Tax implications of Scotland Rentals

[CalGalTraveler]

One option with our Scotland purchases is to rent out the unit if we have too many points. I have questions about the tax implications.

1) The monies from rentals deposit directly into our Scotland HGVC account. If we keep those funds in the Scotland account and apply those funds to pay MF, then we are not subject to currency fluctuations. Would we also not be liable for U.S. income taxes since we are not repatriating the funds into the USA?

2) We pay a VAT tax when we rent out through HGVC Scotland. Is that sufficient tax for the UK? or will we be responsible to U.K. for further income taxes?

3) If we repatriate those funds to the USA, could we offset the rental income with the MF bill, Management fee, UK VAT and currency conversion fees to reduce tax liability?

 

[Nowaker]

Would we also not be liable for U.S. income taxes since we are not repatriating the funds into the USA?

Repatriating is not relevant. US income tax applies to all worldwide income for US citizens and resident aliens.

2) We pay a VAT tax when we rent out through HGVC Scotland. Is that sufficient tax for the UK? or will we be responsible to U.K. for further income taxes?

Not necessarily. VAT is one thing. Local income tax is another - most countries enforce income tax on all income received in their country, and all rental income is considered in the country.

3) If we repatriate those funds to the USA, could we offset the rental income with the MF bill, Management fee, UK VAT and currency conversion fees to reduce tax liability?

Yes.

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Now ask yourself if it's worth the hassle. In today's world of over-regulation & over-taxation, making something by the book (like, really by the book!) is not only impossible but also doesn't make a financial sense.

 

[CalGalTraveler]

Repatriating is not relevant. US income tax applies to all worldwide income for US citizens and resident aliens.

How do US businesses get around this? Is it because they establish local subsidiaries?

Obviously, easiest is the points conversion, honors or trade in RCI/II. Renting is the only way to cash out if we have too many points and want to apply the money elsewhere.

FWIW I've owned/managed several rental properties, including a VRBO vacation rental, so not a hassle and we have a CPA who can file. It's the foreign aspect that is unfamiliar. I would assume that I could write off any UK income taxes against the income effectively making the US taxes a paper filing (aka $0) and the UK taxes after MF and VAT deductions minimal. TBD if UK taxes leaves enough to cover MF.

 

[1Kflyerguy]

How do US businesses get around this? Is it because they establish local subsidiaries?

Many large companies, particularly tech firms, use something like a " Double Irish Dutch Sandwich" arraignment. At my employer we have all international sales conducted by a companies based in a tax havens. Then we don't general ever repatriate the money from international business. We spend all of the monies we earn outside of NAFTA, outside of NAFTA, i.e. large development centers located in India, Romania, etc..

 

[Nowaker]

Obviously, easiest is the points conversion, honors or trade in RCI/II.

The easiest is to simply ignore the taxation aspect because it's pennies anyway and nobody will try to prosecute you for tax evasion. The IRS has some jurisdiction over you, but the UK? What can they do? Extradite you, a US citizen? Secure a court order in the UK against you, that your state of residence won't even consider domesticating?

 

[CanuckTravlr]

The easiest is to simply ignore the taxation aspect because it's pennies anyway and nobody will try to prosecute you for tax evasion. The IRS has some jurisdiction over you, but the UK? What can they do? Extradite you, a US citizen? Secure a court order in the UK against you, that your state of residence won't even consider domesticating?

Not the best advice, but unfortunately not an uncommon attitude when it comes to dealing with foreign jurisdictions. It has nothing to do with whether the court order is "domesticated". You also can't assume it is only "pennies". Also, VAT is a consumption or goods and services tax, so different rules versus any taxes on income.

HM Revenue and Customs in the UK can be just as aggressive as the IRS. The property is in the UK. The UK agency could potentially post a tax lien against the property, and in a worst-case scenario, ultimately foreclose on it or otherwise force compliance. Highly unlikely that would happen, but a US court has no jurisdiction and nothing to do with it! It could also interfere with the owner's ability to enter the UK.

I'm a Canadian CPA. If you haven't actually dealt with this specific situation, or have chosen to ignore it, then best not to offer potentially harmful "advice". The best advice is to seek out a tax lawyer or accountant that is familiar with cross-border transactions. There is a US/UK Tax Treaty (as there is between most western countries) that deals with these types of situations. It is designed to minimize potential "double-taxation" situations.

