If you own a property abroad, or are living abroad and letting out your property at home, you won't escape a tax bill.
The tax system is not dissimilar to that on properties let out in the UK, but there are some differences - especially when you spend money on the property.
This guide explains what you need to know about tax on overseas rental property, and how to report the income you earn to HMRC.
How is overseas rental income taxed?
You're taxed on your foreign properties in the same way as you would be on any UK properties.
In short, you work out the profits for all your foreign properties as a whole (rather than as separate properties) by taking any expenses away from any income.
Unless you let a furnished holiday residence, you won't be able to claim capital allowances for investments against your rental income. Instead, investments in the property count as capital expenditure, meaning they can be tallied up and offset against your capital gains bill when you come to sell the property.
You pay income tax on any profits at your normal rate.
When working out the UK tax, you normally use the exchange rate when the rent was due.
- Thinking about buying a property abroad? Call Which? Mortgage Advisers on 0808 252 7987 to understand what borrowing options you have to finance your purchase.
Tax on overseas property: the remittance basis
If you're domiciled outside the UK or are not ordinarily resident in the UK, you can claim for your foreign income to be charged on the remittance basis instead.
This means that you're taxed only on the income received in the UK in the year.
This is an extremely complex area and you should consider seeking professional advice about the options available to you.
Find out more: Financial advice explained - our guide explains what to expect when dealing with a financial advisor.
Claiming losses on overseas rental properties
Any losses from property abroad can be offset against other overseas properties or carried forward to future years if you make a loss overall.
You can't set foreign property losses against UK property profits or vice versa.
Don't get taxed twice on foreign property income
Normally, the foreign tax authorities will also charge tax on your letting profits.
But you won’t pay twice – the overseas tax paid is usually deducted from the UK tax that is due.
Declaring foreign property on your tax return
You declare income from foreign properties on the foreign property pages of the self-assessment form.
Find out more: Which? tax calculator- check your tax bill with our tax calculator, and submit direct to HMRC.
Paying tax when you buy a property abroad
Always get advice from a local tax expert when you buy abroad. You may be liable for foreign taxes such as purchase tax and income tax on rents.
Many countries also have laws dictating who inherits the property if you die. You may remain liable for UK inheritance tax on the property.
Find out more: Inheritance tax explained - this guide explains what inheritance tax and when you have to pay it.
Tax on a rental property when you live abroad
If you choose to let out your UK home while you live abroad, you pay income tax on the rent in the normal way, but there are special rules about how you pay the tax.
Your letting agent or tenant must deduct tax from your rental profits at the basic-rate (currently 20%) each quarter and pay it to HMRC (although, tenants who pay rent that's less than £100 a week don’t have to do this unless HMRC asks them to).
You can then set off the tax paid against your tax bill when you complete your tax return.
Alternatively, you can apply to HMRC for approval to receive your rental profits with no tax deducted. In return, HMRC will ask you to complete a self-assessment tax return once a year to work out whether any tax is due.
If you're living abroad and buy a property in the UK without selling your overseas home, you could be liable for an additional 3% stamp duty surcharge on the new property. Check out our buy-to-let stamp duty guide for full details.
Find out more: Buying a property overseas - our guide explains what you need to consider with tips from the experts
Get mortgage advice on overseas property
If you're thinking about buying a property abroad but wondering how to finance it, Which? Mortgage Advisers can help you explore your borrowing options. Fill in the form below to get a free call back from an adviser today.