Do overseas landlords need to pay tax on rental income?
- TBA
- Nov 13, 2024
- 4 min read
Updated: Feb 25
The UK property market has always been attractive to investors, including not just new residents in the UK but also many overseas landlords who live elsewhere but still want to invest in UK rental properties.
But are you aware that overseas landlords are subject to the Non-Resident Landlord Scheme (NRLS)?
In most cases, the UK does not tax non-residents. However, if non-residents earn income from the UK, they are required to pay taxes on it. To address this, the government introduced the Non-Resident Landlord Scheme (NRLS) in 1996.
This scheme allows HMRC to collect taxes in advance from landlords living outside the UK. The scheme applies not only to landlords themselves, but also to those managing properties in the UK on behalf of overseas friends or family members.
1.How does the NRLS work?
The Non-Resident Landlord Scheme (NRLS) applies to ‘non-resident landlords’ (also referred to as overseas landlords) and places responsibilities on both the tenant and letting agents.
The tax year for NRLS runs from April 1 to March 31. If you live abroad but earn income from renting property in the UK, this income is typically subject to UK tax, just like any other income sourced from the UK. However, as it is difficult for HMRC to track individuals living overseas, the NRLS is designed to deduct taxes in advance.
2.Who qualifies as a ‘non-resident landlord’?
Under the NRLS, if you spend six months or more per year outside the UK but own rental property in the UK, you are considered a ‘non-resident landlord’. This is different from the broader tax definition of a ‘non-resident’.
In practice, HMRC considers people who have left the UK for six months or more as having a habitual residence outside the UK. Even if you are a UK citizen, you are still classified as a non-resident landlord if you do not meet the residency conditions.
Furthermore, the NRLS applies not only to individuals but also to companies and trustees that own rental properties in the UK but are based abroad. If you qualify as a non-resident landlord, you must register with the NRLS to manage your tax obligations.
Here are the steps:
Fill out the NRL form: Individuals use form NRL1, companies use NRL2, and trustees use NRL3.
Provide documents: Submit evidence of living abroad, such as utility bills, rental agreements, or bank information.
Submit to HMRC: Send the completed forms and documents for approval.
3.Letting agents and tenants’ responsibilities
If you do not manage your UK property yourself, you may hire a letting agent or ask friends or family to help, who will then act as your letting agent.
Alternatively, you may manage the property directly from abroad by liaising with tenants.
In these cases, your letting agent or tenant has a legal responsibility under the NRLS. They must send quarterly reports to HMRC and handle the paperwork.
Additionally, they are responsible for deducting the required tax from your rental income before forwarding it to HMRC.
4.How is tax deducted?
UK tax law mandates that 20% (the basic rate of income tax) be deducted from rental income paid to a non-resident landlord before the landlord receives it.
For example, if a letting agent is managing a property and needs to pay the landlord £1,000 in rent, they must deduct £200 (20%) in tax, pay £800 to the landlord, and send £200 to HMRC.
The purpose of this rule is to prevent rental income from flowing overseas and eroding the UK tax base. However, non-resident landlords can request to receive the full rental income without tax being deducted in advance by applying for ‘full rent receipts’ from HMRC.
If granted, the landlord can manage their tax obligations themselves, but they must ensure they pay taxes on time.
5.What if you don’t apply for full rent receipts?
If non-resident landlords do not apply for or receive approval for full rent receipts, 20% tax will automatically be deducted from their UK rental income. Any pre-deducted tax must be paid to HMRC within 30 days after each calendar quarter ends.
Letting agents or tenants are responsible for making these deductions, submitting payments, and filing quarterly and annual tax returns. Tenants must also deduct tax if there is no letting agent involved and the weekly rent exceeds £100.
6.What if there are multiple landlords?
If multiple landlords co-own a property, each landlord must individually register for the NRLS and submit their self-assessment tax returns.
Tax deductions under the NRLS will be calculated and paid based on each landlord’s ownership share in the rental income.
Some advice from TB Accountants
It’s important to note that even if a non-resident landlord applies for full rent receipts, this does not reduce their tax obligations.
Overseas landlords must review their tax situation in their country of residence and pay any owed taxes on time. Additionally, if letting agents or tenants are responsible for managing the property, you must ensure that they fully understand the NRLS rules. Non-compliance can have serious consequences.
At TB Accountants, we offer a range of services to help non-resident landlords register for and comply with the NRLS. We’ve assisted many overseas landlords with tax returns, dual tax treaties, and personal allowances.
If you need help, feel free to contact us for professional advice.
