UK Tax on UK Rental Income

[TandT]

Hi everyone, 

New here :-) 

We are moving to Adelaide in August with my partner's work. We have a home here in the UK that we will be renting out. I have tried looking online but keep going round in circles - we've spoken to a general accountant who couldn't help, and we're struggling to find someone specialising in tax and international stuff who's willing to advise. They keep telling us they can't take on new clients! I've tried the UK Money Advice Service but they just provided links to generic online information which doesn't help. I wondered if anybody could tell me from their own experience or otherwise whether we will be paying UK tax on rental income in our scenario which is as follows:

- We own the house 50/50 so I assume any rental income and personal allowances will theoretically be split 50/50

- When we get to Oz, my partner will be working and paying Australian tax. I don't have a job lined up so may not be working for a while, if I do find something it will be part-time.

I understand we have to notify HMRC and fill in self-assessment forms at both sides and declare everything. What I can't establish is how much tax we'll be paying, if any. Will our UK tax-free personal allowances still apply because we're earning in Oz - i.e. we can both earn up to £10,000 per year from the property without paying tax? We won't be making much money on the property as we've got our mortgage to pay, so it's actually pretty significant if a portion of that is going to the taxman as we need contingency for the house - so we want to get an idea of what to keep back for the end of the year.

I've looked back through the forum but can only find general advice about notifying HMRC and doing a self assessment. Sorry if this has been asked many times before.

Thanks! We'll look to join the Adelaide forum as well shortly.

 

 

 

 

[Aussiepom]

Firstly i'm not a tax specialist but i do have a tenanted UK property and am an Australian tax resident earning a salary in Australia, so this is my understanding:

Firstly you will both need to apply to formally be non resident landlords NRL1.  If you use a managing estate agent, you will both need evidence of NRL1 to avoid the estate agent deducting tax before forwarding on your rent.

To your main question.  You will both be able to earn up to your tax free UK threshold during a UK calendar year, so if for example the property is jointly owned and you receive £15,000.00 a year in rental, with this split into two you will earn £7,500.00 each in that year and providing you have no other UK income, then this would be under the tax threshold.  You would therefore not pay tax on this amount in the UK. 

You will however as tax residents of Australia, need to declare this UK income in Australia and pay tax on it accordingly.  The income will be added onto any earnings you have here and you will be taxed accordingly. Your Australian tax thresholds apply here.

If your rental is over the threshold of your combined tax free allowances, firstly, lucky you - you can probably afford lots of expert advice on this matter, but secondly where you are taxed in the UK, you shouldn't be taxed again in Australia.  There are some calculations that your Australian tax accountant will be able to apply to work all this out for you.

You'll find that many people in Australia use tax accountants, not least because they don't have a self assessment system here as they do in England - folks need to fill in tax returns.  I strongly recommend you budget for a tax accountant that can advise you on both Australian and UK tax law.  There are a few that lurk around in these forums.

[Aussiepom]

I'm still too new to Australia to comment on the self assessment piece.  I would hope that if you aren't legally obliged to pay tax because you're under the threshold, then self assessment wouldn't be necessary, whereas if you are over the threshold, then you probably do need to use self assessment, and you'd want to because you would want to deduct your various rental expenses from the taxable income.

[TandT]

Thank you for your reply Aussiepom. We finally managed to see a tax advisor over here, who confirmed that our UK tax-free allowance would still apply. Rent charged won't go over this threshold so that is what we wanted to hear (especially as the rent charged is not actually income for us to use - 90% of it will be paying our UK mortgage repayments and estate agents management fees, so we will see very little of it and won't be making any money). He couldn't advise us about the Australian system, understandably.

We do need to fill out a self assessment form at both ends, so one for the UK and one for Oz, which was expected. We'll declare everything on both forms (all incomes in UK and Oz) which was expected too.

I am a little concerned that you mention that we will be taxed on the rental in Australia though as we had assumed, from what the tax advisor said, that it would come under the UK tax-free allowance and therefore we would not be paying tax on it. We will obviously have to get advice from the Australian end once we are there, but in the meantime do you know any more about this? It would quickly become infeasible if we were paying 20-30% tax on the incoming rent, when 90% of the rent is covering our mortgage repayments (I understand mortgage repayments are not considered when it comes to rental income). Of course my partner will be paying Australian tax on his salary as per a normal Australian resident, and I will be too once I secure a job. 

