Tax on UK rental

[Llantony]

We are going to rent our UK house to our son at well below market rate.  I gather we will have to pay UK tax on this rent - but will this be at the normal UK income tax rate?  Not even sure how much that is - around 20%?  Seems an awful lot! 

This is an informal arrangement and I haven't yet found an insurance company that will insure our house when we are not living in it.  The only way seems to be to become an official landlord with contract etc. and get landlord's insurance, seems a bit OTT for letting my son live there.

[PeterG]

Why doesn't your son insure the house and deduct the monthy premium form his rent.

[Braco]

Money from children – a concept I am having difficulty conceptualising.

 

On a serious note – child pays all expenses plus makes gift to deserving parent = no rental profit therefore no tax liability.  

[Llantony]

As my son doesn't own the house, I thought he could not insure it.  I asked a couple of insurance companies if I could insure the house nd they did not suggest that solution.  If I do find an insurer, my son could pay which would reduce the rent - which I should declare to UK tax people. 

If I could find a way for him to pay our complementaire health insurance that would reduce the rent to very little!  (Presumably health insurance is not tax deductable in France?).  We are getting estimates for a complementaire at the moment.

[Chancer]

Llantony.

I too had problems insuring a house in the UK which is rented in a similar way and gives me a very small income, I renewed my insurance yesterday with Intasure following a recommendation from someone on this forum, I dont know who they were but thankyou to them [kiss]

I had had a landlords type policy which was not particularly relevant to my circumstances and somewhat restrictive, the policy with Intasure is exactly what I needed and I think will suit you, it is actually a holiday home policy on the basis that you live in France and it is effectively your second home. The cover extends to you, your family and short or long term rentals and best of all it was a saving of 40% for me.

There is another option you could consider which I had to do initially when I had a good friend housesitting for me, I had the problem that my then insurance company refused to cover me as I would not be there (I was travelling at the time) and would not allow the insurance in my friends name as he didnt own the house, I was in a catch 22 situation as I then had to declare to other insurers that I had been refused cover and they in turn would not cover me, I had less than 2 days to do something before leaving to backpack around the world.

I had a stroke of inspiration and decided to (falsely) pay the minority card, I again spoke to the highest person I could with my insurers (red telephone on wheels) once again they repeated that they could/would not help me, so I told them that myself and my friend (except that I fibbed and referred to him as "my partner")  considered their decision homophobic, there was an embarrassed silence and I was put on hold while they conferred and then given the good news that the policy would be amended to show us as joint policy holders, you could not make it up [:D]

I think in your circumstances you may well be able to take out a standard policy with your son as joint policyholder.

Sometimes you have to think outside of the box, I hope that this has been helpfull.

[suein56]

[quote user="J.R gone native"]

I think in your circumstances you may well be able to take out a standard policy with your son as joint policyholder.

[/quote]

I think this is what some friends of ours have done with a home they bought for their son whilst he studied at uni in the UK. usually the whole family is resident in France.

Sue

[Gluestick]

Your son could not insure the property as he has no "Insurable Interest".

The only insurable interest he might have would be for the cost of tenant's liabilities which are normally and usually limited to redecorations in the case of fire, flood etc.

Personally, I would tread very carefully here! If your son is in full time residence then he is indeed a tenant and any incorrect declaration to an insurance underwriter might cause them to repudiate a claim inthe case of significant loss!

Technically and legally, you are indeed a landlord: and your son legally a tenant.

Thus you, not he, is responsible for the annual gas safety check and the issuance of a Landlord's Gas Safety Certificate: and annual safety testing and certification of any electrical equipment such as washers, dishwashers, freezers, fridges and etc. 

There is also a commercial landlord's register coming into force shortly: and ALL commercial (i.e. non social) landlords must register.

Allowing anyone to occupy property without a written codified and precedent lease is always a very dangerous thing to do: son or not.

Personally I would transact this on the basis of An Assured Six Month Shorthold Lease, which rolled over each six months.

Any Income Tax would of course be offset, if appropiate, against your French income tax as you are, I seem to recall, now Fiscally Resident in France.

Tax would be due under the Self Assessment Regime (Income from land and property) and arise on the net profit (i.e. Gross Rent less qualified expenditure).

One further complication is that now, you would be classed as a "Foreign Landlord".

http://www.creaseystaxconsulting.co.uk/docs/RT98.pdf

 

[Chancer]

As if there wasnt sufficient confusion between residence (and its many different measures and interpretations) and domicile now we have "usual place of abode" to throw into the mix.

[Gluestick]

As an accountant in practice where part of the practice focuses on Tax Planning, JR, believe me, it is all a minefield of confusion!

Since NuLab -tried - to merge Revenue and Customs and keep coming up with changes and amendments to just about everything in sight, it becomes worse, far worse, by the day.

BTW: I loved your ploy about Homophobic Discrimination!

I'm going to nick that one and use myself!

