What to know when acquiring a Foreign Property

• Funds used to purchase the property
• Interest relief on loan used to purchase property
• VAT
• Inheriting or receiving a gift of a foreign property
• Stamp duty
• Purchase of property through a company

Funds Used to Purchase the Property

Are there any tax implications when I buy a foreign property?

You are not required to notify Revenue if you buy a foreign property. However, in most cases you will have to open a bank account in the country where you purchase the property, and you must notify Revenue of this on a tax return in the year the account is opened (see miscellaneous issues). You must ensure that the money used to purchase the property has been or will be fully declared for tax purposes and that all due taxes have been paid whatever the source of the money. If you have borrowed money to buy the property, the money used to repay this loan must also be declared.

You must comply with your normal tax obligations. Using monies to buy a foreign property does not remove these obligations. Revenue will be interested in confirming that funds used have been declared for tax purposes or are not liable to tax.

Interest Relief on Loan Used to Purchase Property

Can I claim mortgage interest relief on the loan used to purchase my foreign property? The loan is secured against my Irish property.

Mortgage interest relief usually refers to the relief given for interest paid on a loan to purchase, improve, repair or develop a person’s sole or main residence. It is deducted by the mortgage lender under a system called 'Tax Relief at Source' (TRS). You can only claim mortgage interest relief on your sole or main residence, and only if it is located in Ireland, including Northern Ireland, or Great Britain. The residence can also be the sole or main residence of your former or separated spouse or a dependent relative who occupies the residence rent-free. Mortgage interest relief via TRS cannot be claimed for interest on a loan used to buy a holiday home, an investment property, loan/debt consolidation or for any other purpose which does not qualify for the relief. If you make a false or incorrect claim for TRS, you will be liable to pay back the relief wrongly claimed, as well as interest and penalties.

More information on TRS.

Can I claim any relief for the interest paid on the loan used to purchase my foreign property?

Where borrowed money is used to purchase, improve or repair a rental property, the interest payments can be claimed as a deduction against the rental income from that property. The borrowed money must be used to directly purchase, improve or repair the property (see purchase of property through a company).

VAT

The price I paid for my foreign property included VAT. Can I claim a VAT repayment in Ireland for the VAT paid abroad?

No. As you did not pay any VAT in Ireland, you cannot reclaim any VAT in Ireland.

Can I reclaim VAT in the country where the VAT was paid?

While there is no entitlement to a VAT repayment where a property is for private use, there may be an entitlement to a repayment where the property is used for lettings that are chargeable to foreign VAT. You should contact the relevant foreign tax authority about this.

Inheriting or Receiving a Gift of a Foreign Property

I have inherited or received a gift of a foreign property. Are there any Irish tax implications?

If you are resident or ordinarily resident in Ireland, or if the person from whom you inherited or who gave you the foreign property is resident or ordinarily resident in Ireland, the inheritance will be subject to Irish capital acquisitions tax (CAT). The amount payable will depend on your relationship to the person from whom you inherited the property or the person who gave you the property and any previous gifts or inheritances you have received.

More information on the terms 'resident' and 'ordinarily resident' is provided in foreign rental income - Irish tax obligations. If you require more detailed information on residence please consult Revenue leaflet RES2, Coming to Live in Ireland (PDF, 73 KB).

More information about CAT on gifts and inheritances.

I have paid gift tax or inheritance tax (or an equivalent tax) in another country on my gift or inheritance of foreign property. Do I still have to pay CAT in Ireland on this gift or inheritance?

If, at the time of the gift or inheritance, either you were, or the person from whom you received the property was, Irish resident or ordinarily resident, the gift or inheritance is subject to CAT.

The only Irish double taxation agreements that cover CAT are those with the UK and the USA. If your gift or inheritance has already been subject to the equivalent of CAT in those countries, you can claim a credit for the tax paid in those jurisdictions up to the amount of your Irish tax liability. Please note that the double taxation agreement with the USA only covers federal equivalents of CAT rather than similar taxes imposed by individual states. If your gift or inheritance was subject to the equivalent of CAT in a jurisdiction other than the UK or the USA, where a double taxation treaty covering gift tax or inheritance tax is not in force, you can still claim a credit for the tax paid in that foreign jurisdiction, up to the amount of your Irish CAT liability and Revenue will allow the credit for the foreign tax paid on a unilateral basis.

Stamp Duty

Will I incur a liability to stamp duty if I purchase a house abroad?

You will be liable to stamp duty if the instrument of transfer of the foreign property is executed in Ireland. However, such a liability would not normally occur, because in most instances the transfer document in relation to the purchase of the foreign property would be executed abroad.

Can I qualify as a first time buyer for stamp duty purposes if I have previously purchased a property abroad but not in Ireland?

No. A person who has previously purchased a property, either in Ireland or abroad, is not entitled to claim first time buyer relief. If you make a false or incorrect claim for the relief, you will be liable to pay the stamp duty underpaid, as well as interest and penalties.

More information on stamp duty relief for first time buyers.

Purchase of Property through a Company

What happens if I purchase a foreign property through a company?

If you purchase a foreign rental property through a company that either owns or acquires the property, you will not be entitled to interest relief if you have borrowed to fund the purchase. This is because you are purchasing an interest in the company rather than the property itself. Interest relief is only available where the borrowed money is used to directly purchase a rental property (see also disposal of foreign property - Irish tax obligations and miscellaneous issues - purchase of property through a company).

Trading in Property

If I am buying and selling foreign property on a regular basis, how are my profits taxed?

Normally if a property is sold any profit is subject to capital gains tax. However, if you are essentially trading in properties, the profits may be treated as income and subject to income tax.

Buying Property 'Off the Plans'

If I buy a foreign property 'off the plans' and sell it for a profit before building has finished, do I have to pay tax?

This process is known as 'flipping' and any increase in the value of the property sold is normally subject to Irish CGT. However, if you are carrying on the business of trading in properties, the profit may be treated as income and subject to income tax.

Foreign bank account

I have opened a foreign bank account to make and receive payments relating to my foreign property. Does this give rise to any tax obligations?

PRSI and the Health Contribution

Do I have to pay PRSI on foreign rental income?

