not already being filed). If you do not apply, your letting agent (or tenant) is obliged to continue deducting tax from the rent at basic rate without taking into account any UK personal allowance to which you are entitled or additional expenses to which you may be subject. Taxeezy can help with this application, free of charge when you Register and the ensuing tax return can be used to reclaim, or offset, tax already deducted at source. Sometimes, this reclaim can be substantial and applied to several tax years in retrospect.

Following the end of the tax year, any deducting agent must issue an NRL6 certificate to landlords, detailing the tax deducted and paid over to HMRC. This document is very important in the reclaim of tax in association with a tax return and should be actively requested from the agent if not received within a month or so from the end of the tax year.

If you are resident abroad and, for some reason, your letting agent (or tenant) is not deducting tax at source from rental income, then you must apply regardless on form NRL1i and this is relevant to both UK and Foreign Nationals. Any delay can ultimately lead to substantial penalties by way of late tax return fines and other potential fines.

UK Pensions and People Living Abroad

Your pension income may comprise State Pension and/or Private/Employer Pensions.

For solely State Pension receipt there is usually nothing to do unless you have other UK income, such as from property, which is ‘pushed’ by the pension income above the UK personal allowance, accordingly generating a tax liability.

This ‘pushing’ effect can be eliminated by a Tax Treaty Claim that effectively removes the pension income from the calculation. The UK makes provision in many tax treaties for full relief of UK pension income, including State Pension, and the use of an agent, such as Taxeezy can facilitate in determining whether you are eligible in your particular Country of Residence when you Register on the site.

The same applies for Private/Personal and Employer pensions, however, where a tax treaty makes provision it usually excludes, for UK Nationals, pensions generated as a result of ‘government service’, such as local authority, teacher pensions, etc.

Particularly if you have a combination of State Pension and other pensions, tax will normally be deducted at source by the provider of the personal/private/employer pension(s) due to the element of State Pension being included in the tax code sent to the provider by HMRC. If the relevant tax treaty applies, this tax can be reclaimed in all, or part, initially by removing the State Pension (subject to treaty) and then applying further measures, as applicable to the treaty. Some treaties allow relief on State Pension, some on Private/Employer pensions and some on both, so it is important to understand the applicable treaty in order to obtain maximum benefit.

The tax treaty claim is made alongside the tax return on form HS304 and the result of the claim brought in to the SA302 calculation on the tax return itself. All items are filed online together.

Where there is a reclaim of tax, the taxpayer has the option to have this paid into a UK bank account, sent via cheque to the tax return address or retained on account to offset future tax (or for future reclaim).

If a tax liability remains, even after a tax treaty claim (as may be the case where additional income, such as from UK property, is received) taxpayers with a private pension may be able to opt to have the tax collected via their tax code over the course of the tax year following the deadline of the tax year in question. The principal criteria for this is that the tax return is filed by 30th December preceding the official deadline on 31st January. There are other criteria and often, with a number of small private pensions, rather than a single principal pension, the collection may not be possible and a lump sum would be payable on or before 31st January.

It is important to remember that a tax code collection will reduce the periodic pension payments over the tax year of collection, nevertheless, this is far more cash efficient in comparison to a lump sum payment.

Tax code collection becomes even more cash efficient if ‘payments on account’ are generated in the circumstances of a tax liability of £1,000 or more, resulting in an effective doubling of the required lump sum payment. The tax code collection cancels the requirement for ‘payments on account’.

UK Capital Gains Tax and People Living Abroad

Traditionally UK non-residents had only to report capital gains on return to residence, subject to length of stay abroad, however, now a report is required ‘immediately’ on the disposal of UK Land and Property. If you dispose of shares in a company that derives all or part of it’s income from land or property you may also have to make a report. Disposal includes ‘giving away’, as well as selling and, for jointly owned properties, all owners have to make individual reports according to their share.

Regardless of whether you currently file tax returns, an initial report has to be made to HMRC within 30 days of conveyance (completion) detailing the disposal of the property and a late report can attract a penalty that increases over time. If you currently file tax returns, on the initial report you have the option to defer a calculation and associated payment of any tax to your ensuing self-assessment tax return (the tax return applicable to the tax year in which the property is sold).

When the calculation is made on UK Residential Property, non-residents have the option to choose an increase in value from 5th April 2015 in order to calculate the principal gain. This can be achieved by either taking the market value as at that date supported by an official valuation, or use the ‘time apportionment’ method which calculates the amount of gain between that date and disposal relative to the whole period of ownership. The traditional whole period ownership can be also be used and, essentially, whatever is the most favourable method for the taxpayer is selected. This is why it is important to seek advice on this subject being that it is possible for a calculation, using one method, to produce a substantial tax liability and another method, far less tax, or no tax liability at all. You can Register with Taxeezy for a good start in this direction.

It is often the case that there will be zero tax liability on the most favourable calculation being that each individual is also entitled to an Annual Exempt Amount, regardless of where they are resident. If the final gain, after applicable reductions, falls below this (and assuming only one disposal is utilising the ‘AEA’) then there will be no tax liability.

Note: All advice give in this article is general and should not be acted upon without first receiving direct advice specific to your circumstances. Taxeezy is an established, long-standing, tax return service that provides specific advice, free of charge, to registrants on this site.

 

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