Tax Treatment of NZ Investment Property for UK Tax Residents
Taxation has always been a complex area to navigate. However, when it comes to investing in properties overseas, a thorough understanding of your local tax obligations is important to help you structure your investments to allow you to utilise your losses and minimise tax obligations.
What is tax residency?
For taxation purposes, there will typically be differences in how much and what you will be taxed on by a country, depending on whether or not you are a tax resident of that country. The criteria for tax residence varies internationally, and it is crucial to understand your tax residency as tax obligations in most countries usually differ depending on whether you are a resident or non-resident.
How tax residency is assessed in the UK:
According to the Statutory Residence Test in the UK, you are a UK tax resident if:
- You have been in the UK for more than 183 days in the tax year (first automatic UK test), or
- You do not meet any of the three automatic overseas tests, but you meet either the second or third automatic UK tests (see below),
- You meet the sufficient ties test.
The second UK test is relevant if you have or had a home in the UK during all or part of the tax year, and you will meet the test if:
- There is at least one period of 91 consecutive days, at least 30 days of which fall in the tax year, when:
- You have a home in the UK in which you spend a sufficient amount of time, i.e. you were present in that home on at least 30 days during the tax year, and
- Either you have no overseas home, or you spend no more than the permitted amount of time, i.e. present in that home on fewer than 30 days, in each overseas home you own.
The third UK test is relevant if you work full-time in the UK for any period of 365 days, with no significant break from UK work and:
- All or part of that 365-day period falls within the tax year,
- More than 75% of the total number of days when you do more than three hours of work are days when you do more than three hours of work in the UK,
- At least one day which is both in the 365-day period and in the tax year is a day on which you do more than three hours of work in the UK.
The sufficient ties test is relevant if you do not meet any of the automatic overseas tests or any of the automatic UK tests.
This test examines whether you have family ties, accommodation ties, work ties or a 90-day tie in relation to the UK. You are deemed to have a 90-day tie to the UK if you spend more than 90 days in the UK in either or both of the previous tax years.
If you meet any of the above tests for UK tax residency, the HM Revenue & Customs (HMR&C) will consider you to be a UK tax resident for tax purposes. However, your tax obligations as a UK tax resident will vary depending on whether you are “domiciled” in the UK.
What is “domicile”
In the UK context, domicile is the legal term used to describe the place where a person has chosen to make a fixed and permanent home. Generally speaking, you will be domiciled in the UK if you intend to permanently reside in, or plan to return to, the UK.
What are your tax obligations?
As a UK tax resident, your tax obligations in the UK vary depending on whether you are domiciled in the UK.
If you are a UK tax resident and you are domiciled in the UK, you will be taxed on all UK income and capital gains, as well as all foreign income and capital gains.
If you are a UK tax resident but you are not domiciled in the UK, you will be taxed on all UK income and capital gains. For foreign income and capital gains will either be taxed on the sum of your foreign income or, you can choose to only pay tax on a remittance basis, i.e. how much of the income you intend to bring into the UK. That means, if you hold properties in New Zealand and you don’t intend to bring the rental income and/or capital gains into the UK, you will not need to pay tax on this income if you adopt the remittance basis.
There are however potential costs if you are a long term resident in the UK and you choose to pay tax on the remittance basis. Currently, if you have been a UK resident for at least seven of the previous nine tax years, you will have to pay an annual £30,000 remittance basis charge if you chose to pay tax on the remittance basis. This charge increases to £50,000 per annum if you have been a UK resident for at least twelve of the previous fourteen tax years. Payment of this charge allows your foreign income and gains for the relevant financial year to be tax-exempt unless they are remitted to the UK.
If you are not a UK tax resident, you will only be taxed on your UK income, if any.
With regards to investment properties, how are incomes and losses from my investment properties in New Zealand treated in the UK?
As a UK tax resident, you cannot use losses from investment properties, regardless of whether they are domestic or foreign, to offset against your income for tax purposes in the UK. This is because the HMR&C states that for tax purposes in the UK, investment properties are treated as a business and any income losses derived from this source cannot be used to offset against personal income. The HMR&C also requires foreign rental incomes to be declared separately from domestic rental income as the two sources are taxed separately.
However it should be noted that any losses generated from investment properties in NZ can be carried forward and accumulated year on year. If at some point your portfolio begins making profits, then the losses can be offset against this profit. Alternatively you may return to New Zealand and begin earning a salary. In this instance, the accumulated losses can also be offset against your New Zealand income.
How are realised capital gains/losses on New Zealand property treated while you are living in the UK?
UK tax residents are taxed on all capital gains worldwide, except for any capital gains on their family home (in general). Capital losses incurred during a financial year are carried forward and can be used to offset against capital gains in either the same financial year or in later years.
In the UK, there is an annual tax-free allowance for capital gains, which domiciled tax residents are able to enjoy. Under the allowance, you will only be taxed on your capital gains once they are above the threshold. The implication from this is that if you are currently based in the UK and you intend on permanently leaving in the future, you will no longer be able to benefit from the annual tax-free allowance as your capital gains will be taxed on the full amount once you cease to be domiciled in the UK.
Relief from paying tax on capital gains as a non-domiciled tax resident can be sought by claiming the remittance basis (see Tax Obligations section).
Based on the information outlined above, how should I structure my investments in New Zealand to utilise any potential tax losses?
In New Zealand, popular ownership vehicles for property currently include trusts, personal name, and look-through companies. Although trusts may provide additional protection against claims and creditors, they have a major disadvantage from an investment point of view in that only profits, and not losses, can be distributed to beneficiaries. As such, you will be unable to use tax losses from properties held in a trust to offset against your personal income. In contrast, a look-through company (LTC), which is a tax structure in New Zealand, allows both profits and losses to be distributed directly to its shareholders, who are then taxed at the personal level.
As previously stated, investment properties are treated as a business, and rental business losses cannot be offset against general income except in the case of exceptional expenses associated with capital allowances. However, this does not mean ownership structure is unimportant. For example, if you move to Australia from the UK, then the commonly used LTC may not be the best vehicle – see our separate article on tax treatment in Australia.
What about double taxing?
New Zealand currently has double tax agreements with many countries, including the UK, which outline the treatment of tax in order to prevent double taxation and provide tax reliefs for individuals who are tax residents in more than one country. For income derived from New Zealand properties, rental income will be only taxed in New Zealand, and will not be taxed again in the UK. Your capital gains however, will be taxed in the UK if you choose to remit them, as New Zealand do not currently tax capital gains.
The information provided in this article is not intended to provide a comprehensive statement of tax laws and should not be used as a substitute for legal advice.
Published on Thursday, April 3rd, 2014, under Tax