House in UK - CGT if sold vs income tax if rented

[Silver_Swan]

Hello,

We are currently going through a 482 visa application and trying to decide what to do with our UK property, and would like some advice.

For the last two years we have travelled abroad and rented our UK home, we were still deemed UK tax residents during that period as we weren’t settled in one country and were not working. Now we are looking at a move to Oz, and just thought we’d keep our house and continue renting it, however the more I’ve looked into I’ve realised there might be some pretty big financial pitfalls.

We purchased the house (jointly owned by my husband and I) in Dec 2013 for £300k, lived in it until Oct 2017, during that time we did some extensive building work - we basically took the existing house back to brick work to start again and added an extension that doubled the size. The total cost of work was probably in the region of £150k, maybe as much as £200k. The house is probably worth £650k now. We didn’t keep all the receipts for the work we had done but I guess bank statements and credit cards could be used to get a more accurate record? 

Our house is currently rented out, the monthly rent is £2000. Our mortgage is around £1600 (variable) with roughly half (£800) being interest.

So my questions:

1) If we continued to rent the house then the UK income I believe would come under the tax free threshold - is this correct? Would we still be entitled to the threshold as non resident?

2) if we rented the property would we have to pay tax on it in Aus? How is that calculated? 

3) if we sold the property I understand we’d have to pay CGT. In terms of proving what we spent on improving the property what would we need to provide - would credit card statements be enough or would we need receipts and invoices for everything?

4) how much CGT would we pay if we sold now (using Dec 2019 for ease of calculations) versus if we sold in say two years time? My understanding is:

Dec 2019

Owned property for 6yrs (72mths), lived in property for 47mths, Rented it for 25mths.

Gain on property (worst case) £200,000

£200k/72mths = £2777/mth

47 + 18 = 65 x £2777 = £180,500

so CGT liability = £19,500, which would be inside our annual threshold.

 

Alternatively if we kept the property and sold in two years time - Dec 2021:

Owned property for 8yrs (96mths), lived in property for 47mths, Rented it for 49mths.

Gain on property (I guess this would probably be a bit higher, circa 4% over two years based on current rises = value of £626k) £226,000

£226k/96mths = £2354/mth

47 + 9 = 56 x £2354 = £132k

so CGT liability = £94k. £24k threshold, so we’d pay tax on £70, at either 18% or 28%. (£12,600 / £19,600) 

5) if we sell the house how do we work out if we are basic rate or higher rate tax payers? Our “normal” jobs would both be higher rate - but do they only look at UK income (ie. income from renting our property) or is is based on what we’d be earning in Aus?

thanks in advance for any help and advice you can give!

 

 

[Marisawright]

As you’re only coming on a temp visa and it won’t be economic to buy in Australia, is it really a good idea to sell?

[Silver_Swan]

35 minutes ago, Marisawright said:

As you’re only coming on a temp visa and it won’t be economic to buy in Australia, is it really a good idea to sell?

Obviously if we return to the UK then it would affect it - but that’s what I’m trying to work out. Assuming we like Australia our intention would be to apply for PR - and I don’t want to find out we have a huge tax bill a couple of years down the line...

[Ken]

5 hours ago, Silver_Swan said:

Hello,

We are currently going through a 482 visa application and trying to decide what to do with our UK property, and would like some advice.

For the last two years we have travelled abroad and rented our UK home, we were still deemed UK tax residents during that period as we weren’t settled in one country and were not working. Now we are looking at a move to Oz, and just thought we’d keep our house and continue renting it, however the more I’ve looked into I’ve realised there might be some pretty big financial pitfalls.

We purchased the house (jointly owned by my husband and I) in Dec 2013 for £300k, lived in it until Oct 2017, during that time we did some extensive building work - we basically took the existing house back to brick work to start again and added an extension that doubled the size. The total cost of work was probably in the region of £150k, maybe as much as £200k. The house is probably worth £650k now. We didn’t keep all the receipts for the work we had done but I guess bank statements and credit cards could be used to get a more accurate record? 

Our house is currently rented out, the monthly rent is £2000. Our mortgage is around £1600 (variable) with roughly half (£800) being interest.

So my questions:

1) If we continued to rent the house then the UK income I believe would come under the tax free threshold - is this correct? Would we still be entitled to the threshold as non resident?