I'm not familiar with the details of the UK treaty, but am familiar with the US/Canada Tax Treaty. Typically, these treaties may allow you to elect to have any income taxed as if it was located in your home country (with whom you have "a closer connection"). Alternatively, it may allow for credits for any taxes paid in the foreign country to be applied against any equivalent taxes when filing your US (or in my case, Canadian) tax return. I assume the UK treaty is similar, but the devil is in the details of the specific treaty, so best to seek professional help.

 

[escanoe]

I am not a lawyer and feel 100% confident in the advice I am about to give.

Following the advice below and hiring a lawyer to help you understand this is going to cost more than you are going to make renting the property a few times.

I would either take more vacation, gift it to family members, or rent out domestic HGVC owned weeks and use the Scotland points for personal travel.

Not the best advice, but unfortunately not an uncommon attitude when it comes to dealing with foreign jurisdictions. It has nothing to do with whether the court order is "domesticated". You also can't assume it is only "pennies". Also, VAT is a consumption or goods and services tax, so different rules versus any taxes on income.

HM Revenue and Customs in the UK can be just as aggressive as the IRS. The property is in the UK. The UK agency could potentially post a tax lien against the property, and in a worst-case scenario, ultimately foreclose on it or otherwise force compliance. Highly unlikely that would happen, but a US court has no jurisdiction and nothing to do with it! It could also interfere with the owner's ability to enter the UK.

I'm a Canadian CPA. If you haven't actually dealt with this specific situation, or have chosen to ignore it, then best not to offer potentially harmful "advice". The best advice is to seek out a tax lawyer or accountant that is familiar with cross-border transactions. There is a US/UK Tax Treaty (as there is between most western countries) that deals with these types of situations. It is designed to minimize potential "double-taxation" situations.

I'm not familiar with the details of the UK treaty, but am familiar with the US/Canada Tax Treaty. Typically, these treaties may allow you to elect to have any income taxed as if it was located in your home country (with whom you have "a closer connection"). Alternatively, it may allow for credits for any taxes paid in the foreign country to be applied against any equivalent taxes when filing your US (or in my case, Canadian) tax return. I assume the UK treaty is similar, but the devil is in the details of the specific treaty, so best to seek professional help.

 

[dioxide45]

I am not a lawyer and feel 100% confident in the advice I am about to give.

Following the advice below and hiring a lawyer to help you understand this is going to cost more than you are going to make renting the property a few times.

I would either take more vacation, gift it to family members, or rent out domestic HGVC owned weeks and use the Scotland points for personal travel.

Exactly. How much is one going to spend to get advice for an issue that has a miniscule chance of even being an issue? Get professional tax advice or a lawyer sounds like advice coming from accountants and lawyers.

 

[ocdb8r]

You've already got your answers as regards the US - you are taxed on your worldwide income. You can offset rental income with true costs (maintenance fees, listing fees, payment processing fees...etc) AND depreciation (your tax advisor can assist).

As regards the UK, there is a fairly high allowance before tax obligations kick in (I believe 12,500 GBP). Unless you're renting out more than that, it's unlikely you have any liability (much less any chance of being chased) in the UK.

 

[klpca]

Everyone has their own comfort level of risk when dealing with compliance with financial matters. I don't have any first hand experience (and your personal accountant/attorney probably won't either) but it *may* need to be reported in the foreign country, absolutely needs to be reported in the US, probably won't amount to a hill of beans in US tax, will be a PITA to report in the UK - just on lack of knowledge and and the need to understand how to report it. I personally wouldn't bother to rent it out because there is no way that it is worth the hassle to me, but ymmv.

 

[ljmiii]

The IRS has some jurisdiction over you, but the UK? What can they do?

You have an asset in the UK! Though the jurisdictions are different, NYC has quite happily made money off of people who thought that their non-NY residence insulated them from having to pay taxes to the city. I would follow the advice of @escanoe.

 

[CalGalTraveler]

You have an asset in the UK! Though the jurisdictions are different, NYC has quite happily made money off of people who thought that their non-NY residence insulated them from having to pay taxes to the city. I would follow the advice of @escanoe.

Thanks all for the comments.

One other piece of information. It is not a traditional land asset because it is not a deed. Scotland are holiday certificates (perpetual RTU). So no foreclosure I presume. Does this change anything?

Where would I find a CPA or lawyer that understand UK to US transactions? Our CPA is very good but not sure if he knows details of UK taxation. It would be under 12,500 GBP so it would be nice if income taxation is not required since HGVC Scotland already pays VAT on our behalf.

