As a landlord, you should know all your legal obligations and responsibilities. If you own property in the UK but live overseas, then you are a non-resident landlord. In case you have a usual place of abode overseas, then it is important that you know the tax rules. This guide will cover all the important aspects of the non-resident landlord scheme.
First, let’s discuss the definition of a non-resident landlord. Then, we can move on to your obligations under the NRLS.
Who qualifies as a Non-Resident Landlord?
Following are the criteria to qualify as a non-resident landlord:
- For tax purposes, you are not a resident in the UK.
- You have ownership of residential property in the UK.
- From that property, you are receiving rental income.
The NRLS is applicable to offshore trusts, offshore entities, partnerships, and individuals.
What is the Non-Resident Landlord Scheme (NRLS)?
The purpose of the NRLS is to tax the UK rental income of non-resident landlords. People who reside outside of the UK are called non-resident landlords. There is an imposition of obligations on the tenants. Or if there is a letting agent, then the imposition is on them. The tax year for the NRLS starts from 1 April and ends on 31March.
If you live abroad but receive income from a residential property in the UK, it is taxable in the UK. This is crucial for you to understand that it is taxable, like any other UK-sourced income. Irrespective of the fact that you are a resident or non-resident in the UK, this is the case for tax purposes. It does not matter where the payment takes place.
Nevertheless, it is difficult for HMRC to chase non-resident landlords who do not comply with the UK tax obligations. Therefore, under the NRLS, UK law seeks to collect tax on the rental income before the overseas landlord receives it.
There is an imposition on the UK letting agent to withhold tax on the rental income before the overseas landlord receives it. In case there is no UK letting agent, then the tenant needs to withhold tax. That is, if the rent payment is of more than £100 a week.
The tax that they withhold is usable as a deduction against the non-resident landlord’s UK tax liability. They can deduct it at the time of completing the UK Self-Assessment tax return. It does not matter whether the UK property income is taxable, the non-resident landlord scheme does not change.
Even if there is no tax to pay, non-resident landlords need to file a Self-Assessment tax return.
Fundamental Aspects of the NRLS
Following are the key features of the scheme:
Responsibility of Tenant or Letting Agent
Through this scheme, the responsibility of ensuring the right amount of tax deduction belongs to the tenant or letting agents. They must deduct it from the rental income and do so before the landlord receives it.
The tenant or letting agent must deduct basic rate income tax from the rent before giving it to the landlord. Basic rate income tax currently stands at 20%. After deduction, the landlord receives the net amount. The letting agent or tenant must pay the tax to HMRC directly. It is important to understand the features of the non-resident landlord scheme.
Exemptions from Deducting Tax
It is possible for non-resident landlords to apply for an exemption from tax deduction by the tenant or letting agent. For this, they must submit the NRL application form. Through approval from HMRC, non-resident landlords can receive rental income without the deduction of tax.
Filing Annual Tax Return
It is mandatory for non-resident landlords to file a corporation tax return and an annual Self-Assessment tax return. Offshore entities file the former, while individuals and offshore trusts file the latter. They must do so even if they have no further UK income. With the help of the returns, there is surety of payment of the right amount of tax and adjustments are possible.
It is crucial to keep detailed records of all transactions, income, and expenses that relate to the UK property.
Advantages of NRLS
Following are the benefits of the NRLS:
Compliance with Tax Obligations
Non-resident landlords can fulfil their tax obligations through the NRLS. It also makes sure of proper taxation of their rental income.
Less Administrative Burden
By hiring a tax agent to manage your tax matters, you can simplify the complex process.
Tax Treaty Advantages
Through tax treaties, you can gain relief from double taxation. This benefits you in the UK and your home country. Therefore, there are plenty of benefits of the non-resident landlord scheme.
Disadvantages of NRLS
Following are the drawbacks of the NRLS:
Mandatory Tax Deduction
You can face higher initial tax payments and potential cash flow problems because of obligatory tax deduction. Thus, you should apply for an exemption.
Complexities of NRLS
It is difficult to navigate the complexities of NRLS and tax regulations. This is especially true for those who are not expert in UK tax laws. It is ideal to appoint a tax agent to assist you.
Accurate Record Keeping
It is time-consuming to keep accurate records. Nevertheless, it is necessary t ensure compliance with the scheme. You can remove most of this burden by renting the property through the letting agent. Now, you know the drawbacks of the non-resident landlord scheme.
Are You Non-Resident Landlord for the Purposes of the NRLS?
Please note that a non-resident landlord for the purposes of the NRLS is not the same as a landlord who is non-resident for UK tax purposes more generally.
Suppose you have UK rental income, and your ‘usual place of abode’ is outside the UK. Then, for the purposes of NRLS, you are treated as a non-resident landlord. Even though the law does not state it, HMRC considers your absence of six months or more from the UK to mean that you have a usual place of abode overseas. Thus, you can be treated as a non-resident landlord for the purposes of NRLS. Whereas you are in face a UK resident for tax purposes.
It is possible that trustees and companies are non-resident landlords.
What are the Tax obligations of Non-Resident Landlords Under the NRLS?
