Wiggle

C'mon .. the IR is the same as the IRS .. they want you to pay tax on ANY and ALL profit you make. So, yes when you sell the house there will be a capital gains tax to be paid (as its not your primary residence) AND a tax on the Income you make from the rental.

I doubt very much you can offset the mortgage against your rental income and any repairs you can offset will be so few and far between that if they did amount to anything substantial you stand the chance of being investigated, which you definately don't want !

Don

Capital gains made in UK will be free of UK tax provided you make the gains when you are non resident and are non resident for at least 5 complete tax years before moving back to live in UK.

The gains may or may not be taxable in your country of residence depending on the relevant tax laws. Eg in NZ they would generally be tax free.

dunroving

Where are you getting your information from? You sound like you are making it up as you go along. I can't see any reason why mortgage paymants and house expenses should not offset rental income - as you said, you get taxed on the profit (income minus expenses). Other business are able to offset business expenses against income. If all businesses paid tax on their gross income, they'd all be out of business.

As for selling the house, you are assuming that the house is not my principal residence (or won't be my principal residence when I sell it). That's not the case. I'm not exactly a property magnate.

Englishmum

We left the UK more than 9 years ago (we were only originally going to be away for 12-18 months!) and we rent out our house in Essex.

We have never had to pay tax on rental income to the Inland Revenue; yes you do offset repairs and the fees you pay to the estate agent for managing the property. We were sent tax returns for about 7 years to send to the IR and then we received a letter from them to say that we wouldn't need to be sending in any more tax returns unless our circumstances changed greatly! Mind you, we don't make a huge profit on our rental income anyway and to keep from having a large turnover of tenants every six months or so we are not being greedy but renting the house at at slightly below the market rate..... but it covers the mortgage and of course the house has increased in value over the years.

To be honest, this year we won't be making any 'profit' at all; we've had an e-mail from the estate agent saying that the tenant is requesting new carpet for the lounge and stairs as the current one is becoming 'threadbare', and that they think a new kitchen is going to be needed....!!!! Last year we paid for a new central heating boiler, new double glazed windows, a new bathroom and oven.

The good thing though about being resident in the US is that the expenditure you shell out on your UK house is deductible on your IRS tax return!

dunroving

Thanks, Englishmum, that confirms what I thought - Mr Wiggle IS making it up as he goes along!

I guess in the long term you do eventually make a profit as the rental value of your house goes up over the years and your mortgage payments remain the same (interest rate rises notwithstanding).

I owned and rented a house in the UK when I lived in Nassau and ended up taking a huge loss what with unexpected repairs (tenants wrecked the place). I'll be more than chuffed if I make any profit the first few years!

Didn't know that UK house expenses could be offset on your US IRS return - how do you figure the exchange rate? Do you use the prevailing rate at the time of the expense, or some kind of 12-month guesstimate?

Englishmum

I haven't got a clue how the pound-dollar rate is assessed! We have been in the States for four years and at the end of the first year my husband's company paid for an accountant to sort out our tax affairs. My husband travels all the time and was too busy to do his own tax return and just let the accountant (a British guy who used to work as a senior auditor at my husband's company until he went into a partnership himself) complete his subsequent returns. This past tax year my husband did it himself with 'Turbo Tax'. I have a feeling that my husband just writes the figures in pounds sterling and lets the IRS decide which conversion rate to use. I'll ask my husband later to check for sure.

Actually the IRS is pretty generous in some respects....it was nice to get the actual costs of relocating to the US offset against tax as well.

Wiggle

http://www.inlandrevenue.gov.uk/cnr/nr_landlords.htm

Check it out then and see if I am "making it up"

donglemouse

OK the "profit" I was referring to was income less allowable expenditure

allowable expenditure amongst other things does include mortgage interest paid but not mortgage capital repayments

Not making it up as I'm am a chartered accountant
Donglemouse

dunroving

Thanks! I was intending to get an interest only mortgage anyway so that works just fine. Does allowable expenditure also include capital expenses (repairs, upkeep, replacement of duff appliances, etc.)?

donglemouse

Basically yes as long as it is to prevent the property from derirorating.

