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Created: Monday, 08 October 2018 14:19

Last Updated: Saturday, 10 October 2020 18:14

Written by Ray Coman

A non-resident is only liable to UK tax on income arising in the UK. The most common example of UK arising income is rental profits. Savings and investment income is disregarded for tax purposes.

Entitlement to the UK personal allowance will exempt rental profits below the annual limit. Where profits exceed the allowance, it is only excess which would be taxable.

The UK
National and resident
The European Economic Area (EEA)
EEA countries listed
Residence only
National only
No entitlement to allowance
Double Tax Treaty Digest Table

The UK

A person who is resident in the UK is entitled to a personal allowance regardless of their nationality. Loss of personal allowance occurs where income exceeds £100,000 and for people claiming the remittance basis as the personal allowance summary explains.

A person who is UK national can obtain the UK allowance wherever resident. This is the same as for EEA nationals (see below.)

The effect of UK nationality for this purpose is extended to certain crown employees such as: diplomats, civil servants and members of HM Armed forces.

National and resident

Most major countries in the world grant a UK personal allowance to their residents only if that person also holds nationality of that country. For instance, a person living in Argentina, with only Australian nationality would not be entitled to a UK personal allowance. Only people with Argentinian nationality would be eligible. In the Table below N&R signifies this status.

The European Economic Area (EEA)

An exception to the N&R rule explained above applies within the EEA. A person who is national and resident of an EEA country is entitled to the UK personal allowance regardless of where they are resident. Therefore, if an EEA country in the Table below has No or just N or just R, this applies only to individuals who are not EEA National.

EEA countries listed

Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

Switzerland is not in the EEA.

Residence only

Most countries require that an individual is both national and resident to be granted a UK personal allowance. However, some countries require only that the person is resident. For instance, Kenya require only that you are Kenyan resident to claim the UK allowance; nationality is not considered. These countries are denoted in the Table below by R.

National only

Other countries require that you are only National of the country. The place where a person resides does not affect eligibility. For Instance, Israelis anywhere in the world can claim a UK personal allowance. The letter N next a country in the table below indicates that the above applies.

No entitlement to allowance

As the table below illustrates, eligibility to the UK personal allowance varies according to country. Some countries do not allow their residents a UK personal allowance. This includes the USA and China and many low tax jurisdictions. Countries in the list below with a No allow their residents no entitlement to the UK personal allowance.

Most of the major populated counties are listed in the table below. However, if a country does not appear it is unlikely that their residents would be able to claim the UK personal allowance:

Double Tax Treaty Digest Table

 *EEA countries

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Created: Monday, 12 February 2018 08:22

Last Updated: Wednesday, 21 February 2018 09:47

Written by Ray Coman

One method of saving tax on a rental property is to loan the company funds and deduct interest on this mortgage from general income.

This has two tax benefits:

1. The individual can obtain tax relief from the loan even when the property is loss making; and

2. The restriction on deduction of mortgage interest from rental property would not apply.

The loan should be for a qualifying purpose under ITA 2007, s 392(2)(b) https://www.legislation.gov.uk/ukpga/2007/3/section/392 as the investment is “for the purpose of making investments in land, or estates or interests inland, in cases where the land is, or is intended to be, let commercially.” To this extent the property could not be let to connected persons such as family members.

The company must be a close company, which typically means for a company five or fewer shareholder each with 5% stake.  Further definition of “close investment-holding company” is found in CTA 2010, s 34(2)(b).

A loan is often raised via mortgage or second mortgage on the company’s owner’s home.

Potential pitfalls of the arrangement explained above are listed below:

There is a risk that such arrangement could be successfully challenged by HMRC by invoking section 384A of the same act: https://www.legislation.gov.uk/ukpga/2007/3/section/384A

“Relief is not to be given … for interest paid by a person on a loan if the arrangements seem to have been designed to reduce any income tax or capital gains tax to which the borrower… would be liable apart from the arrangements.”

Loan interest cannot be greater than £50,000 or 25% of the taxpayer’s income.  This would include any income, for instance in the form of dividends (or other profit extraction) from the company.