If you are a self-employed taxpayer you are liable to pay PRSI on foreign rental income. If you are a PAYE taxpayer you do not have to pay PRSI on foreign rental income. If you are aged over 66 you do not have to pay PRSI.

Do I have to pay the health contribution on foreign rental income?

Taxpayers in receipt of rental income generally have to pay the health contribution in respect of such income. If you are aged over 70 you do not have to pay the health contribution.

Purchase of Property Through a Company

I have purchased a foreign property through a company. How does this affect my Irish tax position?

Depending on the nature of the company and the arrangements you have with the company, the money received by you in connection with the foreign property may be treated in different ways for Irish tax purposes. For example, you may be treated as receiving distributions from the company rather than rental income from the tenants of the property.

Another possible consequence of purchasing a property through a company is that if you occupy the property rent-free or at a rent that is below market value, you may be treated as receiving a benefit-in-kind from the company. This benefit-in-kind may be subject to Irish income tax. For further information on benefit-in-kind please see the Employer's Guide to Benefit in Kind.

(Please see also Acquiring a foreign property - purchase of property through a company in connection with interest relief and Disposal of foreign property - Irish tax obligations in respect of the sale of the property.)

Funds Used to Purchase the Property

Are there any tax implications when I buy a foreign property?

You are not required to notify Revenue if you buy a foreign property. However, in most cases you will have to open a bank account in the country where you purchase the property, and you must notify Revenue of this on a tax return in the year the account is opened (see miscellaneous issues). You must ensure that the money used to purchase the property has been or will be fully declared for tax purposes and that all due taxes have been paid whatever the source of the money. If you have borrowed money to buy the property, the money used to repay this loan must also be declared.

You must comply with your normal tax obligations. Using monies to buy a foreign property does not remove these obligations. Revenue will be interested in confirming that funds used have been declared for tax purposes or are not liable to tax.

Interest Relief on Loan Used to Purchase Property

Can I claim mortgage interest relief on the loan used to purchase my foreign property? The loan is secured against my Irish property.

Mortgage interest relief usually refers to the relief given for interest paid on a loan to purchase, improve, repair or develop a person’s sole or main residence. It is deducted by the mortgage lender under a system called 'Tax Relief at Source' (TRS). You can only claim mortgage interest relief on your sole or main residence, and only if it is located in Ireland, including Northern Ireland, or Great Britain. The residence can also be the sole or main residence of your former or separated spouse or a dependent relative who occupies the residence rent-free. Mortgage interest relief via TRS cannot be claimed for interest on a loan used to buy a holiday home, an investment property, loan/debt consolidation or for any other purpose which does not qualify for the relief. If you make a false or incorrect claim for TRS, you will be liable to pay back the relief wrongly claimed, as well as interest and penalties.

Can I claim any relief for the interest paid on the loan used to purchase my foreign property?

Mortgage interest relief usually refers to the relief given for interest paid on a loan to purchase, improve, repair or develop a person’s sole or main residence. It is deducted by the mortgage lender under a system called 'Tax Relief at Source' (TRS). You can only claim mortgage interest relief on your sole or main residence, and only if it is located in Ireland, including Northern Ireland, or Great Britain. The residence can also be the sole or main residence of your former or separated spouse or a dependent relative who occupies the residence rent-free. Mortgage interest relief via TRS cannot be claimed for interest on a loan used to buy a holiday home, an investment property, loan/debt consolidation or for any other purpose which does not qualify for the relief. If you make a false or incorrect claim for TRS, you will be liable to pay back the relief wrongly claimed, as well as interest and penalties.

Inheriting or Receiving a Gift of a Foreign Property

I have inherited or received a gift of a foreign property. Are there any Irish tax implications?

If you are resident or ordinarily resident in Ireland, or if the person from whom you inherited or who gave you the foreign property is resident or ordinarily resident in Ireland, the inheritance will be subject to Irish capital acquisitions tax (CAT). The amount payable will depend on your relationship to the person from whom you inherited the property or the person who gave you the property and any previous gifts or inheritances you have received.

More information on the terms 'resident' and 'ordinarily resident' is provided in foreign rental income - Irish tax obligations. If you require more detailed information on residence please consult Revenue leaflet RES2, Coming to Live in Ireland (PDF, 73 KB).

I have paid gift tax or inheritance tax (or an equivalent tax) in another country on my gift or inheritance of foreign property. Do I still have to pay CAT in Ireland on this gift or inheritance?

If, at the time of the gift or inheritance, either you were, or the person from whom you received the property was, Irish resident or ordinarily resident, the gift or inheritance is subject to CAT.

The only Irish double taxation agreements that cover CAT are those with the UK and the USA. If your gift or inheritance has already been subject to the equivalent of CAT in those countries, you can claim a credit for the tax paid in those jurisdictions up to the amount of your Irish tax liability. Please note that the double taxation agreement with the USA only covers federal equivalents of CAT rather than similar taxes imposed by individual states. If your gift or inheritance was subject to the equivalent of CAT in a jurisdiction other than the UK or the USA, where a double taxation treaty covering gift tax or inheritance tax is not in force, you can still claim a credit for the tax paid in that foreign jurisdiction, up to the amount of your Irish CAT liability and Revenue will allow the credit for the foreign tax paid on a unilateral basis.

Stamp Duty

Will I incur a liability to stamp duty if I purchase a house abroad?

You will be liable to stamp duty if the instrument of transfer of the foreign property is executed in Ireland. However, such a liability would not normally occur, because in most instances the transfer document in relation to the purchase of the foreign property would be executed abroad.

Can I qualify as a first time buyer for stamp duty purposes if I have previously purchased a property abroad but not in Ireland?

No. A person who has previously purchased a property, either in Ireland or abroad, is not entitled to claim first time buyer relief. If you make a false or incorrect claim for the relief, you will be liable to pay the stamp duty underpaid, as well as interest and penalties.

Purchase of Property through a Company

What happens if I purchase a foreign property through a company?

If you purchase a foreign rental property through a company that either owns or acquires the property, you will not be entitled to interest relief if you have borrowed to fund the purchase. This is because you are purchasing an interest in the company rather than the property itself. Interest relief is only available where the borrowed money is used to directly purchase a rental property (see also disposal of foreign property - Irish tax obligations and miscellaneous issues - purchase of property through a company).

