U.K. Properties- Tax Treatment

April 29, 2013

Many Irish investors have acquired property in the U.K. For Income Tax purposes returns have to be made to both the U.K. and Irish Revenue. If you have UK rental income liable for tax then you will pay both U.K. tax and Irish tax thereon. The Irish Revenue will allow a credit against the Irish tax liability on the U.K. rental income for the tax paid in the U.K. If the property is sold you pay Capital Gains Tax to the Irish Revenue under Irish tax rules. Capital Gains Tax may also arise in the UK and the terms of the Double Taxation Agreement between the countries should be examined – we can provide further advice here.

Dealing with the U.K. Inland Revenue

You must register with the U.K. Revenue for Income Tax purposes and obtain permission from them to allow your tenant pay rents to you without deduction of tax. If you have an agent acting on your behalf in the U.K. they will normally make all necessary arrangements with the U.K. Revenue.

The UK Revenue operates what is referred to as The Non-Resident Landlord Scheme under which clearance is issued for the payment of rents to the non resident landlord without deduction of tax by the tenant. This scheme is administered by
H M Revenue & Customs
Centre for Non Residents
Unit 364 St John’s House
Merton Road
Bootle
Merseyside
L69 9BB
United Kingdom

If you do not have a letting agent acting on your behalf in the UK who will deal with this matter you would need to contact the UK Revenue directly to obtain the required permission from them for payments of rents without deduction of tax. Otherwise your tenant is obliged to deduct tax from your rental income

Making U.K. Tax Returns

U.K. rental tax returns have to be made up to the 5th April each year. By and large the rules for the calculation of your rental profit are the same as for the Irish Revenue. However, there is a different method of claiming a tax allowance for the fit-out of the property and subsequent replacements.

There are two options available here in respect of the letting of furnished residential property. The first is the simplest one whereby you claim a deduction from your gross rents equal to 10% of your rental income instead of a claim for wear & tear on the fit out costs for the property. Under this option you can never claim a tax deduction for the cost of furnishing a property either for the initial fit out or for subsequent replacement costs.

Under the second option you can claim a tax deduction for the net cost of replacing furnishings after the initial fit out costs. There is no annual allowance granted and no claim allowed for the initial fit out costs. As and when furnishings are replaced you claim a tax deduction for the net cost of the item in full during the tax year when it is incurred. Whichever option is chosen must be applied consistently to the properties involved. You cannot switch from one to the other.

Many Irish investors purchased new apartments which would have been fully fitted out at commencement as part of the purchase package. Generally speaking the annual 10% claim is the option chosen by most investors for simplicity and ease of calculation purposes.

If you have a taxable rental profit then U.K. income tax may have to be paid thereon. Once the rental profit is calculated you are entitled to the normal UK personal tax free allowances. For most investors who purchase a property with a substantial mortgage thereon no UK tax liability will arise thereon. If UK tax is paid you will be entitled to claim a credit for the U.K. tax paid against the Irish tax due on the U.K. rental income.

The U.K. Revenue should send you a tax return form for each tax year. Two sections of the form need to be completed. These two sections of the UK tax return form can be completed without the requirement to complete the detailed tax return form. One deals with the rental income return and the other is a declaration of non-residence in the U.K. The UK Revenue may exempt you from having to complete a tax return form every year. This normally happens when it is very obvious to them that you will never owe any UK tax on your rental income. This arrangement is solely at the discretion of the UK Revenue and is subject to whatever conditions they state in their letter notifying you of the exemption.