There is a risk that gains on disposal of the propriety would be subject to corporation tax and on post tax funds subject to capital gains tax.  This double tax charge could result in combined rate of tax of 35.2% on the gain, compared with a rate of 28% for property held personally.  The structure therefore works most effectively for property with high yield rather than expected growth potential.

Capital gains tax would apply to any pregnant gains in property previously owned by the shareholder.  Company ownership is therefore rarely practical for an existing portfolio of rental property.

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Created: Sunday, 23 September 2018 20:30

Last Updated: Monday, 08 October 2018 15:38

Written by Ray Coman

Internet search engines such as AirBnB have facilitated the short stay and lodger lettings market.  There are a number of tax benefits to these arrangements which are explored below.

Furnished holiday lettings

Entrepreneur’s Relief

Interest on loan to a FHL

Roll-over relief

Hold-over relief

Capital gains tax implications

Tax Return requirement

Letting while away

Micro-entrepreneur relief

Furnished holiday lettings

Letting a property to a succession of tenants throughout the year is encouraged through the tax system. In order to qualify as a furnished holiday letting (FHL), the property:

• Must not be let to the same person for more than 31 days in succession. If let to the same person for more than 31 days, the total of these periods should not total more than 155 days;
• The property must be available for letting at least 210 days in the tax year;
• The property must be actually let for at least 140 days in the tax year; and
• The property should be situated in the UK or in the EEA.

The first twelve months is used as a basis period in the initial year, and the tax year thereafter.

A FHL confers various tax benefits:

Interest on loan to a FHL

Any borrowing which is used for the furniture holiday letting, which includes a mortgage secured on that property, would be treated as a loan to a trader.  Consequently, the interest can be deducted from taxable profits in full. The property is not subject to the restriction that applies to other types of property income.

Entrepreneur’s Relief

The property is treated as a business asset for capital gains tax.  This means that Entrepreneur’s Relief applies when the property is either sold or transferred as a gift.  Most residential property is subject to the usual rates of capital gains tax.  For 2018-19, an individual is liable to capital gains tax at a rate of 18% to the extent that taxable gains and income are less than the higher rate tax threshold.  A rate of 28% applies to gains thereafter. In many cases, the rate of capital gains tax on disposal of an investment property is roughly 28%.  The rate applicable to FHL property is 10%.

Roll-over relief

Business asset roll-over relief can also be applied to FHL.  Provided sale proceeds are reinvested in a replacement business asset, which would include a FHL, the capital gains tax on the FHL is deferred until sale of the replacement assets.  Roll over relief provides a cash flow benefit to a landlord wishing to reinvest proceeds from one FHL into another.

Hold-over relief

In some cases a FHL can be transferred as a gift and the capital gains tax liability effectively transferred to the recipient.  This is known as hold over relief.

Rent-a-room-relief

A landlord can deduct certain expenses from rents received in calculating taxable rental profit.  Instead of deducting actual expenses, an amount of up to the rent-a-room relief threshold can be deducted from taxable rental profits.

The relief is available to a landlord who lives in the property being let.  Where a property is a separate dwelling, as evidence by a distinct door entrance, the rent-a-room relief would be lost.

A threshold of £7,500, per landlord, applies for 2018-19.  This allowance is divided in half where there is more than one landlord, for instance where a property is jointly owned by a married couple.  The full relief applies even if the property was only let for part of the year.

As an alternative to rent-a-room relief, a landlord could deduct a proportion of actual letting costs.  The percentage floor area used by the lodger is a typical method of apportioning costs.  Costs which can be deducted from rental profits include letting agent fees, repairs, and building insurance.  Elsewhere on the website provides a more comprehensive list of property expenses.

A landlord can choose each tax year which method is more tax-beneficial.  The actual basis would be more favourable if it creates more profit, or if it leads to a loss.  This is because the excess of rent-a-room allowance over profits is not an allowable loss for tax purposes.

