The non-resident landlord scheme prevents non-resident landlords from avoiding tax on the rental profits of their UK property, whether they refrain from doing so by intention or on the belief that tax is not due.
The UK tax code is notorious for its complexity. Even more so where international elements become involved.
The non resident landlord scheme stems from one of the two basic principles of international taxation which determine one’s liability to taxation within any given jurisdiction:
- The Source Principle – income or gains which derive from a source within a jurisdiction will be subject to tax in that jurisdiction.
- The Residence Principle – income or gains deriving from any worldwide source will be subject to tax in the jurisdiction in which one is resident.
Clearly, the source principle is in play here.
The fact is, if you receive income from the letting of UK property, any income generated from those lettings will fall within the UK tax net.
Who is a ‘non resident landlord’?
The non resident landlord scheme applies to landlords in any shape or form, who have UK rental income and who have a usual place of abode outside the UK.
Individuals, partnerships, companies and trustees all potentially fall within the remit.
- Individuals are usually non resident where they spend more than 183 days living abroad. This is also the case in determining ones ‘usual place of abode’. One may have a usual place of abode outside the UK whilst continuing to remain resident in the UK. Residency is determined using the Statutory Residence Tests (SRTs) provided by HMRC.
- For partnerships, each partner is treated as an individual landlord and these rules will apply to the individual partners on their share of the profits.
The test for individuals in regards to the non resident landlord scheme is strictly based on whether or not one lives abroad for 6 months.
One may have a usual place of abode outside the UK whilst continuing to remain resident in the UK. Residency is determined using the Statutory Residence Tests (SRTs) provided by HMRC. See Part 1 and Part 2 of our articles on the statutory residency tests for more information.
The test for corporate landlord’s residency in the UK is twofold:
- We first look to establish where the company was incorporated. If incorporated in the UK, it will be UK tax resident.
- Where it is incorporated outside of the UK, it will be UK resident if its central management and control or main place of business is in the UK. This is usually where the board of directors manage and control the company via board meetings and executive decision making.
A company’s usual place of abode will therefore be where it is incorporated outside of the UK and its main place of business is outside the UK. If this is abroad, it is caught within the non-resident landlord scheme. If not, it will be subject to UK tax as a UK resident.
A trust is non resident where none of the trustees have their usual place of abode outside the UK or where some of the trustees are resident in the UK and the settlor of the trust was not resident, ordinarily resident or domiciled in the UK.
Where there are multiple trustees and one or more has a usual place of abode in the UK, the trustees will not be considered a non resident landlord for the purposes of the non resident landlord scheme.
Trustees have a usual place of abode outside the UK if all the trustees have a usual place of abode outside the UK (following the rules for individuals and companies, as appropriate). If one or more of the trustees does not have a usual place of abode outside the UK, the trustees are not a non resident landlord for the purposes of the scheme.
The non resident landlord scheme
The non resident landlord scheme places the obligation to collect and pay income tax onto either the tenant (where rents exceed £100 per week). Where letting agents are involved, they will be required to follow the scheme regardless of the amount of rent which is being collected.
The basic rate of income tax (currently 20%) will be deducted from any payments of rent to the non resident landlord by the tenant or landlord.
However, a non resident landlord can apply to HMRC to receive their rental proceeds without deduction of tax. On successful application, the non resident landlord may need to register for self-assessment in the UK and submit self-assessment tax returns.
HMRC will also provide the tenant or letting agent with confirmation in writing that they are no longer required to deduct tax from their rental payments.
Non resident landlords
As mentioned above, non resident landlords may apply to receive rents gross as opposed to the letting agent / tenant withholding tax on behalf of HMRC. The following forms are required for such an application
- For individuals: NRL1
- For companies: NRL2
- For trusts: NRL3
Such an application will usually be accepted where their UK tax affairs are correct and up to date, they have never had any UK tax obligations or they do not expect to be liable to UK tax. Naturally, most landlords would prefer to receive their rental proceeds gross for the purposes of control and administration.
There are also cashflow advantages. A non resident landlord may receive his rent gross of any UK tax. This tax would not be due until 9 months from the end of their accounting period.
Where such an application is accepted, the following obligations fall on the non resident landlord:
- Preparation of accounts for UK rental properties
- Register for and the submission of UK self-assessment tax returns
- Confirmation of residency
Non resident landlords should also keep up to date with the changes in UK taxation to rental properties. For example, the recent changes regarding the restrictions on individuals in regards to the deductibility of finance interests costs relating to UK residental property businesses
Letting agents / tenants
Under the non resident landlord scheme letting agents and tenants will bear the filing and administrative obligations including:
- Registering with HMRC as an agent for non resident landlords (Form NRL4)
- Accounting for tax on a quarterly basis (unless otherwise instructed to do so by HMRC)
- Preparing an annual information return (Form NRLY)
- Providing certificates to the non-resident landlord detailing any tax deduction from rental payments (Form NRL6)
Tenants are not required to pay tax under the non resident landlord scheme if they pay rent of less than £100 per week, or unless HMRC requests them to do so. This does not apply to letting agents.
The non resident’s tax liability
It is unlikely for the tax deducted by the letting agent or tenant to be the correct amount of tax due by the non resident landlord. This is because the rules of the non resident landlord scheme are different from the rules for calculating the landlord’s tax liability.
Therefore, non resident landlords can offset the tax deducted from their UK rental income against their own tax bill when they complete their self-assessment tax return. Where the tax deducted by the agent is greater than the liability, the non resident landlord may claim repayment of any excess.
Agents may deduct expenses where they can be ‘reasonably satisfied’ that it is allowable in computing the profits of the non resident landlords rental business. HMRC accepts that letting agents and tenants may not be tax experts. As such, this provides a protection for those withholding the tax. They will not be penalised in incorrectly deducting any tax due.
Non resident landlord scheme: interest & penalties
An assessment may be made where HMRC have reason to believe that an amount should have paid but was not; or a quarterly return is incorrect. In these circumstances Charities, Savings and International will make the assessment.
Penalties may be incurred by letting agents and tenants whom incorrectly submit quarterly or annual returns, or if the returns are not submitted on time. The maximum penalty for an incorrect return is £3,000. It is common for the penalty to be reduced for numerous factors.
Where an account for tax is incorrect, HMRC will normally seek to recover the tax from the letting agent or tenant.
Interest may be payable where the letting agent or tenant does not pay tax due by the due date. Interest may be charged from the date the tax became due until the date it is paid. Where interest is charged in relation to the late payment of tax, and the tax is subsequently repaid, the letting agent/tenant may not recover the interest.
It would seem unfair to place such a burden on someone who may not have the tax knowledge to accurately record, prepare and pay the necessary non resident landlord tax. It is for this reason HMRC provide the protection for ‘reasonable satisfaction’ of deductible expenses etc.
Clearly, a large responsibility is placed on the tenant or letting agent on renting a property. Much administrative burden and the possibility of penalties and interest are shifted from the landlord to the agent. This may potentially influence one’s decision to let property from a non resident individual… especially where one’s tax knowledge is limited.
Enterprise Tax Consultants can help you with the non resident landlord scheme
If you are unsure as to your tax position or obligations as a non resident landlord, we can assist. The services we are able to offer include:
- Advice in relation to your residence position for UK tax purposes
- Advice on how to apply any relevant UK double taxation agreements
- Advice in relation to your UK income, capital gains and inheritance tax exposure
- Advice and assistance in relation to the disposal of UK residential properties and Non-Resident Capital Gains Tax.
- Advice in relation to tax efficient structuring of your affairs
Contact us for a no-obligation initial conversation with an experienced tax adviser.