claretandblue

Hi,

We just wondered whether it would be best to be taxed in the UK or Australia on a property being rented out in the UK?

Cheers

Rachel & Nigel

JAJ

Unclear why this is in the immigration forum, but however ...

... If you're on a permanent visa (or you're a citizen) and living in Australia - no choice, you have to pay Australian tax. You can offset eligible expenses against rental income.

You can offset any UK tax due (you have to file a return) but usually you don't have to pay any UK tax because of expenses and the UK personal allowance.

paulry

Does anyone know how to set things up in order to avoid double taxation?

JAJ

Read post #2 again, noting in particular: usually you don't have to pay any UK tax because of expenses and the UK personal allowance.

Having considered that, do you still expect to pay UK income tax? Still not a problem, you can usually offset it against Australian tax.

paulry

Thanks JAJ. I would expect an income of around £10k per year (allowing for an average of say 2 months per year with no tenants). I would be looking at bumping my mortgage up to pay for our move and settlement in Australia so the mortgage would be around £5k per year. Add a couple of k for maintenance and estate agents fees. So if I undertand it correctly my net income would be £3k PA = no UK tax? Doesn't the tax free allowance only apply to UK residents?

MartinLuther

Just some notes on UK rentals.

You have to send some form the HMRC to exempt you from paying tax at source. If you don't do this then your agent (or your tenant) is supposed to pay the tax for you (obviously not a good thing).

Double taxation effectively means you pay the higher of the 2 tax systems. So if you are PR in Aus you pay the difference between the tax the UK took and what you should pay if all the money was taxed in Aus.

You do get the UK tax free allowance if you live in Aus. If this means that you pay no tax to the UK then you just pay the tax to Aus instead.

Aus actually allows you to deduct rental loses (even UK ones) against normal salary. (The UK doesn't allow this. They allow you to deduct rental loses against future rental profits).

ozhappy981

If you are in Oz on a temp visa, any profit (or loss) from your UK rental is ignored in the Aus tax return.

Assuming you come to Oz on a perm visa, you first need to make sure you complete the relevant paperwork so that the UK rent is paid to you gross (i.e. without UK tax deducted). Get this organised as soon as you know your definite departure date from the UK!

Here are the forms:

(i) Your letting agent needs to complete form NRL4.

(ii) You need to complete form NRL1.

Both forms and the guidance notes on how to complete the forms are on this page: http://search2.hmrc.gov.uk/kbroker/h...jsp?formId=742

Download them and take them to your letting agent.

When you then come to do your Aus tax return: You can claim all of the expenses of your rental as deductions against the rental income, i.e. mortgage interest, agent's fees, water rates (unless the tenant pays this), repairs, postage, telephone calls etc. If your rental then makes a loss, that loss reduces your other assessable income in your Aus tax return.

paulry

Thanks for all of that . It plugs many of the gaps in my knowledge and understanding of the way that it works.

So the mortgage-related part of the deduction is the interest component only? It makes sense I guess.

NedKelly

The UK are changing the rules on claiming personal allowances for non-residents from April 2010. Something to do with being a Commonwealth citizen and the human rights act.

ozhappy981

Yes, that's right. You can only claim the interest element of your mortgage payments as a deduction.

Lord_Farquar

Correct, but it's not as bad as it sounds. For example, with my UK mortgage the interest makes up the majority of the overall monthly payment.

You can also claim loads of extras and deductions. But to be honest it's a bit complicated.

paulry

The hard part is how to set everything up to minimise the tax burden. Can anyone recommend any good resources which cover the A-Z of it all?

louie

One thing to be aware of is that you can in the UK claim interest on a mortgage of up to the value of the property when you first commenced letting it.

In Australia, you can only claim up to the amount of the mortgage used to purchase the property. So if you remortgage to a higher sum than your original mortgage or you had in the interval paid off some of the mortgage, you could only claim relief in Australia on interest of up to the amount of the original/reduced mortgage. So your plan might (probably would) not work Paulry, because you would not qualify for relief on the "bumped up" mortgage interest in Australia - assuming that you are honest, that is.

ozhappy981

The above post is a little muddled.

In Australia, you can claim all of the mortgage interest that relates to the rental property. Say for example, the rental property is worth $500,000 and you borrow $400,000, then all of the interest on the $400,000 is deductible.

Let's say four years later you borrow another $150,000 to make improvements to the propery (and you continue to rent it out), then the additional interest relating to the remortgage is also fully deductible. In other words: You can now claim all of the interest on the total of $550,000 borrowed.

But if you borrow $150,000 secured on the rental property to buy yourself a swanky boat, then you cannot claim an interest deduction for this.

In Australia, you can also claim all of the mortgage interest even if the mortgage is not secured on the rental property but on another property. Let's say you want to buy a $500,000 rental property but have no money to put down. No lender will give you a 100% mortgage. But if (let's say) you own your own home mortgage-free and that's worth $800,000, you can get a mortgage for $500,000 on your own home and use the money to buy the $500,000 rental property. You can then claim a deduction for all of the mortgage interest.

But if you do the above and let's say the rental property only costs $400,000 and you use the $100,000 extra to by that swanky boat - you can only claim an interest deduction for the $400,000.

paulry

Thanks Louie and Ozhappy981. Having two tax systems to work with is offputting. My mortgage (well, there's actually two) and my full usage of their built-in flexibility makes it very complicated. With the interest rate being so low at the moment it's tempting to just exclude the mortgage interest component out of any future tax return and accept the relatively small financial hit but a risk would be that if the interest rate later goes up (which it will eventually) then I could end up wishing that I'd not followed that path.