 

[TandT]

Oh and thanks for the information about the NRL form. We were aware of this already but I hadn't written it in my original post, so thanks for confirming anyway!

[Aussiepom]

Sadly i'm pretty sure my point around tax in the UK and Australia is correct.  The joint tax treaties between Australia and UK mean you shouldn't have to pay tax twice. But if you're earning money in the UK and not paying tax on it there, and you are also an Australian Tax resident, you are required to declare the earnings and pay tax on them in Australia.  This is a quote from the ATO website:

 

You must include rental income from overseas properties in your Australian tax return.

This income is the full amount of rent and associated payments you receive or become entitled to when you rent out your property. It doesn't matter whether it's paid to you or your agent.

If you receive associated payments in the form of goods and services, you’ll need to work out their monetary value for your Australian tax return.

Your rental income includes any assessable amounts you receive relating to limited recourse debt arrangements involving your rental property.

If you have paid tax in another country on your rental income, you can claim an foreign income tax offset in your Australian tax return.

 

The ATO website is down but try googling "australia pay tax on uk rental income" in a few hours.

 

Our tax accountant here told us to keep receipts for everything to do with the general expenses of tenancy on the house as he can use them to offset our tax here in Australia; much as the foreign income is assessed, so are foreign expenses.

Again, i'm not a professional so you may want to check this out in Australia.  If by the way you are given different advice, please let me know who is providing it to you - not least because if there are ways around this i'd like to know.  I had the similar shock/disappointment you have just had, or are having.

Another one for you - consider remortgaging before you go, or at least sus out HSBC mortgage eligibility - i say this because remortgaging is a real pain.  And i mean a real pain.  if you don't satisfy HSBC eligibility criteria you may be stuck with your non-discounted rate after the rate period ends, and be unable to move mortgage providers.

 

Cheers,

 

 

 

[AJ]

You will pay tax here, the rent you make is income.  You can offset things like maintenance, mortgage interest, agent fees etc.

[Aussiepom]

 

[Marisawright]

2 hours ago, Aussiepom said:

Sadly i'm pretty sure my point around tax in the UK and Australia is correct.  The joint tax treaties between Australia and UK mean you shouldn't have to pay tax twice. But if you're earning money in the UK and not paying tax on it there, and you are also an Australian Tax resident, you are required to declare the earnings and pay tax on them in Australia.  This is a quote from the ATO website:

 

It really is worth finding an accountant who handles both UK and Australian taxes, instead of having one in each country.   The overlap is hard to manage otherwise.

Make sure you claim all your deductions for Australian tax. As well as agent's fees and advertising fees, you can claim mortgage interest (but not the principal) - your lender can tell you what component of your repayments are interest each year.  Another one is depreciation.   Get a depreciation expert to do a report before you start renting, they will give you a depreciation report, and you can then claim an amount for depreciation every year.  It won't make much difference if your property is old, but if it's a newer property or you've done renovations, it can take a nice chunk off the tax payable.

Since depreciation reports are not a thing in the UK, it's not easy to find someone who can do it, but I know they exist and their name has been mentioned before on these forums.

[TandT]

Thank you for your replies. I am disappointed about this, it's just not something we realised and will leave us in a bad financial position. Renting out our house is going to lose us money via the Australian tax system  We thought we had been covering our bases by speaking to two UK tax advisors but obviously not - they didn't say anything about paying Australian tax on UK rent even when we asked them about what else to consider. Our fault for making assumptions and now it's too late to do anything about it! To explain a little, my partner is being transferred via work and we haven't had the luxury of months of being able to research all the implications. They've simply said they want him there ASAP, and we've gone along with it believing we'd considered everything - I think we have, apart from this stupid rental tax scenario! Our flights to leave the UK are in four weeks.

Of course if I find out any helpful tips I shall pass them on @Aussiepom though it doesn't look like there is any way around it. Thank you also for the heads up about the remortgaging. This is going to be another shocker (after reading the other thread) and I fear it will mean we actually have to come home. We're not going to meet the HSBC criteria that you very helpfully posted about on the other thread. 

