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Foreign Property Tax UK Guide [2023]

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    The RWinvest Foreign Property Tax Guide

    Looking to invest in property overseas?

    Or, are you looking to buy UK property as a foreign investor?

    If you own a property abroad or are living abroad and letting out your property at home, unfortunately, you won’t be able to dodge a tax bill.

    Don’t worry if this already seems like a headache – these things can be a bit much to wrap your head around. However, the following guide will explain exactly what you need to know.

    So, if you need the lowdown on UK foreign property tax rules, you’re in the right place!

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      Buying a Property Abroad – How Is It Taxed?

      Like in the UK, tax on foreign property rental income is a guarantee – even if you’re a UK resident buying overseas.

      However, when it comes to foreign property tax, UK rules will essentially still apply.

      You’ll be taxed on any of your foreign properties the same way as you would on any UK property.

      For example, despite being located abroad, you’ll still be liable to pay UK capital gains tax on foreign property if you make a gain on the sale of the property.

      The reasoning behind this is that the UK tax system taxes UK residents on their income and gains worldwide.

      To cut a long story short, when it comes to income tax, you work out the total profit of your foreign properties as a whole – rather than as individual properties – by taking away any expenses from income.

      However, a nice little caveat is that the first £1000 of your income from a rental property may be tax-free because of UK’s property allowance.

      Allowable expenses – like interest costs – should be deducted from the income, with the profit then declared to HMRC in a self-assessment return. Although, there are some limits to how much tax relief is given for this.

      Property expenses that are capital in nature don’t count as allowable expenses – though they will be deductible when working out any gain on the overseas property if it’s later sold.

      If your overseas property is a furnished holiday let, on the other hand, slightly different rules apply – meaning that you’ll be able to claim capital allowances for investments against your rental income.

      There may also be foreign taxes on foreign properties to be aware of, such as purchase taxes, income tax on rents, tax on sales and annual taxes related to the property value. There may also be local gift and death taxes to consider.

      It is therefore vital to get advice on any local taxes from a tax expert in the area where the property is located.

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      Foreign Property Income Tax UK – Double Taxation?

      A UK resident that owns an overseas property is at risk of being taxed twice on any income or gains.

      This comes from both the jurisdiction of the property’s country and the UK (as outlined above).

      This is double taxation.

      However, the good news is that the UK has double taxation agreements with many countries.

      A double taxation agreement contains a set of rules outlining which country has the right to collect the tax in certain situations.

      If the agreement places exclusive taxing rights in the UK, for example, it is only paid in the UK. This overrides UK domestic law, as well as the domestic law in the other country.

      If there’s no double taxation agreement in place, you may still be able to get tax relief for any foreign taxes you pay against your UK tax bill through a foreign tax credit.

      The foreign tax authorities will also charge tax on your letting profits.

      But you don’t have to pay twice – the overseas tax paid is usually deducted from the UK tax that is due.

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      Buying Property in the UK from Abroad - UK Property Tax for Foreigners

      Purchasing or renting out a property in the UK also means you’ll be subjected to various taxes.

      Like with overseas properties, Property Tax in UK for foreigners can be extensive.

      These include:

      • Capital Gains Tax
      • Income Tax
      • Inheritance Tax
      • Stamp Duty Land Tax
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      Capital Gains Tax for Foreign Buyers

      Just like capital gains tax in UK on foreign property, those who profit from selling property in the UK are subject to capital gains tax.

      This is only applied to the profit earned after selling your asset.

      The amount of tax paid depends on the level of profit earned – among other factors.

      Non-UK residents are subject to non-resident capital gains tax.

      You’ll pay this if you’re:

      • Not a resident of the UK.
      • A representative of a non-resident who has died.
      • A non-resident trustee.

      This tax is payable for both the direct and indirect disposal of UK property or land, and you have 60 days from the date of conveyance to pay.

      The amount of tax paid is determined by whether you’re an individual, company, or trust – as well as by what type of property you’re selling.

      For example:

      • A non-resident individual – pays 10 or 20% tax if it is a non-residential property. For residential property, CGT is 18% or 28%.
      • A non-resident company – pays a flat corporation tax of 17%.
      • A non-residential trust – pays 20% tax on non-residential property, and 28% for a non-residential.

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        Income Tax for Foreign Buyers

        Like foreign property tax, UK buyers’ rental income is taxable.

        If you’re a non-UK resident, though, you will only be taxed according to your UK income alone – any income coming from elsewhere is not taxable.

        You can pay tax on your income in two ways:

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        Stamp Duty Land Tax for Foreign Buyers

        In buying UK property, foreign buyer tax on stamp duty is also expected.

        Stamp Duty Land Tax is paid when you buy houses, flats and other land/buildings over a specific price in the UK.

        A similar system is in place in Scotland and Wales, but the tax has a different name and is paid at a different rate than SDLT.

        If you’re buying a second property that is not your home, you will be subjected to an additional 3% charge on top of standard stamp duty rates.

        However, as a foreign buyer, you’ll also pay an additional 2% surcharge as of April 2021.

        The rates are 2 percentage points higher than those that apply to purchases made by UK residents. This surcharge applies to purchases of both freehold and leasehold property, as well as increasing the SDLT payable on rents on the grant of a new lease.

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        UK Inheritance Tax for Foreign Buyers

        Another UK property tax for overseas buyers that you need to keep your eye on is Inheritance Tax. 

        In the UK, the set rate for inheritance tax is 40% – with tax only applied to properties worth over £325,000.

        Even in this case, though, the tax will only be applied to the money that falls above this threshold.

        For example, if a property is worth £500,000, then only the tax only applies to £175,000 of the total amount.

        Again, like most things in this guide, there are ways you can potentially mitigate and minimise inheritance tax, so be sure to speak to an expert financial advisor for more details.

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        Foreign Property Tax UK vs Investing in UK Property as a Foreigner

        Why invest in UK property?

        Well, to be frank, with the current state of the market, it’s difficult to come up with reasons why not to.

        This is probably one of the most profitable and continually growing ventures to invest in at the moment. With prices continuing to rise for the foreseeable future, it’s also probably the best time to get involved.

        To reiterate, research every aspect of a potential investment venture thoroughly before making any final decisions.

        Like most things, if you put the work in, then the best opportunities will land in your lap!

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        Author

        Dale Barham

        Dale is a property content writer at RWinvest. Keeping a close eye on the UK property market, Dale helps our readers stay informed and up to date on the latest market news and statistics.

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