 

[ljmiii]

It is not a traditional land asset because it is not a deed. Scotland are holiday certificates (perpetual RTU). So no foreclosure I presume. Does this change anything?

I own deeded RTUs, but have never heard of "holiday certificates" before. If you buy in Scotland what are you buying - a percentage of a Scottish corporation's land and/or property ownership?

 

[ljmiii]

deleted

 

[dayooper]

I own deeded RTUs, but have never heard of "holiday certificates" before. If you buy in Scotland what are you buying - a percentage of a Scottish corporation's land and/or property ownership?

No, you are buying the right to a weeks vacation in a certain lodge in a fixed week. That's it, nothing more. You can exchange that week into the HGVC system for a set amount of points, but you don't own any property. If you want Scottish property to be called a lord or lady, you could always go with this place:

Highland Titles | Become a Laird, Lord or Lady of the Glen

Buy a souvenir plot of land from Highland Titles and style yourself as Lord, Laird or Lady of the Glen. The amazing gift of Scottish land from just £30.

www.highlandtitles.com

 

[Nowaker]

You have an asset in the UK!

No, I don't.

If you buy in Scotland what are you buying - a percentage of a Scottish corporation's land and/or property ownership?

The UK agency could potentially post a tax lien against the property

They can't because HGVC Scotland is a contract (pay this amount yearly to get to stay here), not a real estate ownership.

Apart from that, the piece of advice you gave is 100% correct from a legal standpoint, and just as impractical.

 

[CanuckTravlr]

No, I don't.

They can't because HGVC Scotland is a contract (pay this amount yearly to get to stay here), not a real estate ownership.

Apart from that, the piece of advice you gave is 100% correct from a legal standpoint, and just as impractical.

You say you don't have an asset in the UK. Is that based on specific tax or legal advice you have received, or just your "opinion"? If the latter, it means squat!

You say you only have a "contract" that you pay an amount yearly to get to stay there. That potentially describes a lease of real property. Many people in the UK, particularly in larger cities (and in many other major cities around the world), lease their residences. They may be annual rental leases or they may be prepaid leases that can be for any term, such as 25, 35, 50, or even 99 year leases. Those rights can also be sold, so can potentially be subject to taxation.

It's not quite the same as a timeshare RTU and I have no idea how the HGVC Scottish timeshares might be treated in the UK for tax purposes, but I suspect neither do you. "Impractical" is a value judgement. What you really mean is that you find getting proper advice inconvenient or expensive relative to the tax exposure, which is fine. You certainly can choose to ignore or decide to effectively self-insure any potential risk. However, if you are ever audited by the IRS or HM Revenue and Customs, just accept that that excuse won't count for a hill of beans.

Yes, legal and tax advice may be expensive, but it doesn't always have to be. Most accountants and lawyers will give you an estimate of what you are looking at in terms of fees and costs before you actually engage them. Once you know what the fees might be, you can properly make the assessment of whether it is "impractical" relative to the tax exposure.

There might not even be any tax exposure. Most countries have minimum tax thresholds before income tax is even liable, as mentioned by @ocdb8r above. As I said originally, it is highly unlikely tax authorities would pursue this, but much of that is dependent upon a number of factors, particularly how much rental income would be generated. Without that we are all just guessing. But unsupported "opinions" are worth what were paid for them and have little relevance when dealing with cross-jurisdictional tax issues.

As mentioned by others, I think the best advice is to avoid the issue in the first place by renting out domestic US units and using any excess points from Scotland to stay elsewhere in the system. It's a much simpler scenario with no foreign hassles!

 

[CanuckTravlr]

Where would I find a CPA or lawyer that understand UK to US transactions? Our CPA is very good but not sure if he knows details of UK taxation. It would be under 12,500 GBP so it would be nice if income taxation is not required since HGVC Scotland already pays VAT on our behalf.

I think it's great you have sought out advice on this before actually doing anything. Too many realize too late that there could be an issue!

I agree that your current CPA is unlikely to have the expertise to deal with this, any more than I do. Finding cross-border experts familiar with the US/UK Tax Treaty, especially as it relates to a Scottish RTU timeshare, might not be easy. The major accounting firms certainly would have them, but their fees are also at the highest level.

If you want, your CPA could try reaching out to the AICPA (the American Institute of CPAs). As a member, he/she has access to some resources that could help point you in the right direction, but you are seeking rather specialized (although not unique) advice. It might be worth a quick check if your CPA is willing to try it, but I would be surprised if they have anything that specific to offer.

