Many people own overseas property but are unsure how rental profits are taxed (or how rental losses are treated). This feature provides an overview of ‘the basics’.

Foreign investment property

As a general rule, overseas property rental profits are calculated using the same principles as a UK property rental business i.e. rental income less mortgage interest, letting fees, maintenance etc.

However, rental income from overseas investment property is taxed separately as ‘foreign income’ (i.e. it is not part of your UK property business). This means that any losses incurred can’t be offset against UK property profits.

Effectively, it doesn’t matter whether the property is a UK or overseas property (assuming you are UK-resident). Income tax is payable at your highest rate of tax (either 20% or 40%) on your rental profits after deducting all business expenses incurred (in the normal way).

Losses on foreign property are simply carried forward to be offset against future foreign property profits (hopefully profits will arise at some point in the future!).

The one area where taxation of foreign property does get complex is ‘tax credit relief’ – this is where you may have paid foreign tax on rental income or profits, and you would like to claim relief on it. This is a complex area, and needs a property tax specialist to deal with it (blush).

Foreign furnished holiday lettings – GOOD NEWS (and some BAD news)

Good news!

Following the recent Budget, losses incurred on overseas furnished holiday lets can be offset against ‘general income’ (i.e. earned income)

This is a nice gift from the taxman before he then completely disallows any offsetting of holiday let losses against general income for both UK and foreign holiday lettings (that’s the bad news!)

So, landlords with losses on EU holiday lets can now offset those losses against their UK general income. This applies to the 2007-08 tax year (hopefully your tax return was filed by 31/1/09?) as well as 2008-09 (tax year just ended) and 2009-10 (current tax year).

This is, essentially, a one-off opportunity to receive a tax rebate NOW on income tax paid for 2007-08, by submitting a claim to HMRC. The time limit is 31st July 2009 though!

Previously EU holiday losses could only be carried forward to offset against future profits.

I am contacting all my clients with EU holiday property to ensure that a claim is made for the 2007-08 tax year (new clients are always welcome!).

Also, as losses on foreign holiday lets can only be offset against general income until April 2010, it’s important that you have a ‘switched-on’ accountant who can ensure that you receive the maximum tax rebate possible … before it’s too late!