• Irish tax obligations
• Calculating taxable rental income
• Rental losses
• Interest relief
• Fitting out a foreign rental property

Irish Tax Obligations

The information in the following answers is a very general outline of the residence and domicile rules and how they impact on a person’s taxable income. Depending on your residence and/or domicile you may be taxable on both your Irish and foreign source income, your Irish source income only or only on income that is actually brought into Ireland.

Is the rental income from my foreign property taxable in Ireland?

Generally speaking, you are chargeable to Irish tax on both Irish and foreign source income for a year during which you are resident or ordinarily resident and domiciled in Ireland. However, for any year during which you are resident but non-domiciled, or resident but not ordinarily resident, you are still chargeable to Irish tax on your Irish and UK source income, but chargeable on your income from all countries and territories other than Ireland and the United Kingdom only to the extent that it is brought into Ireland. This is known as the 'remittance basis' of taxation. This 'remittance' basis of taxation does not apply to rental income from properties situated in the UK. Such income is taxable in Ireland regardless of whether it is remitted to Ireland. If you are taxed on the remittance basis you are taxable on the full amount remitted without any deductions against that amount.

How do I know if I am resident or ordinarily resident in Ireland?

Your residence status for Irish tax purposes is determined by the number of days you are present in Ireland during a particular year. You will be resident in Ireland for a particular year in either of the following circumstances:

• if you spend 183 days or more in Ireland in that year, or
• if you spend 280 days or more in Ireland over a period of two consecutive years you will be regarded as Irish resident for the second year. However, if you spend a total of 30 days or fewer in Ireland in either of those years, those days will not be counted for the purpose of the '280 day' test.

Alternatively, you may elect to be resident for a particular year if you satisfy your local tax office that you will be resident in Ireland in the following year under either of the above tests.

The term 'ordinarily resident' refers to an individual's pattern of residence over a number of years. If you come to Ireland for the first time and remain here for three consecutive years you will become ordinarily resident from the beginning of the fourth year. Conversely, you will cease to be ordinarily resident in Ireland having been non-resident for three consecutive years.

What does domicile mean?

Domicile is a concept of general law. It may broadly be interpreted as meaning residence in a particular country with the intention of residing permanently in that country. Every individual acquires a domicile of origin at birth and most individuals retain that domicile throughout their lives. If you are resident or ordinarily resident but not domiciled in Ireland you are only taxed on rental income from your foreign property to the extent that you bring that income into Ireland. This 'remittance' basis of taxation does not apply to rental income from properties situated in the UK. Such income is taxable in Ireland regardless of whether it is remitted to Ireland.

What should I do if I receive rental income from my foreign property?

Income tax is payable on the net profit rent arising on foreign properties. Such tax is payable under Self Assessment within what is known as the Pay and File system.

Under the Pay and File system, you must, on or before the 31st October of each tax year -

• pay the Preliminary Tax you owe for the current tax year;
• submit your Tax Return for the previous tax year; and
• pay the balance of tax due for the previous tax year.

For more information on tax obligations see Revenue leaflet IT10, A Guide to Self Assessment.

Notwithstanding the Self Assessment Pay and File system, where an individual -

• is a PAYE taxpayer (i.e. is in receipt of employment income or a pension which are subject to deductions at source under the PAYE System); and
• is in receipt of assessable non-PAYE income (including rent from foreign properties) of not more than €3,174 in a tax year (but see note)

- the tax due on such investment income may be paid by way of a reduction of his/her tax credits (i.e. the tax credits normally due against the PAYE income are restricted to cover the tax due on the non-PAYE income).

Note: This practice applies only where the gross non-PAYE income does not exceed €50,000 and the net assessable income does not exceed €3,174 in a tax year.

Calculating Taxable Rental Income

How is taxable foreign rental income calculated?

Generally speaking, rental income from foreign property is computed on the full amount of the rental income receivable in a year regardless of whether the income is ever received in Ireland. The taxable rental income is calculated in the same way as taxable rental income from an Irish property with the same deductions and allowances being available. Deductions are also normally available where tax has been paid on the rental income in the country in which the property is situated (see foreign income tax paid). However, you cannot set any deductions and allowances against your foreign rental income where that income is taxed on the remittance basis (see Irish tax obligations).

The treatment of Irish rental income is outlined in Revenue leaflet IT 70, A Revenue Guide to Rental Income.

How do I calculate my taxable foreign rental income?

From the total rents you are due to receive for the year, you deduct any allowable expenses and deductions. If the allowable expenses and deductions exceed the rents receivable you can deduct any rental loss from your rental income from other foreign properties. You cannot deduct any expenses that are not specifically allowed under Irish tax law, even if such items are deductible in the country in which the property is situated; for example, depreciation of the value of the building (see also rental losses).

What expenses and deductions are allowed?

Only those expenses and deductions that are specified in the Tax Acts and that are wholly and exclusively incurred in connection with the earning of the rental income are allowed. The types of expenses and deductions that are generally allowed are the cost of managing the property, cost of insurance, cost of repairs, local authority rates, interest on borrowings to purchase the property and the cost of fitting out and furnishing the property. For a more detailed list of the allowable expenses and deductions, see Revenue leaflet IT 70, A Revenue Guide to Rental Income.

What expenses can be claimed?

Broadly speaking, in calculating your rental expenses you can deduct expenses as long as they

• are incurred wholly and exclusively for business purposes, and
• Are not of a capital nature.

