Moving to the UK and letting out my New Zealand home

What are the implications of moving to the UK and letting out my New Zealand home?

There is a trickle of people moving back to the UK, and this is a question that occasionally crops up. This may create compliance issues in both countries, but may also result in tax liabilities not planned for.

What are the Income tax implications?

As the house is here in NZ, first taxing rights belong to NZ. This means that you will have to file NZ tax returns showing the rents and expenses and pay tax here. If this becomes your only taxable NZ income, and if the property is in joint names, then the net rental income will be split between you and you will each be taxed at the NZ progressive tax rates of 10.5%, 17.5%, 30%, 33% or 39% depending on how much it is.

You then have to include the same income on your UK tax returns to a slightly different year end, with very slightly different calculation rules, but can claim a credit for any NZ tax paid.

On an ongoing basis you will each need to complete a NZ and UK tax returns for this income and you can either do this yourself if you are tax-savvy, or you can engage someone. Just as a guide to the level of costs you might expect, I complete and file both UK and NZ tax returns and, for relatively straight forward tax positions for a married couple (e.g. salary, interest, dividends and rental income), I would charge $2,000 (with possibly no GST added if you are in the UK) - $1,000 for the UK returns and $1,000 for the NZ returns. My usual charges are $1,000 per return, and if either your UK or NZ returns are more complex, the overall charges could be as high as $4,000 before GST.

It is possible to claim UK remittance basis if you are not domiciled in the UK, although the remittance basis is a prime candidate to be abolished in the coming years. This status is available to those who are not domiciled in the UK and not deemed to be domiciled in the UK. Whilst this can produce large tax savings or tax deferrals when you have lots of foreign (i.e. non-UK) income and assets, it would not be of advantage if your foreign income and assets are more modest.

Will UK capital gains tax apply?

If you are resident in the UK, you are liable to tax on your worldwide income and capital gains. So, if you sell the property whilst resident in the UK, you must declare the disposal and calculate the capital gain. This would be the gain from the time you bought it until the time you sold it, with no discount for the fact that most of the gain may have accrued whilst you were not tax resident in the UK. The saving grace may be that most of the gain may be covered by an exemption for it being your only or main residence for some of the time you owned it. The longer you hold the property whilst resident in the UK, the greater the proportion of the gain will be taxable and not exempt. There is an end of ownership period of exemption (the last 9 months) and an annual exemption for capital gains (£6,000 each) which may reduce any possible tax charge.

What is the effect for UK Inheritance Tax?

Inheritance tax applies to an individual who is domiciled in the UK or who has assets situated in the UK. Domicile is a common law terms to define a country or territory that is the ‘home country’ of an individual. A place where they have a fixed and permanent connection and to which they may return.

For a person with a domicile of origin in the UK, the property in New Zealand may form part of your estate for Inheritance Tax purposes almost immediately, whereas for a non-domiciled individual this may take some time.

Inheritance Tax can be quite complex where one spouse is domiciled in the UK and the other spouse is not. In such cases, there is a limit to the transfers between spouses that are exempt from Inheritance Tax that you need to be conscious of.

Does it affect the rate of UK Stamp Duty Land Tax?

If you intend to purchase a property in the UK, you need to be aware of the additional Stamp Duty Land Tax (SDLT) that may apply if you have a second property (e.g. a rented property in New Zealand). The additional duty rate applicable is 3%, so that if you purchase a property for, say, £500k, you would pay SDLT of 8% instead of the usual 5%. Purchasing a property in the UK whilst non-resident can result in a further 2% being added, making the SDLT in the above example 10%.

What if the property is held in trust?

If you have a family trust in New Zealand you may wish to wind it up before you go to the UK. Trusts, where the settlors (the donors) can benefit, are transparent for UK tax purposes and can result in complex tax positions where the income and gains are attributed to the settlors without any deduction for trust expenses. Previous gains realised before your change of residence can also become taxable in the UK in certain circumstances.