UK House Income- How to limit Tax?

Hello,

I am now an Australian Citizen (british Ex Pat), where I rent my UK property - in UK the tax is around 20%, whilst obviously here it is higher. The rent just covers the outgoings, so I am left with a big tax-bill. I understand I can claim tax already paid in the UK (however, I am under their threshold), and can claim other expenses like interest payments- however, I am still left with a loss- and I can not really put my rent up in that area.

Can someone please give me guidance towards this- minimising this. Someone explained to be about making that a Company as this would require less tax after paying all the fees. Could someone please advice if this is legally correct and a good idea?

thanks
Tom

 

If rent just covers outgoings, why do you have a tax bill?

If you have a loss, there shouldnt be tax payable.

 

I am paying my mortgage off via repayment - its not interest- (sorry, I wasn't clear on that).

 

Still not clear. Can you put up some numbers? Rent, interest, principal repayments? Whats your marginal tax rate?

 

Sure, for example (using rough numbers)- Rental income in GBP 1000, my outgoings for mortgage, property management, insurance etc comes to around GBP 970- however, as the mortgage is repayment, I can only claim the interest element of it towards expenses- not the whole mortgage repayment. This is great, as I understand I am paying off my mortgage, however, this is currently not in. my pocket, and I will receive a tax bill on the small profit of GBP 30, and on my mortgage repayment (minus the interest component)- therefore, leaving me with a tax bill- of around $4000 per a year.
Thanks for your help

 

Have you declared to HMRC that you're not a UK tax resident (cant remember how we did it, might have been a form?)? Then, fill out an NRL1 form (none resident landlord) so you're agent can pay your rent gross without taking the tax off first. Then, as the income is low, request via letter to HMRC that, as you are not a UK resident for tax, do not intent to be again and are now an Australian Citizen "please" can they release you form not having to fill in UK self assessment forms any more (if you ever had to anyway).

Then, treat your UK income as foreign rent income accordingly based on the ATO rules.

Not advice.... but that's how it was for us for a long time (since got rid of the UK house), the rules may have changed in the UK now as well for foreign landlords, it may be taxed differently now?

 

How do you get a tax bill of $4k if you're profit is $30 (per month?) and the tax free threshold is what, about $9k in the UK?

 

If I recall rightly, I think they changed the tax rules so you cant offset all of your expenses any more against rental income in the UK? Only up to a certain percentage? Which is why, if you can, it's better to ensure HMRC are no longer treating you as a tax resident, grant you an NRL1 exemption and let you off the hook for self assessment, that way you only have to do one set of tax returns, your Aussie ones, and treat all the income and expenses as foreign rent based on how the ATO say to treat it.

 

It used to annoy the heck out of me, for years I had to self assess in the UK as I had my own company, my partner was standard PAYG earner so she never had to self-assess.

Our property was owned 50/50.

When we told them we were leaving, and we got the NRL1 exemption, we both got letters from HMRC... mine said "great, good luck in Aus, we know you still have a house but as the net income is so low we don't need you to fill in your self assessment anymore, go about your business in Australia and enjoy and inform us if you ever move back..." (or along those line), my partners letter said "great, good look in Australia, we know you stil have a house here and the net income so low and you've NEVER had to do a self assessment tax return, but we'd like you to now do one every year from Australia please....".

Every year for the passed 13 years we filed a return for her and every year we sent a letter accompanying it to ask PLEASE stop making us fill one in, there will likely never be taxable income for her in the UK, we haven not been back in 13 years and don't intend to come back. We sold that place last year so the last UK return showed the sale and we again requested not to have to keep doing UK returns for her, this time they said yes! Finally, after 13 years.....

 

As I am paying off my mortgage- the interest on my mortgage I can claim towards the tax, however, as their is a repayment element to it- so I am debited to the bank around 700- I think around 300GBP is going to the interest, whilst 400GBP is going into paying the mortgage off/down- so as that 400 counts as an income (can not use towards the interest part)- i will be paying 37.5% tax on that 400 plus the 40- which is GBP440=GBP 5280 per year (2000GBP per year). Which I will have to save up for. These are the rough numbers. Have I got this correct, as this is what I took away from how the accountant explained it to me?


