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Currently, approximately five and a half million British people live outside the UK, a third in New Zealand and Australia, more than a quarter in Canada or the US, and some dispersed throughout Europe. Many of these immigrants choose to rent out a UK property for financial sustenance living abroad.
However, there is a misconception that since they live outside the country, they are not liable for any UK property income tax obligation. A non resident landlord tax legislation has since been in place in 1996 in which landlords absent from the country for six months or more in a year are to be considered non-resident landlords (NRLs) and should register with HM Revenue and Customs (HMRC) and pay under the non UK resident landlord scheme (NRLS), although with some exemptions.
This article serves as a complete guide on income tax for non-resident landlords who have to strictly adhere to the scheme to avoid HMRC’s costly penalties. Whilst non-resident landlords or investors of a property in the UK pay both property income and capital gains tax, this article focuses on their income tax responsibilities.
Overall, we discuss about who are considered as NRLs, what the non UK resident landlord scheme (NRLS) is, how much the rental tax they pay, how they pay it, and the penalties, as well as answer other questions, such as what if there is just only one tenant or more than one landlord.
Who is Classified as Non-Resident Landlord?
Any individual, company, or trust renting out a UK property whilst living abroad are immediately classified by HMRC as non-resident landlord and is subject to paying property rental income tax, pension income, and capital gains tax (CGT) for the properties they sold or disposed of, which they can do themselves or through their letting agents or tenants. This scheme covers accidental landlord as well for tax purposes.
Regardless of whether they are a UK tax resident or not, as long as their place of abode is outside the UK for more than six months each year, they are immediately considered NRLs. Aside from renting out UK properties, companies are considered as NRLs when their main office is located or their business is incorporated outside the country. Whilst for trusts, HMRC considers them as NRLs when they rent out a UK property and almost all of the trustee members reside abroad.
What is Non-Resident Landlord Scheme?
Once landlords decide their place of abode or business operations to be outside the country, they are required to comply with the non-resident landlord scheme and their annual self-assessment tax return obligations every end of the tax year. HMRC introduced this scheme to prevent non resident landlord tax evasions, enforced alongside Let Property Campaign. To apply for the scheme, non-residential landlords need to complete HMRC’s online form NRL1.
Both resident and non-resident landlords are obliged to pay rate tax against their rental income gross amounts, fair and square. Since it can be difficult to track and make individuals, companies, or trusts pay their basic rate tax obligation when they are outside the country, the UK tax authority collects their tax on rental income before they receive their profits through the scheme.
As such, HMRC gives the obligation to the tenant or letting agent (if there is one) to deduct and withhold the tax portion (profits reduced with the allowable expenses first) before the overseas landlord can receive the net profits. Where there is no letting agent to do the task on their behalf, NRLs can personally withhold basic rate tax from their profits.
The scheme particularly obliges the tenant or the letting agent to deduct and withhold tax from their overseas landlord when the rent paid every week is more than £100 and submit the amount quarterly to HMRC. When overseas landlords file their capital gains tax return, they write such an amount as deduction from their tax liability in the UK.
However, HMRC also allows individual landlords to apply for receiving their UK rental income in gross amount (without the deduct tax amount through the tenant or letting agent) if they meet the criteria for the exemption. Different forms for application are provided for individuals, companies, or trustees. The criteria are as follows:
- Their tax obligation is updated.
- They never had any non resident landlord tax and other tax liabilities.
- They anticipate that they do not have to pay the tax, such that their overall taxable income in which the application is made is within their UK personal allowance.
If HMRC considers and accepts their application, they will only have to report their rental expenses and income in their tax returns and compute their tax liabilities but not make any deductions. Whilst for companies, they can get their UK rental income in full when they are a UK resident for tax purposes and have overseas UK branches registered for corporation tax.
HMRC will then issue a notice to the overseas landlords’ letting agent or tenant that they can now directly make rent payments to their landlord without having to deduct tax, nor withhold or submit tax payments quarterly to HMRC. This doesn’t mean, however, that the overseas landlords are exempt from paying tax on their income but that they agree to comply with their tax obligation strictly by themselves. Even if they do not need to pay the tax, they are also still obliged to submit a self-assessment tax return every year.