The following are examples of the type of expenses that may be claimed for:

• Rents payable by the landlord in respect of the property, e.g. ground rent
• Rates or levies payable on the property, i.e., water rates, refuse collection etc.
• Cost of any service or goods provided by the landlord, e.g. gas, electricity, central heating, telephone rental, cable television etc. for which they do not receive a separate payment
• Maintenance, e.g. cleaning and general servicing of the premises
• Insurance of the premises against fire, public liability insurance, etc.
• Management, e.g. actual cost of collection of rents, advertising, etc.
• Legal fees to cover the drawing up of leases or the issue of solicitors letters to tenants who default on payment of rent.
• Accountancy fees incurred for the purposes of preparing a rental income account.
• Wear and Tear on furniture and fittings, e.g. carpets, cookers, central heating etc.
• Interest paid on monies borrowed for the purchase, improvement or repair of certain properties.
• Repairs, e.g.. decorating and general upkeep of the property. A 'repair' means the restoration of an asset by replacing subsidiary parts of the whole asset. Examples of common repairs which are normally deductible in computing rental profits include:
  • exterior and interior painting and decorating
  • damp and rot treatment
  • mending broken windows, doors, furniture and machines
  • Replacing roof slates.

However, landlords may not claim a deduction for their own labour.

• Certain mortgage protection policy premiums with effect from 1 January 2002. Refer to Appendix 1.
• Capital Expenditure on certain properties under the various Incentive schemes.

What is the position with regard to interest paid on borrowings?

Certain restrictions were introduced on the deductibility of interest on borrowed money used on or after 3/4/1998, in the construction, purchase, or repair of rented residential premises in the State, or 7/5/1998 in the case of foreign residential premises. However, the relief for interest on borrowed money was restored for such interest accruing on or after 1 January 2002. There were some transitional arrangements in place in the interim period.

Relief is disallowed as respects interest accruing on or after 6 February 2003 where the let premises was purchased from the spouse of the person chargeable in respect of the rental income. However, the disallowance of interest relief does not apply in the case of legally separated or divorced persons.

What expenses can be claimed for Wear and Tear?

If a premises is let for residential purposes and it is furnished, a claim can be made for a wear and tear allowance based on the cost of the furniture and fittings. It will be necessary to retain an itemised list of expenditure incurred each year.

• With effect from 4 December 2002 the allowance is 12.5% per year over 8 years.
• For the period between 1 December 2001 and 3 December 2002 the allowance was 20% per year over 5 years. Transitional provisions apply allowing the rate of 20% per year over 5 years if the item was acquired under a written contract before 4 December 2002 and the expenditure was incurred before 31 January 2003.
• Prior to 1 January 2001 the allowance was 15% per year for the first 6 years and 10% in the 7th year.

Relief for refurbishment of certain rented accommodation effective from 6 April 2001.

Tax relief can be claimed for capital expenditure incurred, on or after 6 April 2001, on the refurbishment of rented residential accommodation.

The expenditure is allowed as a deduction over a 7 year period, i.e. the expenditure is allowed at a rate of 15% per annum for the first 6 years with the balance of 10% allowed in year 7.

To qualify, the premises must be used as a dwelling and from the date of completion of the refurbishment must be let in its entirety under a qualifying lease throughout the relevant period, i.e. 10 years from the date of completion of the work or if later, the date of first letting. A lease is not a qualifying lease if it enables any person to acquire an interest in the premises for a consideration less than the market value. The lesser must comply with the regulations in relation to standards for rented houses, rent books and registration of rented houses.

Where a premises ceases to be a qualifying premises or the lesser passes his or her interest in the premises to another person, the relief will be clawed back from the person who had been entitled to the relief.

Where the lesser passes on his or her interest in the premises by sale or transfer then the person who becomes owner of the premises is treated as having incurred the relevant expenditure.

If relief is given under any other section of the Tax Act, then no relief will be given under this section.

What expenses cannot be claimed for?

• Pre-letting expenses, i.e. expenses incurred prior to the date on which the premises was first let apart from auctioneer's letting fees, advertising fees and legal expenses incurred on first lettings.
• Post letting expenses i.e. expenses incurred after the period of the last letting are not allowable.
• Capital expenditure incurred on additions, alterations or improvements to the premises unless allowable under an Incentive scheme
• A deduction can be made only once. If a deduction has already been made in a person's tax computation, the amount will not be allowed as a deduction in arriving at the person's net profit/loss rent, i.e. you cannot obtain relief more than once for the same expense.
• Expenses incurred in the letting of premises on an uneconomic basis are not deductible.

Expenses incurred between lettings

Expenses incurred in the period between lettings are deductible provided the landlord was not in occupation of the premises during the period and a new lease is granted.

Rent a Room Relief

From 6 April 2001, where an individual rents a room (or rooms) in a 'qualifying residence' and the gross rent received, including sums arising for food, laundry or similar goods and services and the income does not exceed €7,620 this income will be exempt from income tax by including it in the individuals tax return. Where more than one individual is entitled to the rent, the limit is divided between the individuals concerned.

The relief is available to individuals only. It does not apply to companies or partnerships. However, it can apply where individuals have the income jointly (for instance husband and wife where there is no partnership), there the limit can be divided between the individuals concerned. Individuals who rent as well as individuals who own their own home may avail of the relief.

A 'qualifying residence' is a residential premises in the State, which is occupied by an individual as his/her principal private residence during the year of assessment.

Room rentals coming within the scope of this scheme will not affect the person's entitlement to mortgage interest relief or the capital gains tax exemption on the disposal of a principal private residence.

There is no deduction for expenses made in ascertaining the rental income received and if the income does not exceed the limit in the year then those profits/losses are treated as nil for the year of assessment.

This income is not liable to either PRSI or the 2% Health Levy but it must be included on an individuals annual income tax return.

What if a premise is only partly let?

If part of premises is let, only expenses incurred on that part of the premises are available for set off against rental income.

For example, if rooms are let in a private house and the income received exceeds the limits of the Rent a Room relief, the expenses for gas, electricity, etc., are shared by all the occupants of the house, expenses applicable to that part of the house which is let are only available for set off against profit rent. Expenses should be apportioned based on the occupancy of the house, i.e. the number of rooms occupied by tenants.

How are Premiums on Leases treated for tax purposes?

Certain premiums on leases are taxable. If a premium is paid on the granting of a short lease, i.e. if the duration of the lease is less than 50 years, the following formula is applied to calculate the amount that will be assessed as rent in the first year of letting:

P - (N - 1 / 50) x P

Where 'P' = Amount of the Premium paid and 'N' = The length of the lease.

This amount will be assessed in addition to any profit rent.

