Tax and proceeds when selling overseas property

Question from Rod Allan updated on 18th November 2009:

We have recently moved from UK to New Zealand to work - hopefully permanently. We still have a house in UK (unlet)and have just purchased one in NZ in which to live. Assuming we stay here in NZ do we have to sell our UK house within 4 years of arrival to escape having to pay tax on the proceeds? If after 4 years how much tax do you have to pay? Is it at your normal income tax rate? Is there anything we should be aware of in order to minimise our tax liability in NZ? Do we have to lodge the fact we have bought our house here with a view to permanent residence. Currently we are on a 2 year working visa even though we intend to stay permanently.

Our expert Mark Withers responded:

Hi Rod, Quite a lot in this but here are a few thoughts. Generally, once you have established a NZ tax residency your worldwide income is taxable in NZ including the UK rent. You have correctly identified the four year exemption from declaration of foriegn income for migrants and returning expats that have been away 10 years.

If you have a UK loan on the property you may be liable to pay non resident witholding tax on the interest paid to the UK lender. This can be avoided by registering to pay the cheaper 2% approved issuer levy. The AIL is only available if there is no arrears of NRWT though so should be registered for asap.

Again, a UK loan could have some implications under the accrual rules that can require exchange gains and losses on the debt to be recognised. If you are paying tax in the UK on the rental income you will be given credit for this tax paid and only need to "top up" any difference between this and the NZ tax rate.

NZ doesn't have foriegn loss quarantining rules so if the property trades at a loss the loss can be deducted against NZ income. We don't have a capital gains tax in NZ but the property is still subject to UK rules so you should continue to administer your UK based tax compliance with a UK accountant.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.



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