UK rental income on German tax returns (post-Brexit)

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I also fear/expect HMRC will no longer grant personal allowance to EU citizens resident outside the UK. This will have a much bigger impact for me than the Progressionsvorbehalt.

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First, your Brexit summary is in line with how I think things will pan out in Germany but I am sure one or other of the German tax experts will wade in, in due course. The Double Tax Treaty is not changing, and the UK retains taxing rights over income from property located in the UK.  You therefore need to register both you property rental business and apply the non-resident landlord rules ( Paying tax on rent on behalf of landlords who are abroad - GOV.UK (www.gov.uk).

 

As far as the property business accounts are concerned, they should be for the tax year, 6 April to 5 April and, technically, should be on normal accruals basis of accounting.  However, for small-scale property businesses HMRC is normally content with cash basis accounting.  So, if you are within the rules for cash basis accounting, you would just report income received and expenses actually paid in the year, rather than income receivable and expenses payable with debtor and creditor adjustments.

 

Have a look at the HMRC Property Rental Toolkit for all sorts of useful information, including cash basis accounting and allowable expenses. Property rental toolkit - GOV.UK (www.gov.uk)

 

Also take a look at these:

Work out your rental income when you let property - GOV.UK (www.gov.uk)

Examples of how to work out Income Tax when you rent out a property - GOV.UK (www.gov.uk)

 

HMRC also have some great educational material for property rental generally but I cannot recall where it is on gov.uk - something for you to search for, lol

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I thought the tax allowance for expats renting out property in the UK was not just an EU thing.  So should not change?

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1 hour ago, Gambatte said:

https://www.legislation.gov.uk/uksi/2020/332/regulation/3/made

Thanks. But it does not say that EU citizen resident outside the UK  will keep the HMRC personal allowance. 

 

That's exactly what it says, you just have to insert those words you linked to and which show the update to that section done in 2020, into article 56 (3) (za) UK Income Tax Act (they haven't inserted them yet themselves): https://www.legislation.gov.uk/ukpga/2007/3/section/56

 

And you get:

(za) is a national of the United Kingdom or a national of an EEA state

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1 hour ago, PandaMunich said:

 

That's exactly what it says, you just have to insert those words you linked to and which show the update to that section done in 2020, into article 56 (3) (za) UK Income Tax Act (they haven't inserted them yet themselves): https://www.legislation.gov.uk/ukpga/2007/3/section/56

 

And you get:

(za) is a national of the United Kingdom or a national of an EEA state

Couldn't have put it better if I tried.  And for completeness, all EU MS are of course EEA states...

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I see, thank you very much Panda and Gary. Yes, I agree with the conclusion.

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10 hours ago, snowingagain said:

I thought the tax allowance for expats renting out property in the UK was not just an EU thing.  So should not change?

Well, if you do not reside in the UK and are not an EEA citizen HMRC does not grant you an allowance. EEA citizen are taxed less. My thought was that post-Brexit the UK was going to cease this privilege.

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13 hours ago, GaryC said:

First, your Brexit summary is in line with how I think things will pan out in Germany but I am sure one or other of the German tax experts will wade in, in due course. The Double Tax Treaty is not changing, and the UK retains taxing rights over income from property located in the UK.  You therefore need to register both you property rental business and apply the non-resident landlord rules ( Paying tax on rent on behalf of landlords who are abroad - GOV.UK (www.gov.uk).

 

As far as the property business accounts are concerned, they should be for the tax year, 6 April to 5 April and, technically, should be on normal accruals basis of accounting.  However, for small-scale property businesses HMRC is normally content with cash basis accounting.  So, if you are within the rules for cash basis accounting, you would just report income received and expenses actually paid in the year, rather than income receivable and expenses payable with debtor and creditor adjustments.

 

Have a look at the HMRC Property Rental Toolkit for all sorts of useful information, including cash basis accounting and allowable expenses. Property rental toolkit - GOV.UK (www.gov.uk)

 

Also take a look at these:

Work out your rental income when you let property - GOV.UK (www.gov.uk)

Examples of how to work out Income Tax when you rent out a property - GOV.UK (www.gov.uk)

 

HMRC also have some great educational material for property rental generally but I cannot recall where it is on gov.uk - something for you to search for, lol

 

 

Thanks a lot GaryC so far for the very valuable advice regarding HMRC and potential 'cash basis' accounting.

This somewhat confirms what i suspected regarding treatment by HMRC in the UK regarding UK property rental income.

(I live and work in Essen full time - I would class my property business as 'small-scale', as i only have a 2 bed flat in Coventry, which i rent out.

I would therefore use cash-based accounting when submitting my UK Tax return – i.e. when the invoices were paid).

 

 

Just to be 100% clear -

I suppose my 2 questions were actually more related to the 'German Finanzamt' side of things - i.e. how everything is treated from the German Finanzamt side.

