The Non-Resident Landlord Scheme (NRLS) is an HMRC scheme that requires landlords living outside the UK for more than six months a year to pay tax on their rental income from UK properties. So if you have purchased investment properties that you’re renting out in the UK but spend most of the year abroad, then understanding this scheme is crucial. In our guide we will walk you through your obligations, registration requirements, and how to manage tax efficiently under the NRLS.
As we examine the NRLS more closely, you should keep in mind that the scheme exists as just one part of the UK’s tax system, catering specifically to individuals or companies who receive rental income from a UK property but whose usual place of abode is not in the UK. This includes UK residents who have taken up residence elsewhere for more than six months, expanding the definition to those who may not traditionally consider themselves ‘non-residents’.
Understanding the NRLS is important to make sure that you abide by UK tax laws and to optimise your rental income. But being a non-resident landlord under NRLS does not automatically classify you as a non-resident for other UK tax purposes. The statutory residence test may still deem you a UK resident for tax purposes, depending on your circumstances.
The term ‘non-resident landlord’ applies to any person or entity that rents out a UK property but has their usual place of abode outside the UK for more than six months and is categorised under this term. This classification is significant as it determines how rental income is taxed and what responsibilities you have to bear.
These individuals or companies are not just absentee landlords; they are often professionals, retirees, or even members of HM Armed Forces and other Crown Servants who have assignments abroad. The resident landlord scheme NRLS is the framework that ensures these non-resident landlords contribute their fair share of taxes whilst also protecting their interests.
Non-resident landlords looking to receive their rental income without tax deductions at source need to seek approval from HMRC and submit the relevant form based on their circumstances:
Be aware that approval is not a one-time guarantee; you may be required to supply additional information in the future, and failure to comply can result in the withdrawal of approval. If your application encounters any issues you can appeal within 90 days of the notice.
Filing a UK self-assessment tax return is required each tax year that a non-resident landlord generates rental income from their UK property. This involves completing both the ‘residence’ and ‘property’ sections of the tax return to provide a comprehensive picture of your rental business.
Good record-keeping is essential, with a four-year retention requirement for all relevant documents, including rental payments and expenses. Staying up to date with your UK tax affairs is not only necessary for applying for gross rental income treatment but also for staying on HMRC’s good side.
As an overseas investor, you likely won’t be physically present to manage your rental properties, but your letting agents and tenants are and have a role in compliance with NRLS. Letting agents are tasked with the responsibility of deducting tax from your UK rental income and remitting it to HMRC. Tenants, too, must pay rent and withhold tax from their rent payments if they pay more than £100 per week and there is no letting agent involved.
The obligations of letting agents and tenants extend beyond tax withholding to include quarterly reporting to HMRC and the issuance of a certificate to the landlord and HMRC, detailing the deducted tax. Non-compliance can have serious repercussions, making it imperative for landlords to ensure their agents and tenants are well-informed and diligent in fulfilling their roles under NRLS.
When it comes to calculating and paying tax under the NRLS, letting agents and tenants must go through a series of steps and deadlines. The tax year for NRLS purposes runs from 1 April to 31 March, and all rental income received within a quarter is subject to calculation. As a landlord, your tax is calculated after deductible expenses are accounted for, which can affect the net amount owed.
The UK standard personal allowance, which is £12,570 for the 2022/23 tax year, applies to all income from rental properties. This means you are required to report the income to HMRC but tax is only due when the taxable amount after deductions exceeds £12,570 within the tax year.
The first £1,000 of property rental income is exempt from UK tax if no expenses are claimed against it.
Should the rental income surpass £2,500 without any claimed allowable property expenses, or exceed £9,999 when such expenses are claimed, it must be reported to HMRC.
Upon surpassing this threshold, the following UK income tax bands apply to your rental income:
For those classified as non-residents for UK tax purposes, only the income generated within the UK is liable for UK income tax.
Payments to HMRC are due quarterly, and the deadlines are non-negotiable. Failing to submit payments within 30 days at the end of each tax quarter can lead to penalties.
Letting agents and tenants who participate in the scheme are required to withhold tax and make payments to HMRC on a quarterly basis, corresponding to these specific 3-month periods ending on:
Non-resident landlords should also be aware that they may be entitled to a personal allowance, which can reduce the overall tax burden if certain conditions are met.
Allowable expenses are those that can be deducted from the rental income, reducing the taxable income and, consequently, the tax payable. These expenses must be of a revenue, not capital, nature and can range from agent fees to maintenance and insurance costs.
Allowable property expenses cover a variety of costs such as agent fees, property maintenance, legal services, insurance, and upkeep expenses like cleaning and gardening. HMRC’s Property Income Manual has more in-depth information regarding allowable expenses.
The NRLS is not one-size-fits-all, particularly when it comes to jointly owned properties or companies with UK rental income. Joint owners need to tackle their tax obligations individually, with each person applying separately for their share of the rental income. This includes married couples and civil partners, who must each complete the application process independently.
For companies, managing tax obligations under NRLS is equally important. Each company must be mindful of its responsibilities for each property owned, ensuring compliance and proper handling of tax liabilities.
NRLS is complex and can be intimidating seeking professional help is generally advised. Tax specialists and accountants can offer invaluable assistance with:
Their expertise can help you through the complexities of NRLS and ensure that your tax affairs are in order.
Professionals can not only help plan to reduce tax bills but can also review employment contracts for those planning to move abroad, advising on the impact of Income Tax and Capital Gains Tax changes. By consulting with experts, you can steer clear of potential tax pitfalls, pay tax efficiently, and keep your rental business running smoothly.
At Prosperity Wealth we provide off-plan property investment opportunities that cater to the needs of overseas investors that would be non-resident landlords. Our monthly payment plans are designed to help build a deposit and establish a strong property portfolio. Investing in property with Prosperity Wealth gives you access to investment options that are designed to match your financial goals, including benefits such as staged payments and the potential for capital growth during the construction phase.
In conclusion, the Non-Resident Landlord Scheme is a critical aspect of managing UK rental income for those living abroad. By understanding and fulfilling your responsibilities and taking advantage of available exemptions, you can manage your NRLS duties effectively and look forward to a financially rewarding future.
A non-resident landlord under the NRLS is an individual or company that rents out a UK property but usually lives outside the UK for more than six months in a tax year. This status has tax implications.
The penalties for non-compliance with the NRLS can include fines for late tax returns, daily penalties for prolonged delays, and higher charges for careless or deliberate errors. It’s crucial to maintain accurate records and make timely filings to avoid these consequences.
Yes, tenants are exempt from operating the NRLS if they pay rent of £100 a week or less, unless HMRC directs otherwise. Letting agents and tenants also do not need to operate NRLS if they know the landlord mostly resides in the UK.
If HMRC withdraws approval for no tax deductions under NRLS, they will notify the landlord to start deducting tax from the rental income again, allowing the landlord to appeal the decision within 90 days.
Yes, joint owners of a UK rental property can be treated separately for tax purposes under the NRLS, with each owner responsible for their share of tax liabilities and separate tax returns to HMRC.
