Profits deriving from UK rental receipts are taxable in the UK on non-resident landlords as they derive from a UK-situs asset. As such all non-resident individuals and entities have a UK tax filing obligation and will be subject to UK tax on rental profits.
Appropriate structuring may serve to reduce the overall rate of tax payable and advice should be taken in this regard (please ask us for our briefing sheets on property structuring). However, the general basis of taxation of rental income is as follows:-
- Non-resident individual owner – at a rate of between 20% and 45%
- Non-resident company – at a rate of 20%
- Non-resident discretionary trust – at a rate of 45%
Filing obligations of non-resident landlords
Non-resident individuals, non-resident companies and trustees of non-resident trusts in receipt of UK rental income have an obligation to register with HM Revenue & Customs (HMRC) and file a Self-Assessment Tax Return each year declaring any UK rental income.
Failure to register and file UK tax returns may lead to the non-resident landlord becoming liable to penalties and interest in respect of late payment of UK tax or late filing of returns.
Non-Resident Landlord Scheme (NRLS)
The NRLS is the mechanism by which HMRC collects the tax due on the UK rental income of non-resident landlords. Non-resident landlords are individuals, companies or trustees who receive rental income from property owned in the UK and whose “usual place of abode” is outside the UK.
The scheme requires UK letting agents (or tenants if the weekly rent exceeds £100 and no letting agent is appointed) to deduct basic rate tax (currently 20%) on any rental income they collect on behalf of non-resident landlords and pay this tax over to HMRC on a quarterly basis.
Non-resident landlords can offset any tax deducted under the NRLS against their tax liability when they complete and file their UK Tax Return.
However, it is not necessary for letting agents or tenants to deduct tax from rental income of a non-resident landlord if HMRC informs them by letter that the landlord is approved to receive the rental income gross.
Approval to receive rental income with no tax deducted
Non-resident landlords may apply to HMRC for approval to receive rental income gross in cases where either:
- Their UK tax affairs are up to date;
- They have not previously had any UK tax obligations; or
- They do not expect to be liable to UK income tax for the year in which they apply.
The application must be made to HMRC’s Personal Tax International department using the necessary form depending on whether the non-resident landlord is an individual, a company or a trustee. Applications by individuals can be made no more than three months before the individual leaves the UK, where appropriate.
HMRC may approve an application by notice in writing to the non-resident landlord provided that the application form is completed correctly and it is satisfied that the non-resident landlord making the application will comply with his or her UK tax obligations.
If the application is successful, HMRC will also issue a separate notice to the letting agents or tenants authorising them to pay rental income to the non-resident landlord without deducting UK tax.
Withdrawal of approval
HMRC may withdraw approval by issuing notice to the non-resident landlord if:
- It ceases to be satisfied that the information provided in the original application is correct;
- It is no longer satisfied that the non-resident landlord will comply with their UK tax obligations; or
- The non-resident landlord fails to provide the information requested by HMRC.
The notice will state the reason for the withdrawal and the date from which it is effective. The landlord will have 90 days from the date of the notice to appeal the withdrawal.
Non-resident landlords have an obligation to register with HMRC and are taxable in the UK on profits derived from UK property. Most non-resident landlords will prefer to seek and obtain HMRC approval in order to receive rental income without basic rate tax deducted.
The non-resident landlord will also be required to file an annual UK Tax Return and settle their tax liability by 31 January after the end of the tax year.