@Marisawright Thank you for the tips about the potential rent-related tax deductions. They seem similar to the UK rules (again something we DID look at!) but the depreciation report is interesting. I have found nothing online about such experts but found mention of this on here. I am unable to send messages to users at present - I guess I am still too new to the forum - but will try and find some way before we leave.

Thanks again all.

[Aussiepom]

There's an Accountant (Alan Collett) who browses the forum that has lots of info on these things.  I don't work for him and he's not my accountant but here's a useful link

http://www.gmtax.com.au/depreciation-rental-property-tax-deduction-on-australian-tax-returns/

On the mortgage front, are you in a position to remortgage before you leave without breaking the discounted term?  I guess if you're leaving in a month then there may not be enough time.  Perhaps equipped with the right information about your actual costs, your other half might be able to negotiate some kind of bump in salary to make up for the costs?

[TandT]

@Aussiepom Thanks for being so helpful. We actually contacted Alan via his website, just waiting to hear back. However we have since managed to establish some really good news by more googling - we're exempt from the Australian tax on foreign property rental. This is because we are on 457 visas (they've been phased out as you'll know but we got in on the last batch). Though we may apply for Australian residency at some point - partner's work have already mentioned doing this in future - at the moment we don't have to worry about it. Until we reach the point of knowing we'll want to outstay the visa (we have 4 years but have to make a decision by year 3) I think we'll just see it as a bridge to cross in future by which point circumstances could have changed wildly. I suppose you are on a permanent visa @Aussiepom so don't get this same benefit?

We will however be in the same boat regarding remortgaging. Partner's had the Australian salary and contract agreed and I don't think we can ask for more at this point. But we'll look in to other options if we can!

 

[Aussiepom]

@TandT Interesting that the 457 visa allows it.  Good news.  I am a duel citizen so no such luck for me.  Given that you are on 457, what provisions has your partner's employer provided to cover the medicare gap?  If this is a new one, google 457 health insurance.

https://www.homeaffairs.gov.au/trav/stud/more/health-insurance

 

[TandT]

@Aussiepom Yes, it is a bit of good luck really - though obviously this would change in future if we were changing to residency. I hadn't realised visa type would have had an impact otherwise would have mentioned it earlier on! We have medical insurance provided by the employer thank you - one thing that is sorted!

[Marisawright]

On 14/06/2018 at 00:11, TandT said:

This is because we are on 457 visas (they've been phased out as you'll know but we got in on the last batch). Though we may apply for Australian residency at some point - partner's work have already mentioned doing this in future - at the moment we don't have to worry about it. Until we reach the point of knowing we'll want to outstay the visa (we have 4 years but have to make a decision by year 3) I think we'll just see it as a bridge to cross in future

This is off topic but just to make sure you're aware - employers sometimes portray the transition to residency as a guaranteed thing, it's just a case of you making up your mind.  Far from it!  These forums are littered with families on 457's who wanted to stay, but had to come home.  The problem is that the rules change every year, so while you may be eligible for PR now, you may not qualify in 3 or 4 years time. That's especially true now, when the government are making big changes and cutting back on the number of occupations. Note that it really makes no difference how much the employer wants your oh to stay, it's up to the government to decide.

So the message is, if you find that you're enjoying Australia and want to stay, don't wait till the deadline.  Set the wheels in motion as soon as you've made up your mind, whether that's in six months or a year, to avoid potential disappointment. 

Edited June 15, 2018 by Marisawright

[TandT]

@Marisawright Thanks for the tip! We will bear it in mind. I think we'll have to see how things go and what our circumstances are like further down the line. 

[Marisawright]

17 minutes ago, TandT said:

@Marisawright Thanks for the tip! We will bear it in mind. I think we'll have to see how things go and what our circumstances are like further down the line. 

Of course.  The good thing is that you're not burning your bridges, and your employer is paying all the costs to get there and back, so  you have nothing to lose really.   

It's the families who arrive on a 457 with their hearts set on PR that feel hardest hit when it doesn't work out. If you're happy to enjoy the adventure and view possible residency as a bonus, you'll be fine.

[TandT]

@Marisawright Yes, it must be difficult if people have a fixed idea of a permanent place to live but don't yet have the permanent visa. I know a lot of people see it as all or nothing. I think we're quite used to moving around and exploring new opportunities, so we'll see what happens! It's a useful tip if we do decide we want to stay though so thank you.