(my fault, as i didn't explicitly make this clear enough , first time around).

Or put another way – do the German Finanzamt operate in exactly the same way as HMRC on this front?

 

  1. is there a formal comprehensive list published anywhere online of what are classed as ‘allowable expenses’ relating to UK rental property from the 'German Finanzamt' perspective (in either English or German)?

 

  1. in terms of any ‘income received’ and ‘expenses paid’, which date is actually most relevant from the 'German Finanzamt' perspective ?

 

The physical date I actually pay the invoice on………….or the period the invoice actually relates to?

 

Fictive example:  

– e.g. say, I have received an invoice from a supplier that relates to work they carried out for me on my UK rental property from 1st October 2020 to 31st December 2020 .

However,  I don’t manage to actually pay the invoice until 4th January 2021.

Which tax year is the invoice most relevant to?           2020, or 2021?

i.e. from the 'German Finanzamt' perspective  - what principle governs the treatment of income and expenses – is it accrual based accounting, or cash based accounting?

 

 

(once again, all advice is definitely very welcome - they may sound like silly questions, but I am totally serious!)

 

 

 

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I think letting just one UK residential property would indeed count as small-scale.

 

My understanding for the German return is that, for the 2020 German tax year, EU rules still apply so the UK profit does not feature in your German tax calculations. Germany has no taxing rights over that property income under the DTA and it does not feature in the Progressionsvorbehalt to determine the rate at which you pay tax in Germany. The UK income that the FA will not be interested in, is that for the UK tax year beginning in 2020,  i.e. 2020/21 - 6 April 2020 to 5 April 2021.

 

My understanding for 2021 is that the UK is a third country and while the sole taxing rights for property income remain with the UK under the DTA, the income will feature on your German tax return to feed into the Progressionsvorbehalt but will not be directly taxed as Germany has no taxing right over that income (DTA).  That would, I think, be the UK property income entered on your UK tax return for the UK tax year starting in 2021, so, 2021/22. 

 

A notice to file that UK tax return will be given in April 2022 and the return must be submitted by 31 January 2023 at the very latest.  As a non-resident that will be on paper, I think. However, as the German tax tax return for 2021 has to be submitted by 31 July 2022 you'll need to get your skates on and submit your UK return before 31 July, so you can provide a copy to the FA if required.  If all you have is property income in the UK that shouldn't be difficult and given that the UK tax system is Self Assessment, you do not need to wait for any form of confirmation of the year before using the tax return for German purposes.  HMRC has a 12-month window within which to make enquiries into your return if it either does a random "compliance check" or has intelligence to suggest there is something amiss.

 

I'll duck now in case this is wrong...

 

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An interesting twist could be that in UK a property could have a loss bought forwards which could reduce tax payable, whereas in DE the property could be looked at as being in a profit situation. Obviously there would be no actual tax in DE, but it could increase tax here when overall it is running at a loss (very possible with low rent areas where the property may have incurred a large cost e.g. repairs or a new boiler.

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2 hours ago, SusieT said:

An interesting twist could be that in UK a property could have a loss bought forwards which could reduce tax payable, whereas in DE the property could be looked at as being in a profit situation. Obviously there would be no actual tax in DE, but it could increase tax here when overall it is running at a loss (very possible with low rent areas where the property may have incurred a large cost e.g. repairs or a new boiler.

I think that depends on how the Progressionsvorbehalt rules operate and will apply to UK rental income now we are a 3rd country.  In the year of loss the amount used in the German rate calculation would be zero.  In the later year when the loss is offset against the rental profit, the equitable outcome would be for Germany to use the net rental income but there isn't necessarily equity in income tax.  I look forward to one of the TT tax experts to express a view...

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But, just to be clear –

The tax  years are very different between the UK and Germany.

  • For Germany, the tax year is the actual calendar year e.g. 1st Jan 2021 to 31st Dec 2021.

  • For the UK, the tax year is e.g. 6th April 2021 to 5th April 2022.

 

Obviously, when I submit my UK Self-assessment, I would need to consider any income and expenses I have had during the UK tax year (e.g. 6th April 2021 to 5th April 2022).

However, when I submit my German tax return for the actual calendar year (e.g. 1st Jan 2021 to 31st Dec 2021), wouldn’t I only consider any income and expenses I have had during the actual calendar year (e.g. 1st Jan 2021 to 31st Dec 2021)?

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The tax years are indeed different but if you look at the form you use to claim unlimited liability treatment as a non-resident receiving German-source income (004 - Bescheinigung EU / EWR - Englisch 2018 (finanzamt-rente-im-ausland.de)) it specifically sys that you report the UK taxable income for the UK tax year which commences in the German tax year in question.  So, for German tax year 2020, you would report UK income for the tax year starting on 6 April 2020.

 

I may be wrong but I cannot imagine that it is different for other tax purposes and/or that the FA would require a separate calculation of income over which they have no taxing rights just for the purposes of the Progressionsvorbehalt.  But, of course, I stand to be corrected.   

