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The P's

Making Property Rental Tax Efficient

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This year we decided to try letting our trullo via an agent to cover some of the running costs. Whilst the agent is expensive, he is very good and for first time renters the 2 bed property has done reasonably well and our income after commission for this season is €20,400. Italian tax is deducted at source at 21% which I am told is a low rate in Italy - normally circa 30% - but at the lower rate you are not allowed to claim back running costs from the Italian authorities.

We will of course need to declare this income on our UK self assessment forms, but assume that the tax paid in Italy under the 'double taxation' rules can be offset against UK income tax. However can I then offset the running costs (gas/water/electric/maintenance less an allowance for personal usage) against my UK tax bill?

If so, what is the best way to do it? Do I set up a company or just treat it as a joint self employed venture with my wife?

What have others done?

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For UK tax purposes the income would not normally be from self employment but from overseas property. There are differences but in practice would not be significant

For UK tax purposes you can deduct the expenses relating to the letting; general/annual expenses would need to be apportioned if the property is only let part time or is available to you to use.

The double tax relief is the lower of:

(a)    the UK tax on the taxable income (ie after allowable expenses); and

(b)   the Italian tax paid.

It is possible as an alternative to treat the Italian tax as an expense. However, this is unlikely to be of benefit unless expenses are very high and the tax exceeds the net UK taxable income – it would create a loss to carry forward.

Unless the UK taxable income is going to be taxed at higher rates (40%+) you should have no UK tax liability but it still needs to be properly included on your tax returns.

For a single property also used as a holiday home I would not normally recommend putting it into a company – could be significant costs and tax consequences of doing so.

The above is a general guide only. If your situation is not straightforward you should consider getting specific advice on your situation.

Hope that helps

 

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Hi Mr. e Mrs P,

Just to let you know that the 21% tax situation is now on hold, after protests after the Airbnb fiasco. And rumours are that they may reduce that figure too. That is going to be reviewed soon hopefully so that we know what we are doing for 2020.

I will leave others to let you know what they have done about offsetting bills against any eventual UK tax.

For me, it would not seem logical to allow Italian expenses to be set off against UK income tax just as it is not right to pay taxes in the uk against an italian income.

However, not everything is as it appears!

 

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4 hours ago, Panner said:

For UK tax purposes the income would not normally be from self employment but from overseas property. There are differences but in practice would not be significant

 

For UK tax purposes you can deduct the expenses relating to the letting; general/annual expenses would need to be apportioned if the property is only let part time or is available to you to use.

 

The double tax relief is the lower of:

 

(a)    the UK tax on the taxable income (ie after allowable expenses); and

 

(b)   the Italian tax paid.

 

It is possible as an alternative to treat the Italian tax as an expense. However, this is unlikely to be of benefit unless expenses are very high and the tax exceeds the net UK taxable income – it would create a loss to carry forward.

 

Unless the UK taxable income is going to be taxed at higher rates (40%+) you should have no UK tax liability but it still needs to be properly included on your tax returns.

 

For a single property also used as a holiday home I would not normally recommend putting it into a company – could be significant costs and tax consequences of doing so.

 

The above is a general guide only. If your situation is not straightforward you should consider getting specific advice on your situation.

 

Hope that helps

 

 

 

Panner, thank you very much for the reply, very useful.

Do you know what the calculation is for the apportionment of personal use?  There is a couple of ways that I can think of.  We used the property for one month, so do we calculate at 1/12th, as the property is available for rental throughout the year or as the property was actually rented across 7 months, we calculate at 1/7th. Or maybe there is precedent with HMRC for a fixed percentage?

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Hi the P's

Strictly speaking it is the time available to you divided by the time available in total. However, can  vary according to the expense. eg electric/gas - standing charge as above useage - time used by you divided by total time occupied (eg 1/8) - anything specific to rental - eg meet & greet/cleaning etc as it falls.

Rubbish tax/emu etc (annual fixed costs) - time available to youy divided by 52. Time available is time used plus nay time unoccupied unless you are excluded from using - eg if contract with agents requires it to be available to them apart from specified weeks reserved for you.

Whatever basis used it is important that it makes sense and the rationale/basis is set out in the notes on the tax return - HMRC may query but at leaset you will have disclosed everything - gives them limited time to query

 

Regards

 

 

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