Moreover, non UK resident landlords also have to check if their country of residence has a double taxation agreement in place or not or if it allows them to claim their UK personal allowance. A double taxation agreement allows landlords to avoid being taxed twice—being taxable in the UK and other countries—in which they only need to pay basic rate tax on their UK income in the country where they are currently residing and simply claim UK income tax relief in the UK.
How Much is the Non Resident Landlord Tax?
UK rental income and income tax have different amounts for personal allowance or the threshold on which taxpayers don’t pay basic rate tax on their income. For the tax years 2021/22 and 2022/23, the personal allowance for rental earnings is £1,000, whilst for income tax, the threshold is set at £12,570 per year.
UK income tax rates depend on which band the overseas landlord belongs to. Take a look at the rates imposed for the 2021/22 and 2022/23 tax years:
| Income Tax Rate | Income Tax Band | Tax Rate |
|---|---|---|
|
Basic Rate |
£12,571 and £50,270 |
20% |
|
Higher Rate |
£50,271 and £150,000 |
40% |
|
Additional Rate |
£150,000 and more |
45% |
This applies to all non-resident landlords, whether an individual, company, or trust. Additionally, private landlords who don’t operate rental businesses will not have to use their National Insurance number as they are not required to make their National Insurance contributions.
Aside from using personal allowance (if applicable), overseas landlords can also claim tax reliefs by offsetting allowable expenses paid for buying and running a property in the UK, which includes their mortgage interests, property section repairs, letting agent, lawyer, or accountant fees, insurance, and more.
How to Pay Non Resident Landlord Tax?
Non-resident landlords have two options to receive their rent, which would also be the way they will be paying their income tax on investments. It could be either of the following:
- Receive the rental profit in gross amount and pay their taxes through digital service self-assessment.
- Receive tax-deducted amount done by the tenant or letting agent.
They can only pay through self-assessment when HMRC allows them (see the criteria for eligibility above). For overseas landlords who receive tax-deducted rental profits, their rental agent or tenant will bear certain responsibilities, especially if the tenant pays more than £100 a week for the rent.
The letting agent or tenant will have to register with HMRC, deduct and withhold tax from the landlord’s rental profit, pay tax within 30 days at the end of the tax quarter, send annual tax returns, and provide a tax liability certificate to the landlord every year to confirm that tax payment has been made from the rental profit.
However, if in case the non-resident landlord earns a mere annual profit between £1,000 and £2,500, they will have to contact HMRC to see how they report this small amount of rental profit. They are generally required to report their income through annual returns when their profits are between £2,500 and £9,999 after “allowable expenses” or £10,000 or more before allowable expenses. Check out our Tips on How to Reduce Tax on Rental Income.
What If There is More Than One Tenant?
HMRC imposes a £100 per week limit separately for every tenant according to their share of the rent. If they exceed the limit, then they are automatically required to operate under the NRLS unless their landlords have applied to receive the rental profits in full to sort out their tax affairs by themselves.
Take, for instance, an overseas landlord who has two tenants paying £150 a week. Each of these tenants pays their share of £75 weekly. This would mean the tenants don’t have to operate under the non-resident landlord legislation.
In the case of one person being a tenant under the lease contract but living with one or more people, paying more than the £100 weekly limit, this tenant will have to fulfil his/her NRLS obligations. The same goes for more than one tenant, each of them exceeding the limit—every tenant will have to comply with the NRLS.
What If There is More Than One Landlord?
The £100 per week limit applies to the landlords as well, especially if there is more than one, such that couples own a property in the UK in joint ownership. Each of the couples will have to register separately under the scheme. This means that the tenant pays each of the landlords their equal share.
Applying the weekly limit, take, for instance, the tenant pays £150 a week. Each of the landlords will receive £75, which means they are not subject to paying under the non-resident landlord legislation, regardless if they pay the rent in a single amount on a weekly or monthly basis.
When weekly rent exceeds the weekly limit, even when the amount is divided amongst the landlords, the tenant will have to operate under the scheme and adhere to their corresponding tax responsibilities; that is, deduct from their rental payment and pay much tax to HMRC every quarter.
What Are the Penalties Under the NRLS?
Penalties can be costly for the individual, company, or trust landlords if they exceed the weekly limit, fail to register with HMRC, and do not file a self-assessment tax return for that tax year to report their rental income from their UK properties.
