Understanding Tax on Overseas Property: What You Need to Know

The fundamental principle of UK taxation is as follows: 'UK residents are taxed on their worldwide income, while non-UK residents are only taxed on income generated within the UK.' Consequently, the taxes owed on overseas property depend on an individual's residency status. Non-residents do not need to declare or pay taxes on income derived from overseas property. However, UK residents are required to declare income from overseas property, whether it is rental income or capital gains from the disposal of such property.

This article explores the various taxes that must be taken into consideration by the overseas landlords, resident in the UK, starting with the tax on the rental income.

Rental Income 

One common source of income for individuals in the UK is rent from property, whether located within the UK or overseas. UK residents with rental income from abroad must declare this income on their tax return. The rental income should be reported on the supplementary page, SA106 form. Landlords can claim property expenses such as lease payments, repairs, and legal fees on the return.

The SA106 form includes fields for the number of overseas let properties, along with the total rents and receipts. The top of the foreign income page is shown below.

Capital Gains Tax

The disposal of residential properties in the UK must be reported within 60 days of the completion date. Does the same rule apply to residential properties located overseas?

Fortunately, the 60-day rule does not apply to properties located abroad, whether they are residential or commercial. However, capital gains must still be reported. This can be done in one of two ways: either through the individual’s Self-Assessment tax return or by using the ‘real-time’ Capital Gains Tax service. The real-time service is only available for reporting gains on assets sold during the 2023/24 and 2024/25 tax years.

As with UK properties, residential properties abroad are subject to capital gains tax at rates of 18% and 24%, while commercial properties are taxed at 10% or 20%. If no gain arises from the disposal of the overseas property, reporting is not necessary.

Stamp Duty Land Tax (SDLT)

Don’t be discouraged by the heading; Stamp Duty Land Tax (SDLT) is not payable on the purchase of an overseas property. However, owning an overseas property does affect the eligibility for the First-Time Buyers’ Relief. Under this relief, individuals pay SDLT at the reduced rate, on the following rates:

The relief is only available for individuals who own their first property in the UK. However, if the individual already owns a property overseas, they will no longer be able to claim this relief.

Additionally, owning an overseas property also affects one’s SDLT rates on future properties.

If you do not own the property overseas and are purchasing a property in UK for the first time (not covered under first time buyer relief), it will attract Stamp Duty Land Tax (SDLT) at the following rates:

If you own the property overseas and are purchasing the property in UK, it will attract Stamp Duty Land Tax (SDLT) at the following rates:

To sum up, individuals who own property overseas must pay a 5% surcharge on any new residential property purchased in the UK. However, they may potentially claim back this surcharge if they sell the overseas property within 3 years of purchasing the new property, provided they occupy the new property as their main residence.

Therefore, caution must be taken when claiming the first-time buyers’ relief and on SDLT computation by individuals who already own a property abroad.

Inheriting an Overseas Property

Taxes on an inherited overseas property can be complex, as several taxes may be triggered. Fortunately, inheritance tax is not one of them—under certain circumstances. The applicability of Inheritance Tax on foreign assets depends on where the person is domiciled, i.e. the permanent home of the individual.

If the person inheriting the overseas property is domiciled abroad, inheritance tax is not applicable. Individuals with their permanent home abroad only pay inheritance tax on their UK assets, such as property or bank accounts in the UK. 

However, the new policy introduced by the Labour government on 29 July 2024, which abolishes domicile status for UK taxpayers, means that foreign assets may now be subject to inheritance tax if the person has been a UK resident for certain years in the past, regardless of their domicile status.

In contrast, individuals domiciled in the UK will be liable to pay inheritance tax on both their UK properties and properties situated overseas.

Double Taxation Agreement

If a UK resident sells an overseas property, the location where they pay taxes on those gains depends on the double taxation agreement (DTA) between the UK and the specific country where the property is located. For example, tax havens like the Isle of Man do not impose capital gains taxes. However, this does not exempt UK residents from paying UK capital gains tax on properties sold in such locations. Even if the property is sold in a state without any provision for capital gains tax, the gains must still be reported in the UK, and the capital gains tax must be paid.

If there is a DTA between the UK and the other country, any tax paid overseas can be claimed on the SA106 form when reporting the capital gains tax in the UK.

You can find detailed summary of the Double Taxation Agreement between the UK and various states such as, Isle of Man, Jersey, on our website.

Conclusion

Understanding the tax implications of owning or inheriting overseas property is crucial for UK residents. While non-residents are not required to pay UK taxes on overseas income, UK residents must declare and pay taxes on such income, including rental income and capital gains. Additionally, ownership of overseas property can affect eligibility for certain tax reliefs, such as the First-Time Buyers’ Relief.

It's important for individuals to be aware of these rules to ensure compliance and to take advantage of available reliefs where applicable. Seeking professional tax advice is recommended to navigate these complexities and to optimise tax outcomes.