| | UK Property- The Tax Issues |
| |
| | | | | | | The UK residence rules are broadly similar to those in Ireland. An individual is regarded as resident in the UK if he spends 183 or more days in the UK during a tax year, for example, the tax year 6th April 2004 to 5th April 2005. An individual is treated as ‘ordinarily resident’ in the UK if he is habitually and normally resident there, year after year, apart from temporary or occasional absences of long or short duration.
An individual can shed his UK residence by acquiring permanent residence abroad. To shed his ordinary residence his visits to the UK must not exceed 183 days in any tax year, and must not average more than 91 days in a tax year. This average is taken over a period of up to four years. Days spent in the UK through circumstance beyond your control (for example, illness of a family member do not count for the purpose of the 91 day tests).
|
|
| | | | | | | The income tax rates and band applicable in the UK for 2004-5 are as follows:
| | | | | | | | | | | The amount chargeable to capital gains tax is added onto the top of income liable to income tax for individuals and is charged to CGT at the appropriate rates, after deducting the annual exempt amount, which for 2004-5 is Stg£8,200.
The corporate tax rates applicable in 2004 are as follows: | | | | | | | Small companies’ rate 19% |
| |
| | | | | | | The inheritance tax threshold for 2004-5 is Stg£263,000. The value of estates above the threshold is taxed at 40%.
| | | | | The stamp duty rates applicable are: | | | | | Residential | Non-Residential | | | Stg£ | Stg£ | | Zero | 0-60,000 | 0-150,000 | | 1% | 60,000-250,000 | 150,000-250,000 | | 3% | 250,000-500,000 | 250,000-500,000 | | 4% | Over 500,000 | Over 500,000 |
| | | | | An Irish investor is considering investing in a UK rental property needs to look at:
(a) his investment horizon - the time frame in which he hopes to realise his investment
(b) the net cash flow that the investment will produce
(c) the other UK factors including inheritance tax
| | | | | | Example | P, an Irish resident individual, is considering buying an apartment in Manchester. The apartment will cost Stg£200,000 + 1% stamp duty = Stg£201,000. He knows he can rent it at Stg£1,200 per month. He expects the property’s value will increase by 5% per annum, so that in five years time it will be worth almost Stg£230,000.
There is a possibility that his daughter, aged 15, or his son, aged 14 might want to use the apartment while at college in the UK. He will borrow the Stg£180,000 at an interest rate of 5% APR, and will repay the loan over 15 years. He will also spend Stg£5,000 on furnishing the apartment. The following repayment schedule summary shows that his monthly repayments (capital and interest) will be Stg£1,188. The first full years interest (31.08.2005) is Stg£8,812. |
|
| | | | | | | Amount financed | 180,000 | | Annual interest (e.g. 8.25) | 5 | | Duration of loan (in years) | 20 | | Start date of loan | 31.08.2004 | | Monthly repayments | 1,188 | | Total number of payments | 240 | | Monthly repayments | 1,188 | | Yearly principal plus interest | 14,255 | | Principal amount | 180,000 | | Finance charges | 105,101 | | Total cost | 285,101 |
|
|
| | | | | 31.08.04 | 180,000 | 750 | 438 | 179,562 | 750 | 438 | 180,000 | | 31.08.05 | 179,562 | 8,878 | 5,377 | 174,623 | 8,878 | 5,377 | 189,000 | | 31.08.06 | 174,623 | 8,603 | 5,652 | 168,971 | 17,481 | 11,029 | 198,450 | | 31.08.07 | 168,971 | 8,314 | 5.941 | 163,029 | 25,794 | 16,971 | 208,373 | | 31.08.08 | 163,029 | 8,010 | 6,245 | 156,784 | 33,804 | 23,216 | 218,791 | | 31.08.09 | 156,784 | 7,690 | 6,565 | 150,219 | 41,494 | 29,781 | 229,731 |
| | | | In this case, the monthly rent (Stg£1,250) can cover the monthly repayment (Stg£1,188). At the end of five years, he has a property worth Stg£229,731, with outstanding debt of Stg£150,219. In other words, his equity is Stg£79,512. He has invested Stg£26,000 = Stg£20,000 + Stg£1,000 (stamp duty) + Stg£5,000 (fit out). His gross return on investments is Stg£79,512 - Stg£26,000 = Stg£53,512 whish is more than 200% in total, and more than 40% per annum. |
|
| | | | | | | 1. The tax return for 2004-5 (6th April 2004 - 5th April 2005) must be filed by 31st January 2006. In theory, he is liable to UK income tax on the difference between the annual rent for the first seven months (7 x Stg£1,200 = Stg£8,400) and the interest (Stg£750 x 7 = Stg£5,250) plus any expenditure on repairs/upkeep (nil). This works out at Stg£3,150 which is below the 2004-5 personal allowance (Stg£4,745). Unless exempted by the inspector, he must file a UK tax return showing that his income is below the personal allowance.
2. The UK tenant must withhold standard rate income tax from the rent payable, but P can apply to the local tax office to get a dispensation allowing him to be paid gross. To get this, his UK tax affairs must be up to date.
3. Even though his is not liable to UK tax he is liable to Irish tax on the ‘profit rent’ arising in September to December 2004 (Ireland has calendar tax year). Assume this is Stg£4,200 (i.e. Stg£1,200 x 4) less Stg£3,000 (STG£750 x 4) i.e. Stg£1,200 and that it translates to €1,800. The €1,800 must be included in the 2004 tax return and will be taxed at the marginal rate of 20% or 42% as appropriate. |
|
| | | | | | | | 1. Assuming P is not UK resident, there will be no UK capital gains tax (CGT) on the gains (Stg£79,512 which translates to say €119,268).
2.As an Irish resident, P is liable to Irish CGT at 20% on €117,998 (€119,268 less the €1,270 annual exemption) = €23,599.
| | | | | | 1.As an Irish resident, P is liable to Irish CGT at 20% on €117,998 = €23,599.
2. His daughter will need to pay UK stamp duty (1%) on the market value (STg£2,297). As an Irish resident, P is liable to Irish CGT at 20% on €117,998 = €23,599.
| | | | 1.No UK inheritance tax arises as his UK estate (this being the only property) is below the threshold (Stg£263,000).
2.No Irish inheritance tax arises as his daughter can take €456,438 before any inheritance tax arises, and the value of the inheritance (assuming Stg£229,731 translates to €344,596) is below the threshold |
|
| | | | | | ( Reproduced with kind permission of Alan Moore, Tax World Limited: www.taxworld.ie ) | | |  | If you would like to receive more information on overseas property investment,
please complete our email contact form here. |
| | | | | |
|
|
