UK tax on foreign holiday homes
Most people know that any rental income received from UK property should be declared to HMRC and tax paid, but what if the property is not in the UK?
If you are a UK resident and domiciled, you are liable to UK tax on your worldwide income and gains.
Many of us have favourite holiday destinations in the UK or overseas that we have only been able to dream of this year. Some lucky folk buy a holiday home in their chosen location so they can make longer visits without prohibitive hotel costs – which is lovely – but if you let your foreign holiday home when you are not in residence you will have tax liabilities in both countries. You may therefore end up declaring rent and paying tax in the country where your property is situated as well as in the UK.
You should ideally employ a local agent to handle your tax returns in the country where your property is located. Your rent will then be calculated according to the local tax regime. You should keep copies of your offshore tax returns, demands and receipts as HMRC may request proof of foreign tax paid when considering relief.
You should advise HMRC of your new source of income by 5 October following the end of the tax year in which you first receive rent. You will be issued with a unique taxpayer reference (UTR) and required to file annual tax returns. If you already file a tax return you should still advise HMRC of your new income source by 5 October.
Rent is normally taxed as your personal business income, but properties in the EEA (European Economic Area) may meet the requirements to be taxed as trading income under the Furnished Holiday Lettings rules. As many holiday homes are only let your property out occasionally, these rules are not covered here. If you would like further information on the Furnished Holiday Lettings regime please contact us.
Declaring your rent in the UK
When you declare your income and expenses in the UK be aware that you must use the UK rules. Some expenses that may be allowable in the other country may not be allowable in the UK and vice-versa.
If your gross rent for the year is below £150,000, your rental income and expenses should be recorded on the cash basis, that is all income actually received and all expenses actually paid in a 12 month period, usually the income tax year 6 April to the following 5 April. If you use another accounting date you will have to apportion the two sets of accounts that straddle the relevant tax year to obtain the necessary figures for your tax return.
You can claim expenses which are incurred wholly and exclusively for the purposes of renting out the property such as landlord’s insurance, utility bills, property tax, repairs and maintenance, and replacing domestic items such as beds or white goods. The costs of replacement goods are limited to the cost of a like for like replacement plus any costs of delivery and/or disposal less any amounts received on the disposal of the old item.
You should apportion these expenses so that you only claim the proportion that related to the days that the property was let. For example, if you let the property for 120 days you should claim 120/365 of your expenses as relating to the let periods.
From 6 April 2020, mortgage interest relief is given as a basic rate reduction of tax rather than as a deduction from income. As above, you should claim only the proportion that relates to the periods for which the property was let.
You will be able to claim foreign tax credit relief for some, or all, of the tax suffered under a relevant double taxation agreement. If there is no agreement you will usually be able to claim relief. HMRC may require evidence of the foreign tax paid.
If you are lucky enough to have more than one overseas holiday home all your overseas properties are treated as one business. If you make a loss in the tax year that loss cannot be offset against UK rental income but will be carried forward to offset against future rental profits arising overseas.
What if I haven’t declared my rental income?
HMRC has a Let Property Campaign that allows you to report your undeclared rental income and bring your tax compliance up to date. HMRC reduce the penalties for those who come forward. It is always advisable to contact HMRC before they contact you.
The Private Wealth & Tax team here at Child & Child can prepare your tax returns, help you disclose undeclared rental income under the Let Property Campaign, or any other undeclared foreign income under the Worldwide Disclosure facility. We can also discuss your Inheritance Tax position regarding a worldwide will or separate wills for your UK and offshore assets.