If you’re an overseas landlord, you’ll quickly become acquainted with the Non-Resident Landlord Scheme (NRLS). If you don’t state your preferences, your letting agent is legally obliged to deduct tax on your behalf at the basic rate of 20% tax. Considering the average monthly rent in central London, this could be a substantial sum.
The rules on paying income tax to HMRC on UK rental properties as an overseas landlord can initially sound confusing. You might be surprised to learn who HMRC considers a non-resident landlord – even a UK citizen abroad for several months may need to apply.
Being a landlord in London can be confusing. There are over 170 Acts & Regulations to consider, so, how do you know if you are compliant?
Our guide explains the UK non-resident landlord scheme to help you stay on the right side of the law when it comes to tax. Read on to find out who it covers, how to apply and the options open to landlords.
HMRC defines an overseas or non-resident landlord as someone who rents out property in this country and whose usual place of abode is outside the UK. HMRC typically regard an absence of more than six months as the criteria, even if you are a British citizen. This applies if you only work abroad temporarily and includes members of the armed forces or crown servants stationed abroad. As a result, you may be resident in the UK for tax purposes, but still be considered a non-resident landlord.
The non-resident landlord scheme governs how overseas landlords are taxed on their rental income. This takes different forms, depending upon the landlord’s individual situation. For example, it may be down to the letting agent to withhold tax and pass it on to HMRC. Likewise, some landlords will meet the criteria to receive their ‘gross’ rental income without it being deducted at source. Whatever the case, the rules of the NRLS scheme govern how you are legally obliged to pay taxes.
All landlords need to complete an annual return for tax, and if you’re living outside the UK, you have the option to apply for the Non-Resident Landlord Scheme (NRLS). When you apply to the landlords’ scheme, you declare non-resident status to HMRC.
HMRC are wary of encountering problems with collecting tax earned on UK rental income by landlords outside the country’s borders. For this reason, if you don’t register for the overseas landlords’ scheme, your letting agent will automatically be required by HMRC to deduct tax from your income at the 20% rate every quarter.
You can apply for the HMRC Non-Resident Landlord Scheme online using the Government Gateway tax service or complete a postal application. To apply online, you must create a Government Gateway user ID and password if you don’t already have one.
You must use the postal application service to authorise an agent to complete the form for you. In this instance, you must submit a completed 64-8 Agent Authorisation form alongside the NRL1.
For postal applications, you must complete an interactive online form using Adobe Reader and download it to your computer before printing and posting it.
There are several ways in which the NRLS can benefit landlords, depending upon whether they qualify to receive their rent ‘gross’ or not:
While the scheme is certainly beneficial to many landlords, there are also several issues to bear in mind.
As a non-resident landlord, your options within the landlords’ scheme depend on whether you use a letting agent. Most landlords do, but not all – the Non-Resident Landlord Scheme (NRLS) works slightly differently depending on your setup.
However, be aware, letting agents are defined by HMRC as anyone who manages property on behalf of a non-resident landlord (not just traditional letting agents).
Your letting agent has a legal duty to deduct the tax on behalf of non-resident landlords unless notified by HMRC. There’s no upper or lower monetary threshold. Your letting agent must make the 20% deduction regardless of how much rental income the landlord has made.
To do this, the letting agent must join the Non-Resident Landlord Scheme (NRLS) by submitting an NRL4i form within 30 days of the start of the tenancy. Then, the landlord must complete a self-assessment return at the end of the tax year.
If you’re an overseas landlord without a letting agent, your tenant must withhold 20% of the monthly rent for tax. But in this instance, the rules are slightly different. According to Non-Resident Landlord Scheme (NRLS) rules, they only need to make a deduction for rent of more than £100 a week.
Your tenants must register with the landlords’ scheme within 30 days. They should pay the deducted amount to HMRC quarterly.
At the end of the tax year, they should submit an NRLY form to HMRC and an NRL6 form to you, the landlord. You will have to submit your annual income tax self-assessment return as usual.
You can manage your own landlord income tax if you prefer. If you choose this route, you must submit an NRL1i form to HMRC. At the end of the tax year, declare the rental income on your self-assessment return.
Under the landlords’ scheme, you can only request that you receive rent without deductions if you meet certain conditions. You can only apply if you don’t predict that you’ll be liable to pay UK tax in the same tax year in which the application is submitted. You can also make a request if you’re up to date with UK tax obligations, or have never had any UK tax liabilities.
If your application is accepted, HMRC will inform your letting agent in writing that they won’t need to deduct the quarterly tax. Remember that HMRC expects you to keep your tax affairs in good order.
So far, we’ve explored the obligations surrounding individual landlords, but many landlords choose to operate as a limited company – so can they take advantage of the scheme? The simple answer is yes – non-UK resident landlords operating a UK rental property through a limited company are able to comply with the NRLS scheme through filling out a different form (NRL2), and through their company complying with the NRLS criteria.
Similarly, if they are not approved to receive gross income, they will have it taxed at source in the same way as individual landlords do at the 20% basic tax rate. It should also be noted that since the 6th April 2020, non-resident landlord companies must also report their UK rental income through a CT600 return under the corporation tax system. This involves preparing accounts and filing them electronically using iXBRL software.
Ultimately, the rules for limited companies are similar to those for individual landlords – but it is always best to check with regards to your own circumstances. You should always consult a qualified accountant and experienced estate agent to help you understand your tax obligations.
Non-resident landlords can switch to receiving gross rental property income and submit a self-assessment return instead. Details on the eligibility criteria and application process are provided in HMRC guide PIM4860.
If your usual residence changes, contact HMRC for detailed non-resident landlord scheme guidance and advice.
You can be charged interest on the tax due from the first day. There are also penalty charges of up to £3,000 for failing to submit correct quarterly or annual returns.
Yes, HMRC can withdraw approval for landlords to receive gross rental income if they believe the information you supplied is inaccurate, you don’t supply essential information, or they think you may not be compliant. In this scenario, you have 90 days to appeal, and can take your case to the First-tier Tax Tribunal.
Your initial NRLS registration relates to you while you are not resident in the UK – you can supply and update the details of properties in your portfolio within this.
Landlords can be subject to compliance checks, and should keep immaculate records of rental income received, correspondence and expenses.
If the landlords’ scheme sounds confusing, it doesn’t have to. Garret Whitelock is a local estate agency based in London SE1 with lots of experience helping non-resident landlords manage their properties in a way that takes the pressure off them.
We can advise you about making your non-resident landlord application and help you manage many more duties and responsibilities that come with being a landlord at arm’s length. Contact us today if your a landlord in areas such as Elephant & Castle, Surrey Quays, Vauxhall, Canada Water to discuss our range of services, or find out more here.
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Being a landlord in London can be confusing. How do you make sure you are compliant?