If you live and pay tax in the UK you must declare rental income from any property lettings to HMRC, irrespective of whether the property makes a profit.
If the property is outside the UK, then you must declare this on the foreign pages of your tax return. If you also pay foreign tax on the income, you can usually get credit for this against the UK tax you have to pay on it. See below for more information.
Furnished holiday lets
If you let a property out, that is either in the UK or European Economic Area for short periods, i.e. less than 31 days, and you achieve HMRC’s criteria, then it may be eligible for certain tax advantages as a Furnished Holiday Let (FHL). Whilst the eligibility criteria is set to change from 6 April 2012, the main criteria is currently that it is available to let for 140 days and actually rented out for 70 days at market rates, comprising short stays of less than 31 days. How a property qualifies for FHLs.
The main advantage is that losses from a furnished holiday let can be offset against other taxable income, e.g. from your business or employment. This only applies for the tax years 2009/10 and 1011 and has been withdrawn as a benefit from 6 April 2011.
If your property doesn’t qualify as an FHL
If your property doesn't qualify as a furnished holiday let, you will be taxed under the residential property lettings rules, whether the property is in the UK or overseas. Income tax is then payable on the net profits, having deducted allowable expenses from the income.
If, however, you own more than one property in the UK or more than one property overseas and they do not qualify as an FHL then they can be grouped together for tax purposes. Losses from one property can be offset against profits from another, with tax due on the overall profit.
Properties in the UK are treated separately from properties that are overseas and the two cannot be grouped together for tax purposes. So if your overseas property trades at a loss this cannot be deducted from the profits of a UK rental property.
Tax due overseas on rental income
Many people overlook the fact that they have a liability to pay tax on the rental income in the country where their rental property is situated. This applies whether you are resident in that country or in the UK. This means that if you own a property in France, for example, you will need to submit a tax return to the French authorities showing your rental income (together with any other French sourced income), even if you don’t live in France.
As a UK resident you will also need to declare the income to HMRC. France has a “double taxation agreement" with the UK so in most cases you are unlikely to face being taxed twice on the same income.
The double taxation treaty grants partial relief against liability to tax in the UK. Where your UK tax liability is greater than the tax payable in France, the difference is paid in the UK. However, if the UK tax is less, there is no repayment of the French tax in the UK.
For example, if you have a property in France, there is a basic rate of 20% tax on the net rental (and other) income of non-residents, (although you may be able to benefit from a lower rate, depending on the level of your worldwide income). Someone who is a resident in the UK and a higher rate tax payer will pay tax at 20% in France and pay the balance up to 40% or 50% in the UK.
The tax rate is determined by the government of the country your property is located in, so you do need to check what the rate is. In some cases there is a sliding scale dependent on income, or you can opt for a fixed rate, irrespective of income in the tax year.
You are advised to seek specialist advice as many European governments have made recent changes or are considering making changes to the rates at which tax is due on rental income.
Use Capital Allowances to reduce income tax or corporation tax
As stated above, you have a legal obligation to declare and pay taxes on rental profits both in the country your property is in and in the UK. In some cases however, you may be due for a large tax rebate from HMRC, so there is a real incentive to declare the income.
By claiming capital allowances on the integral features of your property (that were either present in the property when you bought it or that have been added since) you can reduce a future tax liability and/or claim tax back from the last two tax years. This can be worth 10% or more of the purchase price as a cash saving for a 40% tax payer. As this is a specialist field most accountants will not be able to identify the allowances for you. You can contact a specialist such as Hedge Tax Mitigation for more information and a free illustration. Act quickly as the deadline to claim tax back from 2009/10 is 31st January 2012.
Selling the property
If you sell your property for more than you paid for it, you may be liable to pay Capital Gains Tax (CGT). The first £10,000 of profit is exempt from tax and there are other allowances or reliefs that can be claimed.
If you go on to reinvest the profit in another holiday let that costs the same or more than the original property, within three years of selling, then you may be able to defer the CGT until you sell. This is known as Business Asset Roll Over Relief.
You may also benefit from Entrepreneurs Relief when you sell your holiday home, if it is classed as a business asset, and this will mean you pay the business rate of CGT, which is 10% rather than 18%.
You are advised to seek the advice of an accountant when you are considering selling as the legislation may have changed.
In some instances it is possible to use Capital Allowances to reduce CGT where you are selling your last holiday let; your accountant can advise on this. To find out how much you can claim in allowances contact a specialist, such as Hedge Tax Mitigation, who will work in conjunction with your accountant.
Don’t make the mistake of not declaring your property, as HMRC is using overseas land registries as well as holiday letting agents to find out who owns holiday lets. You will find a wealth of information on the website www.direct.gov.uk and your local accountant will also be able to advise you about your obligations to HMRC. For information on the tax due overseas there is a wealth of information available on the internet, but you are advised to seek the advice of a specialist.