1. Example:
 

A premises is let for a period of 18 years at an annual rent of €15,000. A premium of €50,000 is paid. Tax will be charged on the following amount:

€50,000 - (18 - 1 / 50) x €50000

Rent = €15,000

Total = €48,000

How is profit/loss rent calculated?

The rental profit or loss is calculated by reference to the rent or total receipts to which the person becomes entitled to in any tax year (as opposed to the period to which the income relates).

Example: Mr. White began leasing a house from Mr. Brown on 1 December 2003. Mr. White pays rent of €2,000 in 4 annual installments on 1st of each quarter. He paid €2,000 on 1 December 2003. His landlord Mr. Brown became entitled to receive the quarters rent on that date, therefore the entire €2,000 is taxable income for 2003. It is important to note that the €2,000 is not apportioned as to make two thirds of it taxable in the tax year 2004.

A separate rental computation is prepared for each property whereby the rental expenses for each property are deducted from the related rental income for the same property in order to arrive at a surplus (i.e. income greater than expenses) or a deficiency (i.e. expenses greater than income) for each property. The total of surpluses and deficiencies are then aggregated to arrive at profits or gains arising in the year, i.e. taxable rent.

What if a loss is made?

A loss will arise if total allowable expenses are more than the rents received. This loss can be set against any other profit rent made by the landlord or carried forward against future rental profits. Such losses cannot be carried back or used to shelter non-rental income.

How is the tax due on rental income collected?

Profit rent is taxed on an actual tax year basis. For individuals taxed under the PAYE system with rental profits that are relatively small it can be arranged to have the tax collected by reduction of their tax credits and standard rate cut-off point. Otherwise, the tax due will be collected under the Self Assessment system. Leaflet IT 10 Guide to Self Assessment gives full details. This is also available from Revenues Forms and Leaflets Service at LoCall 1890 30 67 06 or any Revenue office.

Keeping Records

You must keep full and accurate records of your lettings from the start. You need to do this whether you send in a simple summary of your profit/loss, prepare the accounts yourself, or, have an accountant do it. All supporting records such as invoices, bank and building society statements, cheque stubs, receipts etc., should also be retained. You must keep your records for six years unless your Revenue office advises you otherwise.

What if Rents are payable to a non-resident landlord?

If a landlord resides outside the country and rent is paid directly to him/her or to his/her bank account either in the State or abroad, tax must be deducted by the tenant at the standard rate of tax (currently 20%) from the gross rents payable.

Failure to deduct tax leaves the tenant liable for the tax that should have been deducted.

Example

Gross Rent per month                  €1,000

Deduct tax (1000  x 20%)            €200

Pay to Landlord                          €800

                   
The tenant must also give a Form R185* to the landlord to show that the tax has been accounted for to Revenue.

Where an agent resident in the State, is appointed by the non-resident landlord to manage the property and the agent is collecting the rents, the rents must be paid gross to the agent. The agent is then chargeable to tax on the rents as Collection Agent for the landlord and is required to submit an annual tax return and account for the tax due under Self Assessment. Leaflet IT10 Guide to Self Assessment* provides more detailed information.

Note: The agent appointed need not be a professional person, i.e. it can be a family member or other person prepared to take on the responsibility and undertakes to make annual tax returns and account to Revenue for the tax due.

* (Also available from Revenue's Forms and Leaflets Service at LoCall 1890 306 706 or your local Revenue office).

How are non-resident landlords taxed?

On receipt of the annual tax return, profit rent i.e. rent received less allowable expenses will be assessed. The landlord is entitled to claim relief for expenses, which are usually allowed in arriving at the rental profit. The landlord is also entitled to a credit for the tax deducted by the tenant. Form R185, should be submitted by the landlord with the tax return to obtain credit for the tax retained.

How are foreign rents taxed?

In general, income from foreign property is computed on the full amount of the income arising, irrespective of whether the income has or will be received in the State. In the case of foreign rental income this income is charged under Case III of Schedule D and the same deductions and allowances are available as if the income had been received in the State. Deductions are also normally available in respect of such income for sums in respect of foreign tax paid. This income should be included in an individual's tax return on the Foreign Income panel.

These rules do not apply to a person who is not domiciled in the State or who is an Irish citizen not ordinarily resident in the State. In such cases, income tax is computed on the full amount of the actual sums received in the State from such remittances, etc. without any deduction or relief given.

Rent allowance.

Tax relief may be claimed by a tenant paying rent to a landlord for private accommodation by completing Form Rent 1. This form is also available at Revenue's Forms and Leaflets Service at LoCall 1890 30 67 06 or from any Revenue office. The annual maximum relief allowable is given on Form Rent 1.

Capital Gains Tax.

Where a property that has been let is disposed of, Capital Gains Tax may arise on the disposal. The chargeable gain is calculated by deducting any allowable expenditure from the amount realised on the disposal.

The allowable expenditure may include:

• The cost of acquisition of the property and any costs of acquisition such as solicitors/auctioneers fees
• Any costs incurred in improving the value of the property
• Any costs of disposal such as solicitors/auctioneers fees.

Expenditure on costs of acquisition and improvement may be adjusted to take account of inflation. Where a disposal is made on or after 1 January 2003, the indexation relief will only apply for the period of ownership of the asset up to 31 December 2002. No relief is due if period of ownership is less than 12 months.

Further information on Capital Gains Tax generally is contained in Booklet CGT 1, Guide to Capital Gains Tax, and Leaflet CGT2 - Capital Gains Tax - Revised due dates for 2003 and following years. Both guides are also available from Revenue Forms and Leaflets Service at LoCall 1890 30 67 06 (within ROI only) or from any Revenue office.

The text of the Article in Tax Briefing, Issue 53 on Mortgage Protection Policy Premiums is as follows:

Allowable deductions under the tax law relating to rental income are provided for in Section 97(2) TCA 1997. Section 97(2)(d) authorizes a deduction in respect of 'the cost of ...management of the premises borne by the person chargeable and relating to and constituting an expense of the transaction or transactions under which the rents or receipts were received, not being an expense of a capital nature'.

