UK rental sale taxes
Question from Lynne updated on 23rd January 2019:
I am a British NZ resident (eight years) and have had a rental property in the UK for the past 10 years. I am currently selling it and will have a small amount of capital gains tax as a non UK resident to pay on it (less than $1,000). I know NZ residents gets taxed on worldwide income but if I transfer the profit from the sale to New Zealand does it get declared as income or as capital gains? I assume if declared as capital gains there will be no New Zealand tax to pay on it but if declared as part of my yearly income there could be a significant amount of tax to pay?
Our expert Matthew Gilligan responded:
On the presumption that you are a tax resident of New Zealand, you are right to say that you are taxed on worldwide income. This means the answer lies in whether the gain you realised on selling the UK property is taxable in New Zealand according to New Zealand law.
Although we do not have all the necessary facts to give a definitive answer, it would be fair to say that it is unlikely. As you have owned the property for the past 10 years, it is unlikely that the provisions of the Income Tax Act that can apply to tax gains on sale of a property would be applicable here. Therefore transferring the funds to New Zealand is unlikely to give rise to any tax issues for you.
However, one potential issue is in relation to the repayment of any GBP denominated mortgage. A mortgage is known as a “financial arrangement” for tax purposes in New Zealand. Financial arrangements that are loans denominated in foreign currencies need to be translated into NZ dollars, with the gain or loss in NZ dollar terms being taxable.
Ordinarily, this gain or loss is returned annually, but if you qualify for the “cash basis” exemption you can defer accounting for the gain or loss until the loan is repaid. This is where selling the property and repaying the loan comes into play. This is a relatively complex issue and if you had a UK denominated loan we recommend you seek advice. We also presume that you have been returning the past UK rental profit or loss in your New Zealand tax returns.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.