Do you have a UK mortgage?
If you have a UK mortgage, grab a bottle of gin before you read on, there is some bad news to come. In fact, if you are paying any mortgage outside of New Zealand (NZ), you should read this, because the concepts I’m about to introduce apply to all NZ taxpayers with an overseas mortgage.
Most individuals living in NZ who have a property in the UK are (hopefully) aware that they should declare their income from that property on their NZ tax return, utilising NZ Internal Revenue (IR) tax rules. What most people don’t know, however, is that if there is a mortgage on that property, there are additional NZ tax considerations.
The first is the IR’s application of non -resident withholding tax rules. Essentially, the NZ Government interprets the fact that you are making a payment to a UK bank, as the UK bank conducting business in NZ. Rather than chasing the UK bank for the tax due on the money that it is making (from you paying your mortgage), NZ tax legislation puts the onus on you to pay non-resident withholding tax at 10% to the IRD for every $1 that you pay in interest. It is a somewhat strange concept and involves administration. There are ways in which the 10% can be reduced to 2%, but you are still paying tax on money that you are paying out.
Now, here’s where I need to write a disclaimer for those tax advisers reading this and about to start ‘tutting’ about how the following matters are not as simple as I’ve described — I’ve paraphrased and simplified some tricky rules to get the point across to ordinary people caught in an extraordinary situation.
The second piece of bad news is best introduced by way of a realistic example.
Say Mr A has a UK interest-only mortgage of 100,000 GBP. Thus, he owes someone (Bank A) 100,000 GBP, which was equivalent to $214,000 NZD at the start of this tax year (1 April 2016). If Mr A keeps paying the interest-only mortgage throughout the year, that debt to Bank A remains the same in GBP, but if the exchange rate moves in his ‘favour’, the debt changes value in terms of NZD (as of October 2016, it was $172,000 NZD). This makes Mr A better off by $42,000. Under NZ tax legislation, such a reduction in debt (due to exchange rate fluctuations in Mr A’s favour) is potentially taxable .
Most taxpayers don’t normally need to consider this rule, as (like everything in tax) there are exceptions. Two of the three principle exceptions are that the rules do not apply if:
1. you have less than $1M (1 million) NZD to consider, and
2. the ‘swing’ in exchange rates has never resulted in a $40,000 NZD differential.
In Mr A’s case, he’s had a reduction in debt of $42,000 NZD so he DOES have to consider the rule. The 'Post-Brexit' extra-ordinary exchange rate movements are creating tax headaches for many.
You should also note that whilst I have referred to mortgages (debt), this situation could also apply to anyone who has cash or other cash-type assets overseas.
Finally, to be clear, this is not just a UK issue. The UK has been used in the above illustration, simply because of the recent, wild swing in exchange rates. If you have financial assets (debt or cash) anywhere that are not denominated in NZD, the rules could potentially apply.
What can you do?
1. Keep your head down and carry -on with no regard to the rules. NEVER a recommended approach. In our next article, we will be covering the automatic exchange of information rules: https://www.gov.uk/guidance/automatic-exchange-of-information-introduction, in which the UK is in the first wave of reporting countries.
2. Work out what your exposure is, and talk through the options with a qualified tax advisor. A BETTER option.
3. Blame the messenger for the bad news? – Please don’t. Take advantage of the CloudTax offer for a free initial 20-minute consultation on your tax situation.
Disclaimer: This blog represents general commentary and should not be construed as individual tax advice. If you want tax advice, talk to a tax adviser; don’t make financial decisions based on articles that you read online. The Author: Stuart Clouden is a director at CloudTax Limited, a tax advisory firm that specialises in expatriate tax matters.