In strictness mortgage protection policy premiums are arguably not part of the cost of management of the premises but relate more to the management of the landlord's financial affairs than to the management of the premises. Such expenditure could also be argued to be capital in nature. However, Revenue recognize that financial institutions insist that such policies are put in place when sanctioning borrowings. Accordingly Revenue, having reviewed the position, is prepared to treat mortgage protection policy premiums paid as an allowable deduction in computing rental income for income and corporation tax purposes.

The new treatment applies to returns submitted after 1 January 2002. Returns already submitted will not be reopened.

Practitioners should note that this treatment only applies to mortgage protection policy premiums. Such a policy is aimed at covering the full amount left outstanding on a person's mortgage should they die. It is often called decreasing term insurance, as the amount that needs to be covered reduces every time a payment is made, with the result that premiums are lower than those for straight insurance. This type of policy should not be confused with other products often offered by life assurance companies such as mortgage payment protection policies, keyman insurance or endowment policies. These are a form of short/straight term insurance which pay out if an individual becomes unemployed or ill and are not normally linked to a person's life. Revenue does not allow this latter type of policy premium as a rental income deduction.

Practitioners should also note that mortgage protection plan policies linked to a person's life are life assurance policies, the proceeds of which are taxed in accordance with Section 593 TCA, 1997.

What expenses and deductions are not allowed?

The types of expenses and deductions that are generally not allowed are pre-letting expenses (other than letting and legal fees incurred in connection with the first letting), post-letting expenses, capital expenditure or the cost of your own labor if you carry out repairs to the property.

Why are pre-letting expenses not allowed?

For expenses to be deductible they must be incurred during the term of a lease. This is why pre-letting expenses, with the exception of letting fees, advertising fees and legal expenses incurred on the first letting, are not allowed. For example, when the property is first acquired and before it is let, and occupied by a tenant, interest payments on the borrowings used to purchase the property are not allowed. Expenses, including interest payments, incurred in the period between lettings are deductible provided you do not occupy the property at that time and you re-let it at a later stage.

Does it matter if I stay in the property when it is not rented out?

If you stay in the property when it is not rented out, or if you let others stay in the property rent-free, you will not be entitled to the expenses and deductions that are normally allowed when the property is rented out. Expenses and deductions must be apportioned between the periods when you occupied the property and when it was let.

I sometimes travel to my property to inspect it or to carry out repairs. Can I claim travel costs such as airline tickets and car hire?

The cost of traveling to your let property is only allowable if the journey is undertaken wholly and exclusively for the purposes of earning rental income from the property. There can be no element of private purpose whatsoever. For example, if you or your family also uses the opportunity to take a short break or a holiday or to inspect a property that you do not already own and let no part of the travel cost is allowed.

Can I claim a deduction for the cost of my own labour if I carry out repairs to my property?

You cannot claim any deduction for the time you spend working yourself in your rental business. Thus, while the cost of the actual repairs would be allowable, you are not entitled to a deduction for the time you spend carrying out those repairs.

Can I claim 'rent-a-room' relief in respect of rental income from my foreign property?

No. 'Rent-a-room' relief can only be claimed in respect of rent received on your sole or main residence, which must be located within the State.

Rental Losses

What happens if my expenses are more than the rent receivable from the property?

A rental loss will arise if total allowable expenses exceed the rents receivable from the property.

If I make a loss from renting out my foreign property, can I use it to reduce my other taxable income?

No. A foreign rental loss can only be set against rental profits from other foreign properties. It can be set against such profits for the same year or, if there are no, or insufficient, such profits, the unused loss can be carried forward and set against any profits from the same property, or other foreign property, in subsequent years. If you incur a liability to capital gains tax on the sale of the property, you cannot set any unused rental losses against that liability.

However, there is no relief for a loss that arises in a situation in which a landlord’s maintenance, insurance, repairs and management expenses consistently exceed the rent receivable from the property.

If I make a loss from renting out an Irish property, can I set this loss against my foreign rental income?

No. An Irish rental loss can only be set against Irish rental income for the year in which the rental loss and rental income arise. Any unused loss can only be carried forward against Irish rental income arising in subsequent years.

If my foreign rental income is taxable on the remittance basis and I make a loss, can I claim that against other income?

No. However, if you have remitted some of the rental proceeds, you will have to pay tax on the amount remitted, irrespective of whether you made a loss under normal calculation rules.

Interest Relief

I borrowed money from a bank to pay for the foreign property. Am I entitled to a deduction for the interest that I have to pay on this loan?

Interest on borrowed money that is used to purchase, improve or repair a rental property can be claimed as a deduction against the rental income from that property. The borrowed money must be used to directly purchase, improve or repair the property. For example, if you cannot directly purchase a property in a particular country and, instead, you purchase the property through a company that in turn purchases or owns the property, you will not be entitled to an interest deduction. This is because the borrowed money has been used to purchase an interest in the company and only indirectly to purchase the property. Please also note the restriction on pre-letting expenses outlined in calculating taxable rental income.

Is there a limit on the amount of interest relief?

No. Unlike mortgage interest relief for a person’s sole or main residence, there is no limit on the amount of interest relief in the case of rental properties. However, if you stay in the property or allow others to stay there rent free, you will have to apportion the interest (see calculating taxable rental income at the question, 'Does it matter if I stay in the property when it is not rented out?', and the restriction on pre-letting expenses outlined in that section).

I have an interest-only loan. Does this make a difference to my interest relief?

No. Interest relief applies whether you pay only interest to the lender or whether you repay part of the capital amount together with interest.

Can I deduct interest from the time that I take out the loan?

You can only deduct interest paid during the period in which the property is let. This means that interest is not deductible -

• for the period following the purchase of the property up to the time a tenant enters into a lease and occupies the property, and
• between lettings where you or others occupy the property rent-free, and
• after the property is let.

What effect did the Bacon Report have on interest relief?

Following the Bacon Report, no deduction was allowed for interest where a foreign rental property was purchased between 7 May 1998 and 31 December 2001. Interest relief has been restored for rental income earned since 1 January 2002, regardless of when the property was purchased.

Fitting Out a Foreign Rental Property

Am I entitled to any relief for the cost of fitting out and furnishing my foreign rental property?

