Claim correct tax relief on Spanish Rental Income

What is the correct level of Foreign Tax Credit Relief on Spanish rental income

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Hi All,

I'm sure someone out there can help with this.

We have a Spanish rental property providing a reasonable level of income. We pay Spanish taxes as you would expect and declare all income on our self assessment tax returns here in the UK.

We know we are entitled to Foreign Tax Credit Relief, but my question is, 'At what percentage and/or what monetary amount?

Before Brexit, we were able to deduct all expenses when calculating the Spanish tax liability, and we paid tax at 19% on the profit.

Post Brexit, we cannot deduct our rental expenses and we pay tax at 24%!

When completing our tax returns, what level of Foreign Tax Credit Relief can we claim. 

I have seen some 'advice' stating all of the tax paid - I find this strange as we would only have had to pay 20% UK Income Tax, and this would mean that our overall tax burden would decrease. Now that would be a nice surprise.

I have seen advice stating that the Double Taxation agreement only allows for 15% tax relief - OUCH!

Or, as I would hope/expect, can we claim 20% of the profits generated.

Thank you for taking the time to read over this.

 

Replies (22)

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By David Ex
14th Jan 2024 11:04

I’m sure this was discussed non here in the last couple of weeks. Can’t remember what the conclusion was.

This is an old article but probably still relevant:
https://www.accountingweb.co.uk/tax/personal-tax/brace-for-brexit-19-hig...

And this;
https://www.accountingweb.co.uk/tax/personal-tax/brexit-bombshell-for-ow...

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By CardiffAccountant
14th Jan 2024 12:44

Thanks David X

I looked up the links provided and realised that I read the articles when they were published.

Unfortunately, they do not seem to answer my query.

Thank you for going to the trouble of searching them and letting me know.

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Replying to CardiffAccountant:
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By FactChecker
14th Jan 2024 12:56

You may well have read the articles when they were published, but have you re-read them?

The example in both links (which are almost identical) contains the following:
"As Sam is a UK resident, she will also pay UK income tax at her marginal rate on the net income from the apartment, but with a credit for the Spanish tax paid.
After Brexit, Sam’s UK income tax bill will be fully covered by the Spanish tax paid, but she can’t claim a refund for the extra Spanish tax.
It's the partial loss of tax credit in the UK that will be the real problem, and this will affect basic rate taxpayers even worse than higher-rate taxpayers."

Doesn't that answer exactly the question you posed?

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By richard thomas
14th Jan 2024 12:58

In broad terms you get relief at the marginal rate, so if by treating the foreign income as the top slice it is all taxed at basic rate, the maximum relief is 20% of the profit, not the gross rents. See s 36 TIOPA.

There is no 15% limit for income directly from immovable property. There is a 15% limit on dividends paid by a property investment fund-type - see art 10(2)(a)(ii) of the DTA.

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Replying to richard thomas:
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By CardiffAccountant
14th Jan 2024 16:46

That’s great -thank you!

Checked S 36 TIOPA, and I think I have the ‘answer’.

I guess I pay my Spanish tax liability at 24%.

I then calculate what my rental profits would have been had the income been UK based (ie rental income less rental expenses = rental profit).

Having calculated the ‘profit’, I then calculate what the UK tax would have been (20% in my case).

I then claim tax relief to the value of this calculated figure.

Hope this makes sense (and is correct).

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Replying to CardiffAccountant:
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By richard thomas
14th Jan 2024 16:57

It's correct, but I think you mean in the fourth sentence that you calculate the profits in accordance with UK tax law on income from overseas property (though I suspect it's the same amount).

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Replying to richard thomas:
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By CardiffAccountant
14th Jan 2024 17:09

OOPS!

Yes you are correct, and yes it is!

Thank you for easing my mind regarding this.

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Replying to richard thomas:
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By CardiffAccountant
14th Jan 2024 22:33

Hi Richard,

Thank you for all your help with this.

Been having further thoughts about this.

If we make a rental profit of say £1,000, then the tax relief claim would be £200 (20% x £1,000). Therefore reducing our UK tax liability by £200.

If we make a profit of £2,000, our tax relief will be £400, thus reducing our UK tax liability by £400.

In other words, the greater our Spanish rental income, the greater our tax relief, and therefore the lower our UK tax liability.

I accept that it is likely that the Spanish tax paid would be higher due to the likely higher rents taken, but this may not always be the case.

We are presently in a position where our income has been taxed at 24% on turnover, and yet, when we bring expenses into the mix, we have actually made a loss (we had a lot of maintenance & repairs).

All seems a bit ‘not right’.

Are we missing something really silly stupid?

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Replying to CardiffAccountant:
By Ruddles
14th Jan 2024 22:40

The only reason that it seems “not right” is because you are being taxed on income in Spain and on profits in the UK. It is what it is.