Under the NRLS, you have the following tax obligations as a non-resident landlord:
Completing a Self-Assessment Tax Return
Usually, it is mandatory for non-resident landlords to complete a Self-Assessment Tax Return for every tax year. They should do so if they are receiving rental income from a UK property. It does not matter if they owe tax or not.
Withholding Income and Quarterly Tax Payment
Under the NRLS, it is the legal obligation of the tenant or the letting agent to deduct and withhold tax. They do so from the payments that are due to the landlord. Every quarter, they must pay this tax to HMRC.
Then, when they report their income via a Self-Assessment Tax Return, this will be deducted from any tax due. Therefore, it is crucial to understand your obligations under the non-resident landlord scheme.
Withholding Tax at Source Exemptions
If your rental income is low enough, then HMRC can determine that there is no need for reporting. They will give a confirmation in writing whether there is an exemption from quarterly reporting and payments. Thus, unless you previously advised, your tenant or letting agent needs to report and pay tax quarterly.
How Do You Know if You Have Any Obligations Under the NRLS as a Tenant?
According to the law, you must comply with various obligations under the NRLS, which is called operating the NRLS. That is, if the following applies to you:
- You make payment of rent directly to a non-resident landlord or to another individual who is not a UK letting agent.
- Weekly payment of rent is more than £100.
- HMRC may specifically ask you to operate the NRLS.
As a tenant, you have the right to deduct the tax you need to pay under the NRLS from your rent. You can also deduct from any other money that you owe to the non-resident landlord. Furthermore, you have the right to recover any tax you must pay to the landlord under the scheme. This is the amount you did not deduct from the rent or any other money you owe. It is important to under the non-resident landlord scheme.
HMRC advises you in writing that you do not need to deduct tax or submit annual returns under the scheme.
How Do You Know if Your Landlord Has Their Usual Place of Abode Abroad?
According to HMRC, this does not require any special enquiries, as it is usually evident. In case there is any doubt, you should get more information from the landlord. Nevertheless, it is not necessary to make any special enquiries if there is no basis to believe that a landlord has their usual place of abode overseas. Then, there is no requirement for you to operate the NRLS. You should know that if you pay rent to a UK letting agent, then you do not need to operate the NRLS.
What Happens if There is More Than One Landlord?
Suppose there is more than one landlord. They jointly own the property. In this case you should apply the £100 a week threshold separately to each landlord. This is because you are paying a share of the rent to each landlord.
Here is an example to elaborate:
You rent a property for which you pay £150 a week. A husband and wife jointly own this property in equal shares. They are both non-resident landlords. In this situation, you do not need to operate the scheme. The reason is that you only need to pay £75 a week to each landlord. It does not matter if you pay the rent as a single amount every week. It is crucial for you to comprehend the non-resident landlord scheme.
Now, let us suppose that there is more than one-resident landlord. Furthermore, you are paying rent of more than £100 a week. Then, you must operate the NRLS. You should do so in respect of the rent you pay to each landlord. It is a requirement for you to deduct tax from the rent you pay to a particular landlord. However, HMRC may authorise you to pay rent without deduction of tax.
When HMRC authorises you to not deduct tax, then you do not need to submit an annual return.
What Happens if There is More Than One Tenant?
If there is more than one tenant, then the £100 a week limit is applicable separately to each. This is in respect of their share of the rent.
To elaborate, here is an example:
Under a joint lease, two people share a property for £150 a week. A single non-resident landlord owns this property. Since each tenant’s share is £75 a week, neither of them needs to operate the non-resident landlord scheme.
Suppose two or more people share a property. However, under the lease, only one of them is the tenant. Then, the £100 a week limit is applicable to them. This is in respect of the full rent they must pay under the lease.
Now, change the scenario. Let us suppose there is more than one tenant that must operate the NRLS. They should do so in respect of their rent’s share. Moreover, they must pay it to the overseas landlord directly.
What are Your Obligations as a Tenant Operating the Non-Resident Landlord Scheme?
You must register with HMRC by writing to them if it is a requirement for you to operate the NRLS. For this, you need to give your own name and address. Also, you should give the details of your landlord and state that you want to register for the NRLS.
Then, you must calculate and pay the tax HMRC within 30 days at the end of each quarter. You should do so unless HMRC advises you not to. To pay the tax, you need to use return form NRLQ. HMRC usually issues this form to tenants. Following are the dates on which the four quarters end:
- 30 June
- 30 September
- 31 December
- 31 March
By July 5 of every year, you need to send a report to the landlord and HMRC using form NRLY.
Also, you should provide a certificate NRL6 to the landlord every year by July 5.
For four years, you should keep records of the following:
- Rent payments, including amounts and dates.
- Communication with the landlord. If you reached out to them regarding their residence status.
- Payment of expenses with their amounts, dates, descriptions, and copies of receipts.
To summarise, the NRLS is a scheme to ensure correct payment of tax by non-resident landlords. The tenant or letting agent must deduct tax before paying the rent to the landlord. However, there are cases where that is not necessary. If HMRC advises them not to deduct tax, then they cannot do so. There are plenty of advantages under the NRLS. Yet, you should also know about the disadvantages. Please make sure you know your obligations as a non-resident landlord. If you are a tenant, then you also have obligations when operating the NRLS.