If you incur expenditure on fitting out and furnishing your foreign rental property you are entitled to capital allowances in the form of wear and tear allowances on that cost. The fixtures and furniture must belong to you and be in use at the end of each year for which allowances are claimed. Unlike other deductible expenses, these allowances are given over several years rather than being fully deductible in the year in which the expenditure is incurred. The amount of the annual allowance varies depending on when the expenditure was incurred. Since 4 December 2002, the allowance has been 12.5% of the allowable cost per year over eight years. For the period between 1 January 2001 and 3 December 2002 the allowance was 20% of the allowable cost per year over five years. Prior to that it was 15% of the allowable cost for the first six years and 10% of the allowable cost in the seventh year. The amount of the annual wear and tear allowance can be set against the rental income from the property. The allowances are not available for any part of a year when the property is used for private purposes. More information on capital allowances can be found in the Guide to Completing 2006 Pay and File returns (PDF, 311 KB).

What happens if I dispose of the fixtures and furnishings?

Depending on the amount of the disposal proceeds and the depreciated (for tax purposes) value of the item(s) at the time of disposal you may be entitled to an additional allowance, known as a balancing allowance, or there may be a clawback of allowances that have already been given, known as a balancing charge. If the proceeds exceed the depreciated value of the item(s) there will be a clawback of allowances. Alternatively, if the proceeds are less than the depreciated value of the item(s) you will be entitled to additional allowances. More information on those terms can be found in the Guide to Completing 2006 Pay and File returns (PDF, 311 KB).

Capital Acquisitions Tax

Capital Acquisitions Tax comprises Gift Tax, Inheritance Tax, Discretionary Trust Tax.(It also formerly comprised Probate Tax which was introduced by Finance Act 1993 but later abolished by Finance Act 2001)

• Gift Tax and Inheritance Tax
• Discretionary Trust Tax
• Probate Tax
• Indexed Thresholds for Capital Acquisitions Tax - 2008
• Further Information/Reference Material

Gift Tax and Inheritance Tax

Gift tax is charged on taxable gifts taken on or after 28 February, 1974, and Inheritance Tax is charged on taxable inheritances taken on or after 1 April, 1975. An inheritance is a gratuitous benefit taken on a death and a gift is a gratuitous benefit taken otherwise than on a death.

The tax is charged on the taxable value of the gift or inheritance. The taxable value is arrived at by deducting from the market value of the property comprised in the gift or inheritance permissible debts and incumbrances and any consideration paid by the beneficiary.

Once the taxable value of the gift or inheritance has been determined the amount of tax payable will depend on whether the appropriate tax-free threshold has been exceeded. The rates of tax are as follows-

• The threshold amount - Nil
• Excess 20%

(See Indexed Thresholds Table below for calculation of Gift Tax & Inheritance Tax, exemptions etc.)

Discretionary Trust Tax

A once-off Inheritance Tax applies to property subject to a discretionary trust on 25 January, 1984, or becoming subject to a discretionary trust on or after that date. The current rate of tax is 6%. In certain cases the 6% rate can be reduced to 3%. An annual Inheritance Tax at the rate of 1% applies to property subject to a discretionary trust on 5 April in each year commencing with the year 1986.

Probate Tax

Probate Tax was introduced by Finance Act 1993 and was subsequently abolished by Finance Act 2001. Probate Tax is charged at the rate of 2% on the estates of persons dying on or after 18 June 1993 and before 6 December 2000. For deaths occurring on or after 18 June 1993 and before 1 December 1999 a charge to Probate Tax arose if the deceased was domiciled in Ireland at his date of death or if his estate included Irish assets. For deaths occurring on or after 1 December 1999 and before 6 December 2000 a charge to Probate Tax arose if the deceased was resident or ordinarily resident in Ireland at his date of death or if his estate included Irish assets. Assets passing otherwise than under the will or intestacy are excluded. Funeral expenses and debts owing by the deceased at the time of death are allowable in arriving at the taxable value.

Exemptions include estates below €50,790 in 2000, property passing absolutely to a surviving spouse, the principal private residence (where there is a surviving spouse or where certain dependent children or relatives succeed), property passing to a charity, heritage property, superannuation benefits, certain government securities, unit trusts and policies taken by foreigners, qualifying insurance policies (to the extent that they are utilised in the payment of probate tax or inheritance tax) and property which has already within one year prior to the death borne probate tax on the death of a predeceased spouse (or within 5 years where there is a dependent child).

Indexed Thresholds for Capital Acquisitions Tax - 2008

Gift and Inheritance Tax

For the purpose of Gift and Inheritance Tax, the relationship between the person who provided the gift or inheritance (i.e. the Disponer) and the person who received the gift or inheritance (i.e. the beneficiary), determines the maximum tax free threshold - known as the "group threshold". Three Group thresholds were introduced on 1 December 1999 in respect of gifts and inheritances taken between 1 December 1999 and 31 December 2000. The Group thresholds are indexed by reference to the Consumer Price Index and the indexation factor for 2008 (1 January 2007 to 31 December 2007 inclusive) is 1.368.

The indexed Group thresholds for 2006, 2007 and 2008 are set out in the table below.

Further information may be obtained from the Capital Taxes Division, Taxpayer Information Service, O'Connell Street -Telephone LoCall: 1890 20 11 04

*In certain circumstances a parent taking an inheritance from a child can qualify for Group A threshold.

Gifts or inheritances of Irish property are liable to tax whether or not the Disponer is resident or domiciled in Ireland. Foreign property is liable to tax where either the Disponer or the beneficiary is resident or ordinarily resident in Ireland at the relevant date.

Various exemptions from gift and Inheritance Tax have been provided for. For example, the first €3,000 taken as a gift by a beneficiary from a Disponer in any one year is exempt from tax as are gifts and inheritances taken by one spouse from the other. There are exemptions in favour of certain charities, heritage property, superannuation benefits, and foreign donees of certain Irish government securities. Qualifying insurance policies to the extent that they are utilized in the payment of certain Gift Tax or Inheritance Tax are also exempt.

In addition to the exemptions various relief’s, which are subject to certain conditions being satisfied, apply e.g.

