Income tax on a UK rental property

[danny15]

Hello folks,
Before I talk with a UK and/or Japan tax accountant, I thought I'd see if anyone here might be able to provide some advice. Thank you in advance.
I'm from the UK have lived in Japan for over 20 years. I have not paid any income tax in the UK since I left because all of my income is here in Japan.
I have recently inherited a property in the UK and would like to rent it out. The rent will be £36,000 per year, and I still have an active UK bank account, and rather the rent money stay in the UK and not come to Japan. Since my sister (UK resident) in entitled to half of the rent money, I would trasfer half the money to her each month.
I believe the lowest UK income tax bracket is 20% and that applies to income up to £37,700. Does this mean I will only have to pay 20% income tax?
I am thinking of having the rent money paid to me rather than my sister, as my sister is already on a 40% income tax bracket with her current income. So we figured if everything goes through me, then both of us would pay less tax on the rent money.
Any advice would be greatly appreciated. Thanks!

[Beaglehound]

If you are British you will be entitled to a personal allowance, so the first £12.5k or so should be tax free. After that, 20% as you say, after any deductions for costs incurred in connection with the rental (maintenance, letting agent fees if any etc). I don’t know how taxation of this works in Japan, but others who have rental property in the U.K. will know.

Your plan to have the rent paid to you and then pass the proceeds to your sister sounds like something HMRC would take an extremely dim view of. And would likely add to your tax burden in Japan too.

[Wales4rugbyWC23]

Are you going to rent out the property through a letting agent? There is a HMRC form you can get from them which allows you to get the rent paid gross. I wouldn't advise to do what you are proposing to do with your sister. There is quite a bit you can do with business expenses to get your tax bill down in the UK with the exception of mortgage interest. I have been doing my own UK tax return for buy to lets for about 10 years now, and no problems. Where I would recommend using an accountant is for the Japanese side. It is a bit more complicated. The Japanese tax office wants to know things like the tenant's name and building materials. Plus, it is all in Japanese.

[Tkydon]

Did you to check whether you needed file and pay any Japanese Inheritance Tax due, based on the value of the estate?

[captainspoke]

Did you to check whether you needed file and pay any Japanese Inheritance Tax due, based on the value of the estate?

And if (together with other foreign assets), a person's total goes over ¥50,000,000 there's the foreign asset report, too. (That would seem to be about £270,000 or more.)

[Tkydon]

The rental income would be taxable in Japan at your tax bracket, and you’d need to do the annual tax declaration. You may be able to deduct depreciation and taxes paid in UK.

If your sister is not owning a share of the property, I think there is a chance you will be taxed for the whole 36k£, so you need to consider your income tax and also municipal tax rate in Japan.

You can deduct all expenses paid in the UK, but you can no longer deduct depreciation for overseas properties.

As the income is sourced in the UK from property in the UK, it is taxable in the UK.
See Article 6 of the Tax Treaty:
https://www.mof.go.jp/tax_policy/summar ... n-UKEN.pdf

Will you rent it out through an agency, or just privately?

Keep all records for all interest, fees, management fees, maintenance work, and any and all other costs. You will need these when doing the accounting for the Tax Return - Kakutei Shinkoku in Japan, and for the UK too.

Run the books like a business, and use double entry bookkeeping if you want to get permission to use the Blue Return:

1. Income = Rent

2. Expenses = interest, fees, management fees, maintenance work, property taxes, and any and all other costs

3. Profit = 1. minus 2.

50% Each

You file and pay UK Tax on your 50% at your marginal income tax rate, after your Personal Deduction, and your sister files and pays UK Tax on her 50% at her marginal income tax rate.
So, 20% on anything over £12.5k or so for you.

There is a problem if you take the 100% of the profit and then distribute that back to your sister. She would then have to pay Japanese Gift Tax on that money over Y1.1M in any Japan Tax Year... This is much too complicated, so better to allocate the profit 50/50 from the start...

You file Japan Tax on your 50% of Profit converted to JPY as Income, at your Marginal Income Tax Rate, and Residents' Taxes at 10%, and claim the Foreign Tax Credit for any taxes paid in the UK on that income, converted to JPY, so you pay the difference of
Japan assessed tax at your Marginal Income Tax Rate plus Residents' Taxes minus the UK Taxes Paid converted to JPY = Net Japan Tax.

You cannot claim any Depreciation Expense on overseas properties any more.

You will need to keep all records in the correct format for at least 5 years in case the Japan National Tax Office decides to audit you.

You should consult a professional accountant, or inquire at the National Tax Office, so that you get all the relevant information, correct documentation in the required format, etc., and file correctly, at least for the first year...

[Tkydon]

Didn’t manage to go through the document.
However, I’m not sure that depreciations cannot be deducted.
The loophole was offsetting aggregate income in Japan with losses from overseas real estate. That is not possible anymore.
https://www2.deloitte.com/jp/en/pages/t ... -no68.html

Companies may still be able to take depreciation, but individuals cannot any longer.