I still think your best option is to rent out US domestic locations and use any excess points from Scotland to book stays elsewhere. It's clean and simple and avoids any potential cross-jurisdictional issues, no matter how minimal they might be. Good luck on whatever you decide!

 

[CalGalTraveler]

I think it's great you have sought out advice on this before actually doing anything. Too many realize too late that there could be an issue!

I agree that your current CPA is unlikely to have the expertise to deal with this, any more than I do. Finding cross-border experts familiar with the US/UK Tax Treaty, especially as it relates to a Scottish RTU timeshare, might not be easy. The major accounting firms certainly would have them, but their fees are also at the highest level.

If you want, your CPA could try reaching out to the AICPA (the American Institute of CPAs). As a member, he/she has access to some resources that could help point you in the right direction, but you are seeking rather specialized (although not unique) advice. It might be worth a quick check if your CPA is willing to try it, but I would be surprised if they have anything that specific to offer.

I still think your best option is to rent out US domestic locations and use any excess points from Scotland to book stays elsewhere. It's clean and simple and avoids any potential cross-jurisdictional issues, no matter how minimal they might be. Good luck on whatever you decide!

Thanks for your advice. One of the attractions of renting Scotland is that HGV has an office to rent out the unit and manage the renters. You simply notify them to rent your unit and they take care of the rest. I don't wish to deal with tire-kickers and rental complaints which would be a hassle in renting in the states. (Trading off one hassle for another). I will contact my CPA. He is well versed on our rentals so adding another IRS form may not be a big deal.

Thanks all for the idea of the bottom threshold. I am hoping there is a "no tax filing required" threshold of < $12,500 GBP similar to the USA tax system so there would be no hassle since the VAT is already calculated and filed. That is it simplest question to ask of our CPA to research.

 

[CalGalTraveler]

After a quick Google search it appears that U.K. property rental over L1000 gross receipts requires a tax return. You also cannot file online. Must send tax forms via post (long way from the USA) or have a local CPA file (which would add to the cost).

There do appear to be mechanisms to avoid double-taxation between the U.S. and UK. After deducting MF, VAT and CPA, postage. I doubt there would be any profit to tax.

Self Assessment tax returns: Who must send a tax return - GOV.UK (www.gov.uk)

Simple Tax Guide for American Expats in the UK (taxesforexpats.com)

 

[Nowaker]

@CanuckTravlr All you just wrote could be summarized as "how to tell it's impractical, without saying it's impractical". Take care.

 

[magmue]

HGV has an office to rent out the unit and manage the renters. You simply notify them to rent your unit and they take care of the rest.

It seems unlikely that you would be the first US-based owner doing this. That office might have some feedback about what others typically do or don't do.

 

[dioxide45]

It seems unlikely that you would be the first US-based owner doing this. That office might have some feedback about what others typically do or don't do.

Certainly can ask, but they usually cover their butt and say they don't provide tax advice or guidance, seek out professional help. I suspect that since there is no physical distribution of funds to a bank, they don't issue any tax information to either the IRS or UK.

 

[klpca]

After a quick Google search it appears that U.K. property rental over L1000 gross receipts requires a tax return. You also cannot file online. Must send tax forms via post (long way from the USA) or have a local CPA file (which would add to the cost).

There do appear to be mechanisms to avoid double-taxation between the U.S. and UK. After deducting MF, VAT and CPA, postage. I doubt there would be any profit to tax.

Self Assessment tax returns: Who must send a tax return - GOV.UK (www.gov.uk)

Simple Tax Guide for American Expats in the UK (taxesforexpats.com)

The issue is going to be in the reporting requirements. Gross receipts (in this case, the rent) over £1,000 seems to be a pretty low threshold. So even if you have zero profit, the stated rules are that something seems to be required to be filed. You need to find out if there are things such as a failure to file penalty. Who knows? I doubt that double tax will be an issue unless the point rental generates some profit. I think that this is really a "hassle factor" issue. Maybe one of the HGVC facebook groups will have other owners who have rented their points and can give you some first hand experience.

 

[CanuckTravlr]

@CanuckTravlr All you just wrote could be summarized as "how to tell it's impractical, without saying it's impractical". Take care.

It's unfortunate if that is all you got out of it. If you were just looking for a single sentence reply, then a better summary of my reply to your comment might have been something like, "You have made a number of opinionated statements and they may not be entirely accurate." But of course, you know better. In any case, my comments were primarily for the benefit of the OP. You can choose to ignore them, if you don't think they apply to you.

You take care, too!