Capital gains tax implications

A person’s home is exempt from capital gains tax.  The exemption still applies where the home is only let to one lodger.  In Statement of Practice SP14/80, HMRC state that the letting of a property to only one lodger is not regarded as business use.  If there is more than one lodger, however, the taxable part of the gains is calculated by applying both:

• The percentage floor area used by the lodger;
• The time that the property was let for as a percentage of the time that the property was owned.

The business proportion of the property is further reduced by lettings relief which is capped at £40,000 per owner.  The final 18 months of ownership is a deemed period of occupation.  Gain apportioned to the last year and a half is therefore not taxable, even if the property was let during this period.

Tax Return requirement

If a lodger’s income is less than the rent-a-room relief, there is no tax liability, and no need to complete a Tax Return for this reason alone.  The rent-a-room-relief allowance applies automatically.  It is not a requirement for a landlord to notify HMRC about rental income from a lodger if the income is below the rent-a-room-relief threshold.

Letting while away

Rent-a-room relief will not apply:

• Where the landlord lets their property while not living in it.
• If the property being let is business premises.

AirBnB and similar internet portals, have given rise to landlords letting homes while away for a short spell, such as on holiday.  As a point of clarification HMRC has stated that even for lettings of a short duration, rent-a-room relief will not apply unless there is at least some overlap between the period that the landlord and tenant live in the property.  The new rules take effect from April 2019.

Micro-entrepreneur relief

Where the above rules apply, actual expenses can be deducted from rental income in calculating profits.  Since April 2017, a flat rate of £1,000 can be deducted from income as opposed to actual expenses. Therefore, there would not be a tax liability where rental profit is less than £1,000. A Tax Return requirement has not arisen.

The relief is useful to live-in-landlords, including those providing bed and breakfast service.

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Created: Thursday, 15 December 2016 14:31

Last Updated: Thursday, 15 December 2016 14:57

Written by Ray Coman

Typically, a non-UK resident will only be taxable on UK rental profits.  A generous tax relief available for a UK landlord is the personal allowance.  However, not all non-residents will be entitled to it.

British and EEA nationals

Double tax treaty

Not entitled to a UK personal allowance

Resident but not national within the EEA

Summary

British and EEA nationals

A national of the Britain or the EEA area is entitled to a UK personal allowance.  Generally, a British passport holder or citizen is regarded as a national for tax purposes.

Double tax treaty

The Double Tax treaty of most countries will entitle many other people to a UK personal allowance.  A list of tax treaties can be read here: Digest_of_Double_Taxation_Treaties.

Most commonly a person will be entitled to the allowance if N and R.  This means that the personal allowance is available to individuals who are both a national and a resident of the territory.  However often, it is only a requirement to be resident.  This is designated by the symbol R.

Not entitled to a UK personal allowance

The two largest economies, USA and China, are both notable exceptions. Where the Digest indicates “no”, only a resident of that country who is a UK or EEA national will be entitled to the allowance.  A “no” is designated to many other countries in Africa, South America and the Middle East:  Saudi Arabia, Mexico being two of the larger examples.  The list of “nos” includes many British Overseas Territories, such as the Cayman and British Virgin Islands.  Residents of other low tax jurisdictions such as Qatar, Brunei, Bahrain and Hong Kong are also barred from the UK allowance.

Resident but not national within the EEA

The Double Tax treaty Digest explains that EEA citizens (i.e. nationals) are entitled to the UK Personal Allowance.  However, some individuals may be resident of an EEA country without being a citizen.  In this case, it will be necessary to check through the country listing to see whether the Double Tax Agreement permits a UK personal allowance.  An allowance would not, for instance, be available to a resident of Sweden, Spain, Poland, Norway, Liechtenstein, Iceland, Hungary, Greece, Germany, Crotia, Bulgaria, unless the individual is also a national of an EEA country.

Summary

The determinants of UK personal allowance entitlement can be complex and are prone to change.  It is worth checking the digest and this manual to confirm whether the UK allowance is applicable.  Two people with apparently similar circumstance may have different eligibility.