Home is Where I Rest My Hat
“˜Home is where I rest my hat’ is the view of many people. Unfortunately it is also the view of UK’s HM Revenue & Customs (HMRC). So why should we be concerned? If you leave the UK to work or retire in abroad and purchase or rent a property in the foreign country but keep a UK property then tax problems could arise. In many cases a property in the UK is kept which we either return to, or rent out, potentially leaving an income tax or capital gains tax (CGT) liability.
“˜Home is where I rest my hat’ is the view of many people. Unfortunately it is also the view of UK’s HM Revenue & Customs (HMRC). So why should we be concerned?
If you leave the UK to work or retire in abroad and purchase or rent a property in the foreign country but keep a UK property then tax problems could arise. In many cases a property in the UK is kept which we either return to, or rent out, potentially leaving an income tax or capital gains tax (CGT) liability. The immediate response of your acquaintance in the bar will be “˜No worries mate, you’re UK non-resident’. Unfortunately, bar advice can be financially detrimental to your wealth.
If you rent out your UK property your tenant or letting agent should deduct income tax at 20%. You may be able to claim some of this tax back later but this depends on your circumstances. Non-UK residence is not a reason for not paying tax on UK rental income. If your tax affairs were up to date when you left UK you might be able to have the rent paid without this hassle but a complex form NRL 1 must be completed. Still, your mate in the bar will say “˜HMRC will never find out, so no worries’. Unfortunately HMRC will find out because they obtain details of letting income under their exhaustive powers and then charge you interest and a penalty.
What if you don’t rent out your UK property but stay there occasionally for short periods? You have two places you hang your hat; your property abroad and the one in the UK. Well, HMRC say if you have more than one property you must elect which is your main residence for UK CGT purposes otherwise you could be taxed at up to 28% on any gain on disposal. If you fail to do this then HMRC will elect for you. This may well be your property abroad so when you come to sell the UK property CGT could be payable!
Your mate in the bar will say “˜No worries mate, you’re UK non-resident’. Hang on haven’t we been here before?
So let’s ignore the bar fly for once and do a check list:
1. With one property in the UK and one abroad (rented or purchased) you should elect which one is to be treated as your main residence within two years of acquiring the second property. If you are in a foreign country that has no CGT then the UK property may be the one on which to make the election. Also if you are renting abroad then your UK property would be the one on which to make the election.
2. To avoid CGT in the UK on property sale you must be non-resident and not ordinarily resident for a period of 5 years. But should you return within that period or exceed the 91 days on average per year you will be treated as UK resident and any property abroad or in the UK sold in that period could be taxable at up to 28% if not elected for under 1 above. Consider if you or a close family member is taken ill and have to return to UK within the 5 year period.
3. If you rent out your UK property you should not only consider the election at 1 but also ensure that you have your tax affairs up to date before you leave UK so that rent for your UK property may be paid without deduction of tax as mentioned earlier. Otherwise, your UK agent or tenant will have to deduct tax at 20% of the rent and send it to HMRC. You will have to tally up with HMRC later.
4. If you are working abroad on a contract then HMRC will ignore the whole of the period spent abroad for your work when you come to sell your UK main property. This is only for CGT purposes and does not apply to retirees.
5. Finally, remember that any double taxation treaty in the country you are working or retiring to may have taxing rights on your income and gains. So, check that out too!
Now you and your mate can talk about football or macramÃ© and not tax!Jon Golding ATT TEP is a UK tax reduction specialist with PI Ltd in Kuala Lumpur, Malaysia. Contact (+60) 3 6203 2621 or visit website www.goldtaxservices.com
(Image:"straw hat" by gfoster67 , via Flickr, Creative Commons Attribution.)