‘I want to invest in Australian buy-to-let’
This reader faces a complex series of choices. Amelia Murray seeks expert help
Jennifer Beck has some important financial decisions to make – and needs to make them in the right order to minimise tax and maximise her income. Ms Beck, 44, came to Britain from Australia 16 years ago when maths and science teachers were in short supply. She recently gave up her permanent teaching job and £38,000 salary and is about to start work as a supply teacher, which will pay between £110 and £185 a day. She plans to return to full-time work in September 2017.
Ms Beck owns two buy-to-lets – a flat in Southend, Essex, and a converted stable in nearby Leigh-on-Sea. She also owns her own home, a three-bedroom semi-detached house in Southend where she lives with her three-yearold daughter, Elizabeth. Each property is mortgaged and her total debt is £425,730; the repayments amount to £1,400 a month.
She estimates that the two buy-tolets yield an annual income of £12,900 after the mortgage repayments. Ms Beck also makes £400 a month from a lodger. Maintenance payments from Elizabeth’s father, child tax credits and child benefit add up to about £9,900 a year.
She has £6,000 of credit card debt, which she plans to pay off next month when the 0pc deal expires.
Her buy-to-let flat is currently on the market for £170,000. She bought it in 2012 for £115,000 and hopes to sell it in October, when the fixed-rate mortgage comes to an end. She wants to know how much capital gains tax she will have to pay.
Ms Beck wants to use the proceeds to purchase a buy-to-let property in Australia to “put some roots down” and give her and her daughter the option of moving back in the future. She may also sell her own home, which she bought as a buy-to-let in 2008 for £175,000 and moved into last year. If Ms Beck bought a A$450,000 property in Ballarat, Victoria, she would pay about A$20,000 in government fees and stamp duty.
If she moves to Australia she should consider whether to sell her UK property before departure. As an Australian resident she will be subject to Australian tax on her worldwide income and gains.
Any gain on sale of an Australian property will be taxed at the point of disposal. Typically a qualifying private residence will be exempt from capital gains tax, but investment and rental properties may be subject to tax. Various exemptions exist depending on the specific facts and ownership period. Income and gains are taxed at progressive rates from 0pc to 45pc, depending on other income in the tax year.
If Ms Beck is subject to a higher tax rate in Australia than the UK rate on her gains, the higher Australian tax will represent an additional cost. It may therefore be better to dispose of the properties before becoming an Australian tax resident.
UK property held by non-UK residents remains subject to UK tax, so Ms Beck may suffer both UK and Australian tax on the disposal of the properties once she becomes non-UK tax resident. Ms Beck lived in one of the properties for a period as her
‘In my view, Ms Beck is overexposed to property’
principal residence. Therefore part of the gain relating to this period should be exempt from UK (and possible Australian) tax. Other allowances may also be available, such as lettings relief, which applies if you let out some or all of your principal private residence.
Once Ms Beck becomes a non-UK resident, the rental income from the properties will be subject to a special regime known as the non-resident landlord regime.
Ms Beck will need to request permission from HMRC to receive any rent without deduction of tax at source. Otherwise her tenant or agent will be required to deduct tax at the basic rate from her rental income and pay it to HMRC. If gross payment status is granted she will need to pay tax via a UK tax return.
Relief may be available under the UK-Australian tax treaty to ensure that Ms Beck does not suffer tax twice on the same income or gains.
Ms Beck is currently Australian domiciled and should also consider her inheritance tax position. After 17 years in the UK she will become deemed UK domiciled and will be subject to UK IHT at up to 40pc on her worldwide assets.
There is no inheritance tax in Australia. Instead the capital gains tax regime deals with tax in probate and there are various exemptions available.
Jennifer Beck has two buy-to-lets and her own home in Britain. She needs to avoid paying tax twice