If you’re a foreign investor earning rental income from UK properties, understanding your tax obligations is crucial. Despite living outside the UK, you are still liable to pay tax on any income you generate within the country. This article will guide you through the Non-Resident Landlord Scheme (NRLS), its tax implications, and how to manage your tax responsibilities as a non-resident landlord.
What is a Non-Resident Landlord?
A non-resident landlord (NRL) is someone who owns property in the UK but lives outside the country for more than six months each year. Even though they don’t live in the UK, they are still considered tax residents for their rental income in the UK. This applies not only to individuals but also to companies and trusts that earn rental income from UK properties.
For example, foreign investors purchasing UK property to benefit from the rental market are considered non-resident landlords for tax purposes. To simplify tax compliance, non-resident landlords must register with the HMRC’s Non-Resident Landlord Scheme (NRLS).
What is the Non-Resident Landlord Scheme?
The NRLS was introduced by HMRC to ensure that non-resident landlords pay tax on their UK rental income. This scheme, which has been in place since 1996, makes it easier for HMRC to collect tax from individuals or businesses that own rental properties in the UK but do not reside there.
Under this scheme, non-resident landlords can either manage their own tax obligations or appoint a letting agent or tenant to do so. If no agent is involved, tenants might be required by HMRC to withhold tax from the rental payments.
How to Apply for Gross Rental Income
Non-resident landlords have the option to receive their rental income gross (without any tax deductions), but this typically applies only if the landlord has a good tax standing. To qualify, landlords must ensure their tax obligations are up to date, and they must apply to HMRC via the NRL1 form.
If HMRC approves the application, the landlord will receive the rental income in full, without deductions, and be responsible for filing self-assessment tax returns. Each landlord must apply separately if the property is jointly owned.
What Taxes Do Non-Resident Landlords Pay?
Non-resident landlords are required to pay income tax or corporation tax, depending on their legal status. Individuals, sole traders, or trusts will pay income tax, while companies will pay corporation tax on rental income.
The non-resident landlord tax rate follows the same income tax rates as UK residents:
- Basic Rate (20%) on income between £12,571 and £50,270
- Higher Rate (40%) on income between £50,271 and £125,140
- Additional Rate (45%) on income above £125,140
For companies, the corporation tax rate is:
- Small Profits Rate (19%) for profits under £50,000
- Main Rate (25%) for profits over £250,000
- Marginal Relief for profits between £50,000 and £250,000
How to Pay Non-Resident Landlord Tax
Once approved to receive rental income gross, landlords must report their rental income and expenses to HMRC via self-assessment. If a letting agent or tenant is handling the tax on behalf of the landlord, they will ensure the proper tax is withheld and paid quarterly using the NRLQ form.
Tax returns are due quarterly, with deadlines on 30 June, 30 September, 31 December, and 31 March. Additionally, landlords must submit an annual report using the NRLY form by 5 July, including a certificate (NRL6) for the landlord.
Penalties Under the NRLS
Failing to comply with the NRLS can result in hefty penalties. If you don’t register with HMRC, miss deadlines, or fail to submit tax returns, penalties are imposed based on the length of the delay. For instance, if you file late, the penalty starts at £100 and increases the longer the payment is delayed. After six months, a further 5% of the tax owed is added, and the penalty increases significantly at one year.
The system is designed to ensure landlords meet their tax obligations on time. Therefore, it’s essential to stay up-to-date with tax filings to avoid penalties.
What if There Are Multiple Tenants or Landlords?
The NRLS operates on a £100 per week rent threshold per tenant. If the rent exceeds this amount, tenants may be required to withhold tax on rental payments. If there are multiple tenants or multiple landlords, the threshold applies to each individual tenant or landlord.
For example, if two tenants pay £150 weekly for a property, each paying £75, the tax requirements do not apply. However, if one tenant pays £150 while another shares the rent, the tenant paying over £100 must comply with the NRLS.
Conclusion
Understanding the Non-Resident Landlord Scheme is essential for foreign investors and non-resident landlords who earn rental income from UK properties. Whether you manage your own tax obligations or appoint a letting agent or tenant, it’s crucial to ensure compliance to avoid penalties. By following the rules and using the proper forms, you can navigate the tax system efficiently and continue to benefit from your property investments in the UK.