• Agricultural Relief - This relief operates by reducing the market value of agricultural property; and
• Business relief - The relief is granted by reducing the taxable value of business property

Disposal of Foreign Property

The information in this section covers the Irish capital gains tax (CGT) implications for Irish resident and ordinarily resident individuals who dispose of foreign property. Disposal means a transfer of ownership in an asset whether by means of sale, gift or otherwise. For more information on CGT please see Revenue leaflet CGT1, Guide to Capital Gains Tax (PDF, 212 KB).

• Irish tax obligations
• Calculating the capital gain
• Losses
• Foreign capital gains tax

Irish Tax Obligations

I am selling a foreign property. Will I have to pay CGT?

If you are resident or ordinarily resident in Ireland the sale of the property will, in most cases, be subject to Irish CGT (but see next question if you are not Irish domiciled). You will have to provide details of any gain by filing a return of income by 31 October following the year in which you sold the property.

Are there any circumstances in which a disposal of a foreign property by an Irish resident or ordinarily resident individual does not give rise to a CGT liability?

A gain on the disposal of a property located in a country other than Ireland or the UK by an Irish resident or ordinarily resident individual who is not domiciled in Ireland is subject to Irish CGT only to the extent that the gain is remitted to Ireland. A gain on the disposal of a property located in the UK is fully chargeable to Irish CGT regardless of domicile or whether the gain is remitted to Ireland (see foreign rental income - Irish tax obligations).

If I own a foreign property through a foreign company, and the company sells the property, will I have to pay Irish CGT?

• If you are a 'participator' in the company – that is, if you are entitled to a share or interest in the capital or income of the company – and
• if the foreign company would be regarded as a 'close company' – that is, a company controlled by five or fewer participators – if it were an Irish resident company,

- then any gain realised by the foreign company when selling the foreign property may be attributed to you (in proportion to your share of the company) and you may have to pay Irish CGT, even if the proceeds of sale are not distributed to you at the time of the sale. You will get credit for CGT paid in respect of the property sale against any Irish CGT due if the sale proceeds are distributed to you within two years of the date when the foreign company realised the gain.

If you own the property through a shareholding in a non-close company, you will be liable to Irish CGT on the disposal of your share in the company.

If I buy a foreign property 'off the plans' and sell it for a profit before building has finished, do I have to pay tax?

This process is known as ‘flipping’ and any increase in the value of the property sold is subject to Irish CGT. However, if you are carrying on the business of trading in properties, the profit may be treated as income and subject to income tax rather than CGT.

If I make a full or partial gift of a foreign property to another person, could I be liable to pay CGT?

You will be deemed to have disposed of the property at full market value and will be liable to pay CGT on that basis. The person to whom you made the gift may be liable for Capital Acquisitions Tax (CAT). If this is the case, Irish CGT paid by you may be credited against her/his Irish CAT liability.

When do I have to pay CGT?

If you dispose of your property between 1st January and 30st September, you must pay any CGT by 31st October of that year. If you dispose of your property between 1st October and 31st December, you must pay any CGT by 31st January in the following year.

Calculating the Capital Gain

How do I compute my CGT liability?

You deduct the cost of the asset from the sale proceeds. Certain expenses of disposal and purchase, as well as enhancement expenditure, may be allowed as a deduction. Inflation relief may be allowable on expenditure incurred on or before 31st December 2002. You can also deduct a single annual exemption amount of €1,270 in respect of all gains arising in a year. However, any expenditure allowable in computing income, profits, gains or losses for income tax purposes is excluded in computing CGT.

What tax rate applies to capital gains?

Capital gains on the disposal of both Irish and foreign property are taxed at 20%.

Losses

What happens if I make a capital loss on the disposal of my foreign property?

If you are Irish resident or ordinarily resident and Irish domiciled you can set the loss against other capital gains, other than gains made on the disposal of Irish development land. If you have no capital gains in the year of disposal, you can carry the loss forward against future gains. You cannot set your capital loss against income such as employment, rental or investment income.

If you are not Irish domiciled, your non-Irish and non-UK capital gains are only taxable if remitted to Ireland, and you cannot claim such losses against current or future gains. A capital loss on the disposal of a UK property could be claimed against other current and future capital gains.

Foreign Capital Gains Tax

When I sold my foreign property I paid CGT (or an equivalent tax) in the country where it was located. Do I still have to pay Irish CGT?

Depending on your residence/domicile status the sale of the property may still be chargeable to Irish CGT (see foreign rental income - Irish tax obligations for details). However, you may be able to reduce your Irish tax liability to take account of some, or all, of the foreign tax paid on the same income. The amount by which you can reduce your Irish tax liability depends on whether Ireland has a Double Taxation Agreement with the country in which your property is situated. This is illustrated below. Refer to this list of 'Tax Agreement' countries.

Example 1 - 'Tax Agreement' Country

A foreign property is bought in 2003 for €100,000 and sold in 2007 for €201,270. The foreign CGT is €15,000. There were no other chargeable gains or losses in the tax year.

Where Ireland has a Double Taxation Agreement with the country in which your property is situated and the agreement covers CGT and, for years of assessment from 2007 onwards, if the property disposed of was located in Belgium, Cyprus, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Pakistan and Zambia you are entitled to a credit for the foreign CGT paid on your foreign income against the amount of Irish CGT you have to pay on the same income and up to the amount of the Irish tax payable on that income. How this works is illustrated below.

    Sale proceeds                                       €201,270 

    Less purchase cost                               (€100,000) 

    Less annual exemption                           (€  1,270)

    Chargeable gain                                     €100,000 

    Irish CGT due @ 20%                               €20,000 

    Less foreign CGT paid                              (€15,000)

    Irish CGT payable after deducting foreign credit € 5,000 

    Sales proceeds                 €201,270 

    Less purchase cost           €100,000

    Less foreign CGT paid        €15,000

    Less annual exemption       €1,270

    Chargeable gain                €85,000 

    Irish CGT @ 20%               €17,000

Can I claim a refund in Ireland if the foreign CGT I have paid is greater than my Irish CGT?

No, you can only get double tax relief up to the amount of Irish CGT payable. If the foreign CGT liability on the disposal of your foreign property is higher than your Irish tax liability, you are not entitled to a refund from Revenue in Ireland.

All text used from Revenue.ie