Tax on foreign rental income not received

I have a query regarding tax due on foreign rental. I’m UK tax resident and earn the majority of my income in the UK, but also own property in Italy which is rented to a private tenant (the rental contract came with the property purchase). The rental scheme used is the ‘Cedolare Secca’, under which the tenant pays a fixed amount for a near-guaranteed 5 year term, and the landlord is compensated with a lower rate of tax specifically on that income. A particular aspect of that scheme is that tax is due regardless of whether the tenant pays or not, and a non-paying tenant can only be removed through a series of legal steps so the situation can continue for a lengthy period. If the income is not recovered, then the tax paid on income never received is not refunded, but an application can be made for tax credits against future income. This situation has occurred, and I’m paying tax in Italy on rental income which is unlikely to ever be received. I would like clarification on how this applies when filling out my Self Assessment. For the sake of a simplified example in one currency, and ignoring options like property allowance etc, assume the rental amount is £500 per month, the tax in Italy on that is 10%, and I’m a 40% tax payer in the UK. My understanding has been that £150 (40%-10%) of that monthly income is payable to HMRC, but should this be calculated against the income theoretically due (as in Italy) or income actually received, for the corresponding period?

Hi ,
 

The tax treaty between the UK and Italy, allows both countries to tax your rental income, but it allows Italy to tax your rental income first, as that is where the property is located.  You would convert your gross rental income, expenses and tax paid into pounds sterling and declare in the residential property section of the tax return and claim a foreign tax credit of up to 100% of the tax paid in Italy on the property income and complete the property section of the foreign supplementary section. Thank you .