Penalties for submitting tax returns late and not paying tax on your rental income on time vary, mainly based on how long the delay is. Take a look at the table below for specific penalty amounts:
| Length of Delay | Penalty for Late Tax Return Submission | Penalty for Late Tax Payment |
|---|---|---|
|
1 day |
£100 |
N/A |
|
30 days |
N/A |
5% of the tax bill unpaid at that date |
|
3 months |
£10 per day capped at £900 |
N/A |
|
6 months |
Whichever is higher between £300 or 5% of the tax bill |
A further 5% of the tax bill unpaid at that date |
|
12 months |
Whichever is higher between £300 or 5% of the tax bill (or 100% of the tax bill in some cases) |
A further 5% of the tax bill unpaid at that date (or 100% of the tax bill in some cases) |
For instance, when the taxpayers fail to file their tax return on time for more than 3 months, they will have to pay the one-day late filing penalty, in addition to the £10 per day penalty. Similar with late tax payment, taxpayers who didn’t pay their taxes for more than 6 months will have to pay first the 30-day penalty charged at 5 per cent and then another 5 per cent for the rest of the unpaid bill. Until they complete paying their tax dues and the unpaid penalties, taxpayers will have to continually pay interest on all these outstanding amounts.
Managing non resident landlord tax and all the other tax affairs whilst overseas can be very hassling. This is when the help of accountants can be very useful. A complete guide on income tax for non-resident landlords can help but first-hand tax assistance, especially from Legend Financial, can significantly help landlords proactively sort out their tax liabilities. Reach us today!
References
Guidance for non-residents owning and renting out UK property. (n.d.). Retrieved from Tax Innovations: https://www.taxinnovations.com/personal/determine-tax-status/non-resident-landlords/
Tax on your UK income if you live abroad. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/tax-uk-income-live-abroad/rent
The Non-Resident Landlord Scheme. (n.d.). Retrieved from Low Incomes Tax Reform Group: https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/property-income/non-resident-landlord-scheme
Guide for non-resident landlords. (n.d.). Retrieved from Landlords Tax Services: https://www.landlordstax.co.uk/resources/guide-for-non-resident-landlords/
UK: UK Tax Obligations for Non-Resident Landlords. (n.d.). Retrieved from Mondaq: https://www.mondaq.com/advicecentre/content/3064/UK-Tax-Obligations-for-Non-Resident-Landlords
UK Non Resident Landlord’s Tax Guide. (n.d.). Retrieved from Tax Rebate Services: https://www.taxrebateservices.co.uk/tax-guides/non-resident-landlord-tax-facts.html
Guide to the Non-Resident Landlord Scheme. (May 12, 2021). Retrieved from Alan Boswell: https://www.alanboswell.com/news/guide-to-non-resident-landlord-scheme-nrls/
Late filing and late payment penalties. (n.d.). Retrieved from Landlords Tax Services: https://www.landlordstax.co.uk/resources/guide-for-non-resident-landlords/late-filing-and-late-payment-penalties/
4 responses
If you are working abroad, is your income abroad used as part of the calculation of the tax bracket or only the rental income ?
The new rules for resident landlord’s restrict interest rate deductions to 20 percent of the revenue . Are the rules the same for non resident landlord’s.
HI James,
Thank you for your comments. It sounds like you have become a Non-UK resident while working abroad and as such the overseas income is excluded from the UK tax calculation. And as you have a UK based Residential Property – only the rental profits will be taxed in the UK.
Regarding the interest deductions, the rules are the same so there is no change there.
Should you require any further assistance, you may drop us an email on hello@legendfinancial.co.uk and one of our tax advisors will assist you.
Many thanks,
Good guide.
However, there was no reference to VAT?
Do non-resident Landlords renting UK property, need to pay VAT on a letting invoice to UK based Estate Agents ?
Thank you, Dawn, for your comments here.
In reference to your query about paying VAT on letting invoice, it would have to be paid as these rules are pointed out in section 6 of VAT Notice 741A. As the place of supply is in the UK for the service, then it would be payable.
I hope this answers your question, but if you would require more information or need further assistance, please drop us an email on hello@lgendifnancial.co.uk and one of our tax advisors will be in touch.
Many thanks,