Thank you every one- i have just filed the UK Tax one- but I will endeavour to fill in the NRL1.

thanks
Tom

 

Remember too the loss is foreign income, not a rental loss in the usual part of the Australian tax form. This can affect use of losses.
And the UK tax credits wont be creditable if you make a loss. Foreign tax credits are limited to the extent of additional AU tax paid on the net foreign income in most cases. If its $0 the credits are not given. They are lost. A foreign tax credits arent refundable but can only offset basic tax. There can be strategies around investments that pay foreign income to soak up the tax credits in each year.

 

A mate at a BBQ with no idea. Selling to another entity will trigger all sorts of issues incl UK duty, legals, CGT (on both sides of the ocean) and ....A bad and costly idea

 

If I'm following correctly, the 400 has nothing to do with it. The taxable income is the difference between what you receive in rent less any allowable deductions (regardless of how much yo pay into the mortgage).

So:-

Rental income - 1000
less allowable interest deductions (i'm sure this is a sliding sale in the UK now?) lets say 300 form your example
Insurance - 100
Management lets say - 150?

So the taxable income is the rent received less the above allowed deductions = 450

Times by 12 months = taxable UK income of 5400

Looks like the UK tax brackets are now 0% up to an income of 12,500 per year? so NO UK tax is payable.

Now, your Australian returns has the same sums (but times by the exchange rate), so your UK income in dollars, less deductions in dollars is still GBP 5400 per year, but at 1.95 ex rate is $10,530 AUD - (ATO website has tables on how and when and what rates to use to convert)) so this is additional "worldwide income that you are taxed on in australia, using 37.5% is about the $4k you originally came up with.

This would be payable in Australia though, you should not have a UK tax bill from the numbers you've provided? And seeing as it loos like you're way under the UK tax free threshold, I'd be writing and asking HMRC to release you from having to file UK returns.

Does't mean you pay any less tax (you'll still have to declare the UK rent on your Aus returns), but it's one less set of returns to file a year.

If I recall they changed it in the UK so you're only allowed to deduct a certain percentage of the mortgage interest, not the whole lot? Even though, with a tax free threshold of 12,500 GBP you'd still be under the threshold even if you weren't allowed to deduct any expenses from the rent (in the UK).

 

Hi Propgate,
Exactly, I understand the tax bill of $4000 predicted isn't for the UK, but Australia. I filed my return for the UK the other day and it was 0, which is great, as you said, under the threshold.


However, in Australia, i am taxed on income from my current job, with this foreign income taxed on top of this.

I have just checked my mortgage statement- I have paid interest for the past year of £2,983.22.
however- my mortgage payments are 740GBP per a month, (as 500GBP goes to lowering the mortgage repayment, and 240 goes towards the interest).

So exactly as you've explained, I will be paying that 37.5% of the $10,530 AUD to the Australian tax office- around $4000.

My concern for this leaning towards this post, is after the mortgage payments of 740GBP (500 plus the interest of 240)- I am only left with 360GBP/$712 per year left in the accountant which I will use towards tax.

Therefore, I will have to pay $3288 ($4000-$712) to the tax office from my other income.

 

Yeah i thought it was sounding like this, thanks for setting out straight. Any advice though on this tax bill would be awesome, if not, less spending in the bottle-o.

 

Yep, you got it, you'll have to pay it from your other income. Tax owed is tax owed, they don't care where you get it from, just that they get it from you ;-)

 

I’ve just gone through something similar this year. After 10 years of doing UK return and paying no tax due to threshold in UK which meant a nice annual income of around £5k (no mortgage)...I’ve had to inform HMRC I’m a Aus citizen for tax purposes. They have still sent me a UK self assesment for the current year and I had to declare the income on top of my Aus income so was taxed at top marginal rate!!!

 

Wait until you sell the UK property. It will be even more complex. And only 50% of the UK tax will be creditable here on the capital gain. I have had a handful of ex UK residents sell their UK property recently as conditions and the collision of CGT etc made it viable based on exchange rates etc

 

I've heard about this, is there a time allowance when you can sell the property before you have to pay CGT to both countires?

I have only been here 1.5 years.

 

I've managed to detach myself from UK HMRC - I sold my UK home when I moved here. When our UK family company was sold and I got my share I didn't have to pay UK CGT as I'd been out of UK for five complete tax years (not five years - come here April 7 and the clock doesn't start ticking until April 5 next).