However if expenditure is deemed to be relating to alterations or improvements or additions it isn't allowable or notional repairs (i.e. those that aren't really needed).

If you're in doubt which category expenditure falls into you should contact the IR for clarification.

For further details on what is allowable and what's not check the - IR Helpsheet SA105.

dunroving

US and UK have a dual taxation treaty - you can't be taxed double on earnings, regardless of where you earn the money. I live in the US. I pay US taxes on my earnings. I therefore don't have to pay double taxes to the UK Inland Revenue.

Thanks for the link. Did you read it? Some excerpts below:

"Non-resident landlords can set off the tax deducted from their
UK rental income under the NRL Scheme against their own tax
bill when they complete their UK Self-Assessment Tax Return.
They can also claim repayment of any excess tax deducted
from their UK rental income."

- IF I paid tax on rental income (and it's likely I wouldn't, by filling in an exemption form), then it would presumably be reimbursable on the basis that it would fall under the US/UK dual taxation treaty.

Also, as per your earlier expert opinion, the following deductible expenses can be offset against rental income:

"accountancy expenses (incurred in preparing rental
business accounts but not for preparing personal tax
returns); advertising costs of attracting new tenants; charges for inventories; cleaning; costs of rent collection; Council Tax while the property is vacant but available for letting; gardening; ground rent; insurance against loss of rents; insurance claim fees; insurance on buildings and contents; interest paid on loans to buy land or property (but see paragraphs 10.6. to 10.8 below); interest paid on loans to build or improve premises (but
see paragraphs 10.6 to 10.8 below); legal and professional fees; letting agents’ fees; maintenance charges made by freeholders, or superior leaseholders, of leasehold property; maintenance contracts (for example gas servicing); provision of services (for example gas, electricity, hot water); rates; rental warranty and legal expenses insurance; repairs which are not significant improvements to the property, such as damp and rot treatment, mending broken windows, doors, furniture, cookers, lifts, and so on, painting and decorating, replacing roof slates, flashing and gutters, repointing, and stone cleaning"

- that's a pretty long list, I'd say.

dunroving

Thanks again! That's exactly what I understood: basically, if you have to fix a leaking roof, it's deductible, but if you choose to build a conservatory it's not. My intention is to keep the house in habitable order, not do it up so I should be OK.

Wiggle

I understood from the IR link that being "exempted" simply means that the tax payable is not deducted at source ( eg by the letting agent) but that you still have to declare the rental income on a UK Tax return and be liable for the tax to the UK IR in that manner.
As for dual taxation, of course once you have paid the IR the Tax due, no-one would expect you to pay the IRS the same tax either, as per the dual taxation treaty.

But I still believe you will have to pay UK tax on the rental income, maybe this can be clarified by Donglemouse who has clarified a couple of points on this post.

As for repairs allowed, yes that is a very comprehensive list, but you may have to convince the IR that the expenditure was necessary before they will allow it. And that may not be as easy as it sounds. I can only go by experience and what I have heard from other landlords - few try it .. unless something like the roof falls off !

Finally .. your quip "expert opinion" .. grow up

donglemouse

"But I still believe you will have to pay UK tax on the rental income, maybe this can be clarified by Donglemouse who has clarified a couple of points on this post."

Yes you do - if the property is in the UK you are liable for tax on any rental profit regardless of your residency status. Also even if you don't make a profit you still have to file the return with details of the rental income/expenditure.



I'm not sure how the US system work re. dual taxation but I imagine it may be similar to Canada whichI have some experience of........on your Canadian return you have to declare your UK property income/expenditure but can also claim a separate deduction if you have already had to pay any UK tax on the property profits.

Note your income/expenditure may not be the same as for UK tax purposes if the rules on allowable expenditure vary. For example Canada allows additional items of expenditure to be claimed such as a capital allowance (basically property depreciation) compared to the UK.

Hope that's clear if I'm making no sense someone shout please

daisymoll

We are definitely waiting to buy, house prices are absolutely ludicrous at the moment, the sooner people stop paying these ridiculous prices the sooner they may come down, even the governor of the Bank of England thinks we might be heading for a lower prices....

http://news.bbc.co.uk/1/hi/business/3807937.stm