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Tax Tips for Overseas Investors by Arthur Weller

Below are some guidelines for you if you own property overseas.

Income Tax

Income tax is charged broadly on the world income of UK residents.

Individuals are normally charged on the full amount of foreign income arising abroad, whether it is brought into the UK or not. Someone resident in the UK who is not UK domiciled or not ordinarily resident in the UK, is, however, charged only as and when income is brought into the UK (referred to as the remittances basis).

The government is reviewing the residence and domicile rules in relation to individuals. The main area of concern is the ability of long-term resident non-domiciled individuals to pay little or no UK tax because on overseas income they are taxed only on amounts remitted to the UK. Where tax is charged on the amount that arises abroad, the income to be brought into account is the sterling equivalent of the overseas amount at the date it arises. An average exchange rate for the year may be used, using rates published by the Revenue.

If an individual buys investment property abroad, then any rental income from a foreign possession is charged under Schedule D Case V.

Foreign rental income is calculated in a similar way to UK rental income, but the special rules for furnished holiday lettings do not apply.

Profits and losses for all foreign-let properties are aggregated, any overall profit being treated as the profits of an 'overseas property business.' The profit or loss for properties in different countries needs to be calculated separately, in order to calculate the amount of double tax relief available.

Allowable expenses include interest on borrowings to buy or improve the foreign property. If there is an overall loss, the loss is normally carried forward to set against the total foreign letting profits of later years.

Capita Gains Tax

Individuals who are resident or ordinarily resident in the UK are liable to capital gains tax—on world gains if domiciled in the UK and on gains arising in or remitted to the UK if domiciled elsewhere. The gain or loss on the disposal of property abroad is arrived at by comparing the sterling equivalent of the cost at the date of purchase with the sterling equivalent of the proceeds at the date of sale.

When someone has property abroad, this may lead to problems on death because foreign probate may be required before the assets can be dealt with by the executors. For jointly held assets, this will normally occur only on the second death because the ownership normally passes by survivorship to the other joint owner. The costs involved should be borne in mind when considering investing abroad.

Inheritance Tax (IHT)

Inheritance tax (IHT) applies to all worldwide property for someone domiciled in the UK or deemed UK domiciled for IHT purposes. Someone resident in the UK in at least 17 of the last 20 tax years is deemed UK domiciled for IHT purposes. 

If an overseas property is being purchased through a company in order to prevent problems with overseas rules on inheritance, care must be taken that an unwelcome UK benefits charge does not arise because of the occupation of the property by the family.

Companies with Interests Abroad

If a UK resident company has interests abroad, the company is liable to corporation tax on income received before deduction of foreign taxes and also on any capital gains on the disposal of foreign assets. Income from foreign-let property is included under Schedule D Case V.

A company's income from all property let abroad is treated as the profits of an 'overseas property business' and is computed in broadly the same way as for individuals, i.e., under the Schedule A business rules that apply to UK lettings but with the profit or loss computed separately for properties in different countries, in order to calculate the amount of any available double tax relief.

The profits are, however, still Schedule D Case V profits. Interest on any borrowing to acquire foreign property is deducted under the 'loan relationships' rules in the same way as for UK property. Providing the lettings are on a commercial basis, any losses arising may be carried forward to set against later profits from the overseas property business.

Double Taxation

Where the same income and gains are liable to tax in more than one country, relief for the double tax is given either under the provisions of a double tax agreement with the country concerned or unilaterally.

The relief is calculated separately for each source of income or capital gains.

Where there is a DT agreement (DTA), it may provide for certain foreign income and gains to be wholly exempt from UK tax. If not, UK tax is charged, but a claim may be made for a credit to be given against the UK tax for the lower of the overseas tax liability and the UK tax liability. Where there is no DTA, a claim may be made for unilateral relief against the UK tax of the lower of the UK tax and the overseas tax. UK companies are also eligible for DT relief in a similar way to individuals.

About Arthur Weller

Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate tax advisory service on any aspect of UK taxation, including property taxation, for as little as £87 for a 30 minute telephone tax consultation.

To learn  more about this service click here.