As tax authorities everywhere look to increase tax revenue, rental income is coming under closer scrutiny. If you rent out property, whether in the UK or another country, you need to be sure that you are paying tax correctly.
As tax authorities everywhere look to increase tax revenue, rental income is coming under closer scrutiny. If you rent out property, whether in the UK or another country, you need to be sure that you are paying tax correctly. It is quite easy to make mistakes, especially if the property is located in one country and you are resident in another.
In the UK, HM Revenue & Customs (HMRC) calculates that it loses up to £500 million a year from underpaid tax on rental income. It has launched a “Let Property Campaign” to encourage landlords to regularise their position, whether they have made genuine errors or deliberately not declared income. It is open to UK resident landlords and covers holiday lettings, including properties owned abroad.
A press release from HMRC warned: “HMRC will use information it holds about property rental in the UK and abroad, along with information already held on HMRC‘s digital intelligence system Connect, to identify people who have not paid what they owe. For those that fail to come forward, higher penalties – or even criminal prosecution – could follow.”
The campaign will run for 18 months, but HMRC said it will start to contact landlords it suspects of underpaying tax next year. Since those who voluntarily come forward receive the best penalty terms, it is best to look into this sooner rather than later if necessary.
With increasing exchange of information between countries, you can expect the UK authorities to find out about property abroad in countries like Spain and Portugal and vice versa.
If you are a UK resident and own property abroad, you need to comply with both the UK and regulations and those in the country where the property is located.
As a UK taxpayer, you need to declare the rent on your UK tax returns. Expenses can be deducted.
When you sell the property, any gains need to be declared and taxed in the UK. Overseas property must also be declared as part of your estate for UK inheritance tax purposes if you are UK domiciled.
Property in Spain
In Spain, rental income from the property owned by non-residents is taxed at a fixed rate of 24.75%. EU residents are taxed on the net rental income after allowable expenses. If you do not rent out the property, or for times when it is unlet, a notional income is deemed to arise and tax is due on this.
If and when you sell the property you will pay tax on the capital gain under the savings income regime, at rates of between 21% and 27%. If held for less than a year, any gain is likely to be taxed at the scale income tax rates).
The net equity value of the property is currently liable to wealth tax if it is valued at over the individual allowance of €700,000 for individuals and €1,400,000 for couples (if owned in joint names). A mortgage can also reduce its taxable value.
The property will be subject to succession tax if you die or give it away as a gift. This can be expensive for non-residents as you cannot benefit from the more favourable local rules.
Property in Portugal
Since the property is in Portugal it also taxable in Portugal. Rental income earned by non-residents is taxed a flat rate of tax. It used to be 16.5% but shot up to 28% this year.
You can claim day-to-day costs and stamp taxes, but these are limited in scope. Mortgage interest is not tax deductible in Portugal.
If you sell the property, tax is due on the capital gain. 100% of the gain is taxable for non-residents at a fixed rate of 28%.
It is possible for UK residents to opt to be taxed as a Portuguese resident. In this case, only 50% of the gain is taxable, at the scale rates of income tax. Inflation relief is given after two years of ownership. You have to declare your worldwide income in Portugal so the marginal rate of tax can be calculated.
If you still own the property when you die, it will be liable to stamp duty (inheritance tax). The rate is 10%, and spouses and children are exempt.
The UK, Spain and Portugal each apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
You do not however have to pay tax twice. You can offset the tax paid in Spain or Portugal against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK. If the UK tax is lower, you do not get a refund for the difference.
Where necessary, European tax authorities help each other collect tax. For example, we are aware of a case where an individual sold their home in Portugal and returned to the UK without declaring the gain in Portugal or paying the tax due. The individual was tracked down by HMRC on behalf of their Portuguese counterparts and received a demand for payment totalling £23,020 including interest and costs.
This article looks at Portuguese and Spanish rental income and gains for UK residents, but of course you will have similar tax considerations if your property is in another country, or if you are resident in Spain or Portugal and own UK property. It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated, and you should seek professional advice. Blevins Franks specialises in Spanish, Portuguese, French, Cyprus and Maltese taxation, as well as UK taxation, and how they interact.
14 October 2013
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.