2) if we rented the property would we have to pay tax on it in Aus? How is that calculated? 

3) if we sold the property I understand we’d have to pay CGT. In terms of proving what we spent on improving the property what would we need to provide - would credit card statements be enough or would we need receipts and invoices for everything?

4) how much CGT would we pay if we sold now (using Dec 2019 for ease of calculations) versus if we sold in say two years time? My understanding is:

Dec 2019

Owned property for 6yrs (72mths), lived in property for 47mths, Rented it for 25mths.

Gain on property (worst case) £200,000

£200k/72mths = £2777/mth

47 + 18 = 65 x £2777 = £180,500

so CGT liability = £19,500, which would be inside our annual threshold.

 

Alternatively if we kept the property and sold in two years time - Dec 2021:

Owned property for 8yrs (96mths), lived in property for 47mths, Rented it for 49mths.

Gain on property (I guess this would probably be a bit higher, circa 4% over two years based on current rises = value of £626k) £226,000

£226k/96mths = £2354/mth

47 + 9 = 56 x £2354 = £132k

so CGT liability = £94k. £24k threshold, so we’d pay tax on £70, at either 18% or 28%. (£12,600 / £19,600) 

5) if we sell the house how do we work out if we are basic rate or higher rate tax payers? Our “normal” jobs would both be higher rate - but do they only look at UK income (ie. income from renting our property) or is is based on what we’d be earning in Aus?

thanks in advance for any help and advice you can give!

 

 

1) Yes, even non resident UK citizens get the tax free threshold

2) On a Temp visa your foreign income would be exempt. Once on a permanent visa you're taxed on your worldwide income and it would be converted to Australian dollars and taxed in the normal way (effectively at your marginal tax rate as you'll have used up the tax free and lower brackets already).

3) Depends on how hard nosed your tax inspector is. The law doesn't say you have to have the original invoices - but HMRC might argue that your credit cards don't prove what you spent the money on. It could become an expensive process to prove the facts of your case.

4) If you are correct about you being deemed as UK residents the whole time you were away previously then the non-resident landlord rule doesn't apply and there is no CGT. I'd be wary about making the assumption and would urge you to discuss with an accountant who currently practices in the UK though! The first 6 months of being non-resident is also tax free. Note that on a temp visa there would be no Australian CGT. If you were a permanent resident by the time you sold then Australian CGT would apply but having previously lived in the property you could claim it as your primary residence for up to 6 years after ceasing to live there (i.e. until Oct 2023) and only the gain between you becoming an Australian tax resident and selling the property would be taxable anyway.

5)  It's my understanding that the basic or higher rate comes from your UK tax return and so would not include your earnings in Aus.

Edited October 7, 2019 by Ken

[florafilan]

Not too familiar with UK Tax system, but in Australia residency for tax purpose is different to that for immigration purpose.  Temporary visa holders could be tax residents in Australia and be taxed on their worldwide income in Australia.  If you are deemed to be AU tax resident, your rental income will be included in your AU tax return and any foreign tax paid would be available to you as offsets.

Foreign residents will only be only taxed on Australian sourced income but no tax free threshold would apply.

Gains on sale of property for AU tax purpose would be the difference between sale price and the market value when you became AU tax resident.  There are rules available to reduce or disregard the gains depending on your circumstances.  In general, you can only choose to claim the main residence exemption for one property at a time.

[Alan Collett]

3 hours ago, florafilan said:

Not too familiar with UK Tax system, but in Australia residency for tax purpose is different to that for immigration purpose.  Temporary visa holders could be tax residents in Australia and be taxed on their worldwide income in Australia.  If you are deemed to be AU tax resident, your rental income will be included in your AU tax return and any foreign tax paid would be available to you as offsets.

Foreign residents will only be only taxed on Australian sourced income but no tax free threshold would apply.

Gains on sale of property for AU tax purpose would be the difference between sale price and the market value when you became AU tax resident.  There are rules available to reduce or disregard the gains depending on your circumstances.  In general, you can only choose to claim the main residence exemption for one property at a time.

=>   " ... could be taxed ..."  - yes, but are not usually: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Foreign-income-of-Australian-residents/Foreign-income-exemption-for-temporary-residents---introduction/

=>   " ... Gains on sale of property for AU tax purpose would be the difference between sale price and the market value when you became AU tax resident." - not for most temporary visa holders.

