Renting out my Spanish holiday villa and tax
QUESTION: I live in Northern Ireland and have recently bought a holiday villa in Spain which we used for three weeks during the summer. Now that the kids are back at school and university I am thinking of renting the apartment out for short term holiday lets during the winter months. I need to know whether I need to register it for tax purposes.
ANSWER: Yes you do need to register the Spanish villa for tax purposes in the UK as you are earning this money as a resident in the UK - so you must declare all the rental income to HMRC each tax year and allowable expenses associated with those rents received. If you are also declaring this in Spain and if you suffer Spanish tax then you can have this offset against the UK tax position as we have a double taxation agreement with Spain.
In essence, you are taxed on your foreign properties in the same way as you would be on any UK properties. In short, you work out the profits for all your foreign properties as a whole (rather than as separate properties) by taking any expenses away from any income.
A deduction is given for allowable expenses when working out the profits of the overseas property rental. Broadly, an expense is allowable if it is incurred for the purposes of running the overseas property rental business. The general rule is that the expense must be incurred ‘wholly and exclusively' for the purpose of running the business and must not be of a capital nature. However, relief may be available for some capital expenditure in the form of capital allowances.
Examples of items that may be deducted in computing the profits of the overseas property business include letting agents fees, legal fees, accountant's fees, buildings and contents insurance, maintenance and repairs,utility bills, ground rents and service charges, cleaning, gardening and similar services and advertising costs in letting the property.
Interest on loans to purchase the property is also deductible, but not any capital element of the repayment. As with UK properties, interest is allowable on a loan to the value of the property when it was first let.
You pay income tax on any profits at your normal rate. When working out the UK tax, you normally use the exchange rate when the rent was due.
If you're domiciled outside the UK or are not ordinarily resident in the UK, you can claim for your foreign income to be charged on the remittance basis instead. This means that you're taxed only on the income received in the UK in the year. This is an extremely complex area and you should consider seeking professional advice about the options available to you.
Any losses from property abroad can be offset against other overseas properties, or carried forward to future years if you make a loss overall. You can't set foreign property losses against UK property profits or vice versa.
Normally, the foreign tax authorities will also charge tax on your letting profits. But you won't pay twice – the overseas tax paid is usually deducted from the UK tax that is due. You declare income from foreign properties on the foreign property pages of the self-assessment form.
Paddy Harty (firstname.lastname@example.org) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.