Rent from property outside the UK: IT cases for 2005-06 onwards
General guidance on the taxation of foreign income can be found in the International Manual.
For 2005-06 onwards the main IT rules for taxing property income have been brought together in ITTOIA05, but the scope of the legislation has not changed.
Rent and other receipts from properties outside the UK continue to be taxed separately as foreign income. The profits or losses are computed using trading principles just like those of a UK rental business.
So the other parts of the Property Income Manual generally apply to receipts and expenses of properties outside the UK as well as those within the UK. But this approach does not apply if the taxpayer claims the remittance basis for overseas income, see below.
Profits or losses of an overseas property business are not combined with the profits or losses of a UK rental business; they are taxed separately and losses on one can’t be set against profits on the other.
The special rules for furnished holiday lettings (see PIM4100 onwards) don’t apply to overseas properties, with the exception of furnished holiday lets in the EEA.
Overseas property business
An ‘overseas property business’ is defined in ITTOIA05/S265. The definition is identical to that of a ‘UK property business’ except that the land from which the income arises is outside the UK.
For the purpose of deciding whether there is an overseas property business, overseas land law is interpreted in accordance with ITTOIA05/S363. This is particularly useful when applying the lease premium rules in Chapter 4 of Part 3 of ITTOIA05 to foreign leases.
Charge to tax
The profits of a property business are charged to IT by ITTOIA05/S268. It does not matter whether the property business is a UK property business or an overseas property business.
But the profits of an overseas property business are chargeable to tax only if the business is carried on by a UK resident - ITTOIA05/S269 (2).
A person who is:
domiciled outside the UK, or
not ordinarily resident in the UK
may claim for their relevant foreign income to be charged on the remittance basis. Overseas property income is relevant foreign income. But ITTOIA05/S831 (5) states that the remittance basis cannot apply to relevant foreign income arising in the Republic of Ireland.
If a claim for the remittance basis is made for a year then the only profits of the overseas property business that are chargeable under ITTOIA05/S268 are those in respect of land in the Irish Republic. The other profits of the business are chargeable to IT under ITTOIA05/S357. IT is charged on the full amount of the sums received in the UK in the tax year in respect of the relevant foreign income (ITTOIA05/S832).
Provisions which must be given priority
In the case of a foreign trade the normal ‘boundary rules’ are reversed. The rule in ITTOIA05/S261 (a) is the reverse of that in ITTOIA05/S4 (1). That means that income is charged as trading income rather than property income where the income could be regarded as either trading income or property income. The sort of receipt to which this rule might apply is rent received by a property developer from the temporary letting of land awaiting development. The rent is taxed as trading income.
Tax credit relief
The instructions at PIM4705 in respect of claiming relief for foreign tax paid in respect of income from overseas property remain applicable for 2005-06 onwards.