Best regards.

[Silver_Swan]

On 07/10/2019 at 12:40, Ken said:

1) Yes, even non resident UK citizens get the tax free threshold

2) On a Temp visa your foreign income would be exempt. Once on a permanent visa you're taxed on your worldwide income and it would be converted to Australian dollars and taxed in the normal way (effectively at your marginal tax rate as you'll have used up the tax free and lower brackets already).

3) Depends on how hard nosed your tax inspector is. The law doesn't say you have to have the original invoices - but HMRC might argue that your credit cards don't prove what you spent the money on. It could become an expensive process to prove the facts of your case.

4) If you are correct about you being deemed as UK residents the whole time you were away previously then the non-resident landlord rule doesn't apply and there is no CGT. I'd be wary about making the assumption and would urge you to discuss with an accountant who currently practices in the UK though! The first 6 months of being non-resident is also tax free. Note that on a temp visa there would be no Australian CGT. If you were a permanent resident by the time you sold then Australian CGT would apply but having previously lived in the property you could claim it as your primary residence for up to 6 years after ceasing to live there (i.e. until Oct 2023) and only the gain between you becoming an Australian tax resident and selling the property would be taxable anyway.

5)  It's my understanding that the basic or higher rate comes from your UK tax return and so would not include your earnings in Aus.

Thanks for your comprehensive reply Ken...

On point 4) whilst we've been outside of the UK for two years we haven't been in any one country long enough to be deemed tax resident there - so while we don't meet the requirements for automatic UK resident, we also don't meet the requirements for automatic overseas resident, so as my accountant explained it we'd still be classed as resident since we have a property here - and otherwise where are we resident of? Although having just looked on gov.uk I'm not convinced our second year away would class as resident since we didn't set foot in the UK for the 2018/2019 tax year. 

I'm confused about the CGT implications though - my understanding was if you'd rented out your property you do not qualify for full private residence relief - and therefore have to pay CGT proportionate to the period it was rented?

 

 

 

 

[Silver_Swan]

On 08/10/2019 at 03:59, florafilan said:

Not too familiar with UK Tax system, but in Australia residency for tax purpose is different to that for immigration purpose.  Temporary visa holders could be tax residents in Australia and be taxed on their worldwide income in Australia.  If you are deemed to be AU tax resident, your rental income will be included in your AU tax return and any foreign tax paid would be available to you as offsets.

Foreign residents will only be only taxed on Australian sourced income but no tax free threshold would apply.

Gains on sale of property for AU tax purpose would be the difference between sale price and the market value when you became AU tax resident.  There are rules available to reduce or disregard the gains depending on your circumstances.  In general, you can only choose to claim the main residence exemption for one property at a time.

Having read a bit more into it my understanding is we'd be Australian residents for tax purposes, but as temporary residents (482 visa) we'd not be taxed on foreign income, which is better!

[Silver_Swan]

On 08/10/2019 at 07:46, Alan Collett said:

=>   " ... could be taxed ..."  - yes, but are not usually: https://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Foreign-income-of-Australian-residents/Foreign-income-exemption-for-temporary-residents---introduction/

=>   " ... Gains on sale of property for AU tax purpose would be the difference between sale price and the market value when you became AU tax resident." - not for most temporary visa holders.

Best regards.

thanks - just got to your message and I've just been reading the exact same link - sounds like we'd be classed as resident for tax purposes, but as temporary residents wouldn't be liable for tax on UK income?

[Alan Collett]

3 hours ago, Silver_Swan said:

thanks - just got to your message and I've just been reading the exact same link - sounds like we'd be classed as resident for tax purposes, but as temporary residents wouldn't be liable for tax on UK income?

That is a reasonable conclusion, yes.

Best regards.

[Alan Collett]

3 hours ago, Silver_Swan said:

Thanks for your comprehensive reply Ken...

On point 4) whilst we've been outside of the UK for two years we haven't been in any one country long enough to be deemed tax resident there - so while we don't meet the requirements for automatic UK resident, we also don't meet the requirements for automatic overseas resident, so as my accountant explained it we'd still be classed as resident since we have a property here - and otherwise where are we resident of? Although having just looked on gov.uk I'm not convinced our second year away would class as resident since we didn't set foot in the UK for the 2018/2019 tax year. 