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Replying to Ruddles:
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By CardiffAccountant
14th Jan 2024 22:55

So why not simply ignore my costs, calculate greater profits and therefore, claim higher tax relief?

Is this ‘doable’?

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Replying to CardiffAccountant:
By Ruddles
14th Jan 2024 22:59

CardiffAccountant wrote:

So why not simply ignore my costs, calculate greater profits and therefore, claim higher tax relief?

Is this ‘doable’?


Instinctively I would say no. However, looking at the wording of the DTA I’m not so sure. Too late on a Sunday to look at this but I will do so in the morning
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Replying to Ruddles:
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By CardiffAccountant
14th Jan 2024 23:03

Spoil-sport :-)

Thanks for all your help.

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Replying to CardiffAccountant:
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By FactChecker
14th Jan 2024 23:21

What do you think that 'claiming tax relief' actually means?

Greater profits => greater tax liability (from which tax relief may be available - but only against the liability incurred by the same property, and capped by whatever the DTA recognises as allowable, in this case, Spanish tax).

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Replying to CardiffAccountant:
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By Wanderer
15th Jan 2024 07:34

CardiffAccountant wrote:

So why not simply ignore my costs, calculate greater profits and therefore, claim higher tax relief?

Is this ‘doable’?

Think that through, it's just silly. You say you have a loss when calculating under UK rules.
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Replying to CardiffAccountant:
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By richard thomas
15th Jan 2024 09:47

Doable only in the sense that you could complete a tax return on that basis, but that would arguably amount to tax evasion. As has been pointed out by me and others on another thread, deductions in computing trading (and therefore property business) income are not voluntary and claimable nor are they disclaimable. You would have entered an incorrect amount of profit solely to increase the foreign tax credit that would otherwise have gone to waste.

As has been pointed out in this thread where you have a loss and so no opportunity of using the foreign tax as a credit, you can use it as a deduction so augmenting the loss to carry forward. I do not think Wanderer is correct about this, as having a loss is the main circumstance where it would pay to deduct rather than claim credit - but I stand to be corrected with chapter and verse.

Note that there is a potentially happy outcome from having a loss carried forward, augmented or otherwise. If in the following year you have a profit before deduction of any loss brought forward, the s 36 TIOPA calculation is done before deducting the loss, with the effect that the foreign tax is credited in full (up to the s 36 limit). This is what happened to me in 22/23 in relation to my Spanish FHL. I had brought forward a loss arising from major repairs and renewals during Covid reducing the 22/23 profits to nil, but I still got credit for the iniquitous and unlawful Spanish tax on gross rents against my income tax bill for the year.

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Replying to richard thomas:
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By Wanderer
15th Jan 2024 10:16

richard thomas wrote:

As has been pointed out in this thread where you have a loss and so no opportunity of using the foreign tax as a credit, you can use it as a deduction so augmenting the loss to carry forward. I do not think Wanderer is correct about this, as having a loss is the main circumstance where it would pay to deduct rather than claim credit - but I stand to be corrected with chapter and verse.

Would need to look up the law RT however on page F4 of SA106 if you have a loss in box 25 an entry in box 28 doesn't increase the loss carried forward in box 32, it remains the same as at Box 25.
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Replying to Wanderer:
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By richard thomas
15th Jan 2024 10:57

INTM161050 supports my views - see first para.

I'll look at the SA106 when I have the time.

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Replying to CardiffAccountant:
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By FactChecker
14th Jan 2024 22:53

"I accept that it is likely that the Spanish tax paid would be higher .. but this may not always be the case."
Spain = tax on income (not profit) at rate of x%
UK = tax on profit (after certain expenses) at rate of y%
Nothing will ever be "always the case", but until x% ceases to be a higher rate than y% ... you'll need some strange maths to overcome what you perceive as illogical.

BTW "All seems a bit ‘not right’" is the wrong way to approach taxation issues - especially when you're attempting to compare apples and pears (as you are when a single set of transactions are taxable under different jurisdictions).

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By taxdigital
15th Jan 2024 08:54

I haven't read the whole thread but if you can't claim credit relief then try deduction relief (s.112 TIOPA)

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Replying to taxdigital:
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By Wanderer
15th Jan 2024 08:55

Is that possible when you have a UK calculated loss?

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Replying to Wanderer:
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By taxdigital
15th Jan 2024 11:33

Yes; the foreign property income (in this case) gets reduced by the tax paid.

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By CardiffAccountant
16th Jan 2024 16:29

Hi All,

Thank you for taking the time to 'get involved' with this.

Clearly, it is not an area with which I am fully 'up to speed' with.

Will have to go and do some further reading!

Thank you all again.

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