Jobs & Money Detail
Protecting your property from the tax man
Financial services expert Simon Harvey gives us in-depth information regarding the tax implications for 'reluctant landlords' who are bound for Australia.
Due to the current state of the UK property market, many prospective migrants are finding themselves becoming 'reluctant landlords' as they are unable to sell their home prior to emigrating. Most do so in the hope that it will be for the short term and plan to sell once the property market picks up again. In reality, however, it could of course still be some time before this is the case, meaning there is a danger of new landlords becoming unstuck if failing to plan appropriately.
With the amount of regulation involved and the difficulty posed in managing the property from such a distance, you would be well advised to consider employing a good letting agent to manage the property for you. It is important that you fully understand your responsibilities as a landlord and worth seeking specialist advice regarding your tax position in both the UK and your new home country.
Tax on rental income
Any income you receive from letting property situated in the UK is taxable in the UK after deduction of allowable expenses, even if you cease to be resident in the UK.
Due to the fact that you will be a non-UK resident landlord, your letting agents (or your tenant if letting agents are not employed) are obliged by law to deduct tax at the basic rate from the gross rent, less deductible expenses. They can only pay your rent gross if they have HM Revenue & Customs' authority. Provided your tax affairs are up to date you can apply for approval to have your UK rent paid gross by completing the appropriate form and forwarding it to the revenue.
HM Revenue & Customs will usually send you a Self Assessment Tax Return once a year to establish whether you have any tax to pay. You may find that the profit does not exceed the UK personal allowance (assuming you qualify) and there is no tax to pay. In most cases, Australia will tax residents on their worldwide income and capital gains. Permanent residents need to include rental income from their UK property in their Australian tax return; however, you can claim a credit for any UK tax paid to avoid double taxation. You should keep proof of all expenditure to ensure you can claim tax deductions for everything you're entitled to, including rates, interest, insurance, letting agent fees, depreciation and capital works.
The profit will be taxable at the highest marginal rate of the individual who owns the property, to a maximum of 46.5 per cent. If a property provides a positive return, higher rate tax payers may wish to consider transferring ownership to a lower income earning spouse. On the flipside, if deductions exceed the rental income and the property makes a loss, this loss can be offset against other assessable income, so it may be advantageous for the higher earning spouse to hold sole ownership of the property. You should also consider how this will affect your capital gains tax position at time of disposal before reaching any decisions on whether you should transfer ownership.
Releasing equity
In many cases, the home is an individual's major asset and it may be necessary to release equity from their property to help finance their move. If there is a mortgage against the rental property, you can claim the interest charged on that loan as a deduction for UK tax purposes. If the remortgage is not structured correctly, you may find that the interest on the additional borrowing is not tax deductible in Australia.
Before remortgaging, you will need to ensure that the selected lender will give you permission to let out your property.
Generally buy-to-let mortgages carry hefty arrangement fees and the rates are higher than that on a residential basis. As such, it may make sense to remain on a residential mortgage if your lender will grant permission to let. If you are looking to remortgage, there are a few select lenders who will still grant you permission to let once you have lived in the property for a relatively short period of time after you have taken out the new loan.
You may wish to opt for a fixed rate deal so that you know what your outgoing will be each month and to help you budget. If you intend to sell the property at the earliest opportunity you may opt for a deal with a short term fixed rate or minimal redemption penalties.
Tax on the sale of your property
A property which has always been your main residence will qualify for principal residence relief upon sale and will not be subject to UK capital gains tax (CGT). Where an individual has only occupied his property for part of the period of ownership, a proportion of the gain upon sale could be assessable to tax. Note, however, that upon emigration, it is possible to remove yourself outside the scope of UK CGT, provided that you are neither resident nor ordinarily resident in the UK for a minimum period. This can provide excellent planning opportunities for individuals who own more than one property in the UK although you will however need to consider Australian CGT.
As previously stated, Australia will tax most residents on their worldwide capital gains. The Australian tax system allows you to claim main residence relief in a similar way to the UK. When a property has not been your main residence for the entire period of ownership, you may only be granted part exemption.
Fortunately, though, in some instances you can choose to have a property treated as your main residence for CGT purposes despite not actually living there, including your UK property. Failure to keep your tax affairs up to date can result in penalties and interest on late payments.
If you believe that renting out your UK property is a viable proposition, seek specialist mortgage and tax advice to ensure you stay on the right side of both the UK and Australian tax office.
Simon Harvey is the operations manager at Montfort International plc
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