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On 1/4/2021, 9:56:04, GaryC said:

The tax years are indeed different but if you look at the form you use to claim unlimited liability treatment as a non-resident receiving German-source income (004 - Bescheinigung EU / EWR - Englisch 2018 (finanzamt-rente-im-ausland.de)) it specifically sys that you report the UK taxable income for the UK tax year which commences in the German tax year in question.  So, for German tax year 2020, you would report UK income for the tax year starting on 6 April 2020.

 

I may be wrong but I cannot imagine that it is different for other tax purposes and/or that the FA would require a separate calculation of income over which they have no taxing rights just for the purposes of the Progressionsvorbehalt.  But, of course, I stand to be corrected.   

thanks a lot @GaryC

 

so for the German Tax year of 2021 (1st January 2021 to 31st December 2021)        :

 

=>  i would report (to the German Finanzamt) my UK rental income which is in my UK Tax return 2021/2022 (6th April 2021 to 5th April 2022).

=> This would be considered as Progressionsvorbehalt.  

 

did i get that 100% correct please?

PLEASE CORRECT ME IF NEEDED!!!

(much appreciated!)

 

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I am not an expert on German tax returns and what goes where, or where numbers that feature only in the Pregressionsvorbehalt sit as I haven't done a German return since the late 1980s and my wife was excused from doing one last year as her only taxable income was her German state pension (we are UK resident).  But on the assumption that you are indeed required to report on the same basis as when you make an election for unlimited liability, then yes, your understanding looks correct.

 

Perhaps one of the German tax experts on here could confirm the tax year issue?

    

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I had a "little niggle" in the back of my head about the above and it wouldn't go away despite "sleeping on it" because the general principle underpinning foreign-source income for German tax purposes is that it is calculated according to German tax rules.  So, would that also include the tax year when they differ in the two countries? Having thought about it, I just had to break my brain, aka go googling, to see if I could find anything to scratch that itch or niggle.

§ 32b

Having scratched away, I now think the answer to the "which tax year" question is different for the Progressionsvorbehalt (§32b EStG) than it is for the election to be treated as unbeschränkt einkommensteuerpflichtig (§1 Abs. 3).  This is because §32b Abs.1 S.1 Nr. 2 refers to foreign-source income arising in the period covered by the return ("ausländische Einkünfte, die im Veranlagungszeitraum...").  This is different to the specific mention of UK and German tax years on the form for §1 Abs. 3. 

 

I think this must mean that you need to compute your UK rental income for UK tax purposes by reference to UK rules and UK tax years as mentioned above and then compute it again for German purposes (Progressionsvorbehalt only) by reference to German tax rules and the German tax year.  But as always, I stand to be corrected...

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once again - thanks a lot @GaryC

 

so i try to summarise:

 

 

A)

for the German Tax year of 2021 (1st January 2021 to 31st December 2021)        :

 

=>  i would report (to the German Finanzamt) all rental income (less 'allowable expenses')  incurred on my Rental property based in the UK during the period from 1st January 2021 to 31st December 2021.

i.e.

=> When reporting to the German Finanzamt, i would follow the corresponding German tax year (i.e. 1st January 2021 to 31st December 2021).

=> When reporting to the German Finanzamt, i would follow German tax rules (concerning what is classed as rental income, and especially what is classed as 'allowable expenses'). 

=> Any net profit, while not directly taxable (at e.g. 25%),  would however still be considered as 'Progressionsvorbehalt' in the eyes of the German Finanzamt.

 

 

 

B)

for the UK Tax year of 2021/2022 (6th April 2021 to 5th April 2022)        :

=>  i would report (to HMRC) all rental income (less 'allowable expenses') incurred on my Rental property based in the UK during the period from 6th April 2021 to 5th April 2022.

i.e.

=> When reporting to HMRC, i would follow the corresponding UK tax year i.e. 6th April 2021 to 5th April 2022.

=> When reporting to HMRC, i would follow UK tax rules (concerning what is classed as rental income, and especially what is classed as 'allowable expenses')

=> Any net profit can potentially be offset against the UK personal allowance, as i am a UK passport holder.

(i registered for the 'Non-Resident Landlord' scheme in mid-2012 with HMRC).

 

 

 

as always, please feel free to agree / disagree / heckle / insult (just joking!)

 

all advice / criticism / constructive feedback is always very welcome.

(e.g. where to find a list of the German tax rules for allowable expenses etc.)

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Looks about right but you may want to confirm the German position with a Steuerberater. 

 

The UK position is right and if you are a UK citizen, or citizen of an EU/EEA country then you can claim the UK personal allowance - income of all types over which the UK has taxing rights under the UK/German Double Tax Treaty above the amount of the personal allowance will give rise to UK tax.  Depending on your circumstances you may also want a UK accountant or adviser.

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