 

[Llantony]

Many thanks.  I've just phoned Intasure (having previously tried 3 companies who won't insure us) and they are emailing a quote.  They don't seem to mind whether someone is living in the house or not and it doesn't seem very expensive.  I hope they are helpful should we ever need to claim..

[Un autre Gallois]

Not wishing to add to the confusion, but have any of the forum members explored yet the use of personal UK tax allowances to set against the rental income? Particularly the joint ownership of the rental property where one of the joint owners has utilised all the personal allowances against the taxation of a UK govt pension, but the other owner has enough personal allowance to reduce tax liability on the total rental income to nil.

If only half the rental income from the jointly owned property can be used for this purpose what other options are worth pursuing eg entering into a lease at a small sum from the one owner who has used all the personal allowance to the other joint owner so that the whole of the rental income is properly receivable by the other owner and absorbed by the personal allowance?

p.s. Previously a member of French News forum & recently "discovered" this forum!

[Llantony]

Good point!  My state pension is tiny so even if all the rent was declared as my income, I would still be under the personal allowance.  Somehow I suspect as we are joint owners of the house, I can only claim half of the rent as income.  In fact I'm not sure whether personal allowances operate in the UK for those living in France - presumably we get a joint personal allowance there?

[Gluestick]

Once a person is Fiscally Resident in another jurisdiction, their Personal Allowances evaporate.

 

[Un autre Gallois]

[quote user="Gluestick"]Once a person is Fiscally Resident in another jurisdiction, their Personal Allowances evaporate.[/quote]

I beg to differ! My local govt pension is taxed by law in the UK & my personal allowance is reflected in my tax code. Taxes paid by law in the UK do have the benefit of any UK personal allowances. Mrs autre Gallois has her tax deducted from UK interest refunded because her UK personal allowance is greater than the tax deducted. UK Personal allowances can be set against UK taxes due & this principle applies to absentee landlord rentals taxed by law in the UK.

[Maricopa]

[quote user="Un autre Gallois"][quote user="Gluestick"]Once a person is Fiscally Resident in another jurisdiction, their Personal Allowances evaporate.[/quote] I beg to differ! My local govt pension is taxed by law in the UK & my personal allowance is reflected in my tax code. Taxes paid by law in the UK do have the benefit of any UK personal allowances. Mrs autre Gallois has her tax deducted from UK interest refunded because her UK personal allowance is greater than the tax deducted. UK Personal allowances can be set against UK taxes due & this principle applies to absentee landlord rentals taxed by law in the UK.[/quote]

Absolutely right UAG.  Unfortunately "spare" personal allowance can't be transfered in the case of rental income, the split has to reflect the true state of ownership (ie in most cases 50/50).

[Un autre Gallois]

Thanks, Maricopa; if you go back to my first post I also asked if one joint owner could legitimately lease his/her half ownership to the other who could use their hitherto unused personal allowance to "mop up" totally the taxable rent income.

[Gluestick]

http://www.hmrc.gov.uk/budget2009/bn54.pdf

They plan to extend this apparently: to all non-residents. Picked up in a recent Tax Bulletin.

It is of course Tax Neutral, if one has an income base in UK and is fiscally resident in a state with a good Dual Taxation Treaty in force, since if, for example, one pays UK tax: one then receives a credit in France.

PA used to reduce a UK tax charge means this effectively increase the French liability: since tax due and paid produces a Tax Credit: yet the French Impôt calculate tax arising on whole income; and then deduct tax paid before seeking the balance.

Swings and roundabouts.

 

[Un autre Gallois]

Does para 5 not continue to give the benefit of personal allowances under the double taxation agreement, which would presumably apply to the absent landlords arrangements - rent taxed in the UK, not in France, but counted in the calculation of French marginal rates of taxtion?

[parsnips]

[quote user="Gluestick"]

http://www.hmrc.gov.uk/budget2009/bn54.pdf

They plan to extend this apparently: to all non-residents. Picked up in a recent Tax Bulletin.

It is of course Tax Neutral, if one has an income base in UK and is fiscally resident in a state with a good Dual Taxation Treaty in force, since if, for example, one pays UK tax: one then receives a credit in France.

PA used to reduce a UK tax charge means this effectively increase the French liability: since tax due and paid produces a Tax Credit: yet the French Impôt calculate tax arising on whole income; and then deduct tax paid before seeking the balance.

Swings and roundabouts.

 

[/quote]

Hi,

    I don't understand your swings and roundabouts comment. UK rents are taxable ONLY in the UK. If the tax is reduced or negated by Personal Allowances , this would have only a marginal effect in France where the net rental income is used only to calclate the tax rate applied to french taxable income and where the rents are NOT in themselves taxed.(See the UK /France DTT Article 5-"incomefrom immovable property".and Article 24 "avoidance of double taxation".

