Tax on rental income

[K&J]

Due to the market being great for buyers and terrible for sellers we have decided to buy in Wellington without selling our houses in London and Auckland. However, this means we will receive a rental income from a UK property and a NZ property and we're unsure of the tax implications.

I've done some web-trawling and my understanding is that if you rent your property and continue to live in the UK you only pay tax on any income left after mortgage interest payments, management fees and expenses, but if you live overseas you pay 22% on the entire rental payment received, irrespective if you have nothing left after you've paid out for everything. My questions are:

• Does anyone know if this is correct?
• How do you arrange payment of this tax? Do managing agents arrange it for you, or do you need to do a UK tax self-assessment?

I haven't even started to look at the tax situation for rental properties in NZ. Anyone know how this works? Do you just pay tax if you make a profit?

[James 1077]

I'll look into the UK side for you when I have some time - probably tonight but my memory of it is that the amount of tax you pay will remain the same regardless of whether you are resident or non-resident (ie total rents received less mortgage interest, other loan interest directly related to the property, management fees, wear and tear allowance, and other similar deductions).

You may, however, have to have some rental payments paid after having tax deducted but this should be refundable to the extent that it exceeds your overall tax liability (ie if you receive $1000 in rent you have $220 deducted; you then do your tax calc based on the $1000 rent less deductions and work out that you owe $100 in tax; you have already "paid" $220 (as it has been withheld and paid to HMRC on your behalf) and so when you complete your tax return you get $120 back).

BTW I've put everything in dollars as my work keyboard doesn't have a pound sign!

If you have been in NZ for less than 4 years and you qualify for the new residents passive income relief then you won't have anything else to pay on this in NZ. However if you don't then you may have to pay tax in New Zealand as well as you have to do the same tax calc under your NZ tax rate and then, if it comes out greater than $100 tax payable, you have to pay the difference.

The managing agents should arrange the deduction if they pay you the money otherwise your tenant will have to do it themselves. You can also, I think, get a waiver off HMRC so that you don't have to have any tax withheld if you can show that you aren't going to be making a profit after all the deductions have been taken into account.

I think that the NZ calculation system is similar to the UK's so yes, you only pay tax on any profit in a similar way. You won't, however, have anything withheld from payment.


Tax planning-wise it is best to rack up the mortgage on your rental properties and have them interest only and then use the funds from doing this to pay a deposit on your new property. This way you have less to pay on your new property so can pay off your mortgage quicker and you get larger deductions for the interest element on your rental properties so will have less tax (if any) to pay. You may, however, need to show that the funds raised from the additional mortgage relates to the property you are renting out but it is unlikely that you'll be asked this question.