I'm confused about the CGT implications though - my understanding was if you'd rented out your property you do not qualify for full private residence relief - and therefore have to pay CGT proportionate to the period it was rented?

 

 

 

 

Suggest you might need to drill down into the sufficient ties tests with the UK's Statutory Residency Test.

I have a flowchart which might help with your UK residency questions - feel able to ping a private message to me with your name and email address if you would like me to email it to you.

Best regards.

[Alan Collett]

PS.   The UK will require you to account for CGT on the disposal of a UK residential property while non UK resident.

Reference is made to the value of the property on 6 April 2015 (if owned at that time).

There is a Non Resident CGT return to be prepared and lodged with HMRC within 30 days of the sale completing; a late filing penalty regime underpins this requirement.

Best regards.

[Marisawright]

On 07/10/2019 at 18:32, Silver_Swan said:

Obviously if we return to the UK then it would affect it - but that’s what I’m trying to work out. Assuming we like Australia our intention would be to apply for PR - and I don’t want to find out we have a huge tax bill a couple of years down the line...

@Silver_Swan, you may already know this, but there is NO guaranteed pathway to PR after a 482.  It's just a possibility, subject to the employer being willing AND you being eligible.  

Years ago under the old 457, it used to be more certain.  However the rules change every year now, and we're seeing more and more people finding they're no longer eligible by the time they're ready to apply.   

As it sounds like you're burning your bridges in the UK and transporting your whole life to Oz, I'd suggest starting your own application for a 189 or 190 as soon as you arrive in Australia, rather than waiting till the end of the 482, to be on the safe side.

[Silver_Swan]

8 hours ago, Marisawright said:

@Silver_Swan, you may already know this, but there is NO guaranteed pathway to PR after a 482.  It's just a possibility, subject to the employer being willing AND you being eligible.  

Years ago under the old 457, it used to be more certain.  However the rules change every year now, and we're seeing more and more people finding they're no longer eligible by the time they're ready to apply.   

As it sounds like you're burning your bridges in the UK and transporting your whole life to Oz, I'd suggest starting your own application for a 189 or 190 as soon as you arrive in Australia, rather than waiting till the end of the 482, to be on the safe side.

I’ve not been able to get any concrete answers about what the path to PR is on the 482... and for 189 and 190 I don’t think we’ll have enough points. We’ve decided to keep the house in the UK, and cross that bridge when we come to it! 

 

[Marisawright]

27 minutes ago, Silver_Swan said:

I’ve not been able to get any concrete answers about what the path to PR is on the 482... and for 189 and 190 I don’t think we’ll have enough points. We’ve decided to keep the house in the UK, and cross that bridge when we come to it! 

Good idea.  

If your 482 is for a skill that's on the short-term list, there is no pathway to permanent residency.   If that's the case, maybe look at the possibility of a 491 visa.    If it's on the medium to long-term list, then the pathway is to ask the employer to sponsor you for the 186 visa (which gives you PR).

https://immi.homeaffairs.gov.au/visas/getting-a-visa/visa-listing/employer-nomination-scheme-186/temporary-residence-transition-stream

It all sounds straightforward, and sometimes it is.   Unfortunately there are several things that can go wrong.  Just take a look at some of the threads on these forums about the 186 to get an idea!   

The biggest hurdle is that you'll have to stick with that employer for three years before you can apply, and then for another year or so while the application goes through.  If you hate the job and want to resign, you'll have to leave the country unless you can find another sponsor. That isn't  easy, as many employers won't sponsor unless they're desperate, due to the amount of administration  and cost involved.   Your employer will be well aware of that, and some unscrupulous employers will take advantage of it, making unreasonable demands because they know you're stuck.  If you're in that situation, four years can feel like a very long time...

There's also the risk that the employer can go bust, and in that case you'll have 90 days to find another sponsor or leave the country.  Ditto if you get retrenched. 

Then there's the fact that the rules change almost every year, with more and more occupations being removed from the lists, or downgraded to short-term.  if that happens before you're able to apply, you're stuffed. 

All that may sound a bit depressing - however looking at your other posts, it looks as if you're used to globe-trotting so you're probably more flexible and more able to deal with uncertainty than the average migrant. Worse case scenario you can treat it as another adventure and see how it turns out. Good luck!

Edited December 29, 2019 by Marisawright