[Gluestick]

[quote]Hi,
    I don't understand your swings and roundabouts comment. UK rents are taxable ONLY in the UK. [/quote]

Agreed: it is a core principle of international tax (And in particular "Withholding Tax") that tax on profits arising from "Immovables" accrue to the Fiscal Body where the immovable is sited.

[quote]If the tax is reduced or negated by Personal Allowances , this would have only a marginal effect in France where the net rental income is used only to calclate the tax rate applied to french taxable income and where the rents are NOT in themselves taxed.(See the UK /France DTT Article 5-"incomefrom immovable property".and Article 24 "avoidance of double taxation".[/quote]

As in nearly all jurisdictions now, individuals are taxed on a "Worldwide Income Arising", basis. Subsequently mitigated by any Dual Taxation Treaty in force.

Thus profits arising from (e.g.) a UK real property, will fall to tax in the UK: then form thereafter the basis of holistic global income, on which the French (e.g.) Fiscal Authority will seek to tax: less any tax credit due, under the Dual Taxation Treaty.

Therefore using Personal Allowances to mitigate a UK liability reduces the tax charged in the UK: ergo the actual amount of tax paid would be less: ergo the Tax Credit would be less.

The actual French Tax arising would wholly depend on all other circumstances of income.

Unless you are suggesting that rents from property in the UK do not fall to tax at all in France: in which case one needs to commute pensions, amass cash and invest in UK letting property and be fiscally resident in France! Where irrespective of income, one would pay no more than Basic Rate UK Tax of 20%, instead of the French Rate of 30% once income exceeds € 25,927 !

BTW: you are aware that a new DTT came into being in 2008 and should be in force in 2009?

http://www.lg-legal.com/assets/Downloadablefile/French%20Tax%20News%2004-2009.pdf

Immovable property rules are in fact Art.6. Not 5.

Further BTW: I mentioned earlier the planned extension to abolition of Personal Allowances for all non-residents; in an "Early Warning" Tax Bulletin.

During the past ten years there have been immense changes in UK tax treatment of anything "Foreign". And, as always, the devil is in the detail. Whilst hoi polloi focus in the Budget is prices of booze, fags and fuel, like icebergs, each Finance Act is a mass of new tax law and proposed changes: and behind the scenes, of course, Treasury and the Exchequer are constantly working with such as CCAB, et al to hammer out forward changes: some introduced by SIs.

Hard to keep up with!

 

 

[parsnips]

Hi Gluestick,

      Re your post , income from immovable property is under art.6 in the "new" as yet unapplied treaty, but under art.5 in the old,still applicable, treaty,; to see the reason for the total exemption from french tax it has to be read in conjunction with art.24b.of that "old" treaty.

      I can see no such specific exemption in the "new" treaty, but none of the commentaries on it picks up on this , so I think we will just have to wait and see how it is applied when (if) it comes into force.

      Having read the information about the withdrawal of UK personal allowances; this clearly says that it applies only to persons holding british passports solely by reason of being "commonwealth citizens" and meeting no other test .

[Gluestick]

Yes but that is what was passed in 2008 and comes into force this year or 2010. (vis a vis personal allowances amendments).

What is currently under debate is yet another matter.

The core precept seems to be that where a person is non-resident, and their global income falls to tax in their present jurisdiction of residence, then they must expect to be taxed using the allowances and tax bands and threshholds of that jurisdiction: and no other.

Corporate tax affairs have become even more complex!

What fiscal authorities are endeavouring to do, of course, is create harmonisation; particularly so in the EU as this (and common tax and corporate laws) is a core concept of EMU.

Internationally, since the World is now a 24/7 global capital market, efforts are being made to provide a level playing field on corprate taxes in order that different bourses and stocks can be evaluated on a single benchmark, rather than having to carry out arcane calculations to remove skewing.

Britain is also desperately trying to remove anomolies of Domecile and Residence from tax law.

Increasingly driven by the unpalatable reality of many of the top financial wheeler dealers earning millions in the City and not paying their whack of UK tax.

 

[Llantony]

It seems a bit unfair - and I've probably misunderstood - that e.g. teachers' pensions are taxed in the UK even when people don't live there, but the personal allowance won't apply if you live outside the UK.

[Gluestick]

If no personal allowance applies then the Tax Credit for Tax Paid under the DTT will then be higher. (Since the tax will be charged at the basic Rate on £0 onwards).

You can't have it twice!

In France, the "Family" free of tax threshold is far higher than 2 X UK Personal Allowances: unless they are two higher rate age allowances: which evaporate above a pretty low income threshold anyway.

 

[parsnips]

[quote user="Llantony"]It seems a bit unfair - and I've probably misunderstood - that e.g. teachers' pensions are taxed in the UK even when people don't live there, but the personal allowance won't apply if you live outside the UK.[/quote]

Hi,

      I've only just noticed this, and you may have been answered elsewhere, but if you are a British citizen you are entitled to your full personal allowance against any UK tax liability.