Non resident landlord services
Written by Ray Coman
A landlord, regardless of where resident, is subject to UK tax on income and gains from UK property. Many non-resident landlords will be entitled to a UK personal allowance. This could result in no liability to income tax. However, a non-resident landlord is still obliged to file a UK Tax Return. On disposal of the property, a non-resident landlord is required to report a gain to HMRC within 30 days of completion. The disposal could result in liability to capital gains tax.
Broadly, UK residency is determined by the number of days a person is physically present in the UK. A person is automatically not-resident who works outside the UK and is present in the UK less than 91 days a year. A person is automatically resident if physically present in the UK for 183 days a year or more. If not automatically resident or automatically non-resident, the determinants are too numerous to summarise succinctly. The determinants of UK residency are explained in a separate guide on statutory residence.
In the tax year of departure or tax year of arrival, it is possible claim the split year treatment. This will apply if leaving the UK for a contract of work that last at least a complete tax year. The benefit of the split year treatment is that the leaver or arriver will only be liable to UK tax on world-wide income for that part of the tax year in which present in the UK. Further information can be read in the report on statutory residence.
A non-resident is not liable to UK tax on most income. Any income arising outside the UK is automatically outside the scope of UK tax. Investment income, such as bank interest and savings, is disregarded. Banks no longer automatically deduct tax on interest following the introduction of the savings allowance. If tax has been deducted at source, it should be possible to arrange for interest to be paid gross. The alternatives are to file a UK Tax Return. If tax is due in any case, in the country of residence, a Tax Return requirement could be avoided where UK tax is available to reduce local, foreign tax.
For non-residents, the UK state pension and private pensions are not liable to tax. As an exception, civil service pensions continue to be taxable. Profits of a self-employed person not resident in the UK will not be liable to UK tax.
Employment earnings are liable to UK tax (section 27 ITEPA.) A UK employer is obliged to operate PAYE if the product of an employee’s labour confers a benefit to the UK operations of that business. The system of payroll aims to deduct the correct amount of UK tax and national insurance from pay. A workday is a day in which a person works three hours or more, and employment earnings from a work day will be liable to UK tax regardless of the employee or director’s residence. If the only income is from UK employment, and income is less than £100,000 a year, a Tax Return would not be required.
In conclusion therefore, it is probable that a non-resident will only be liable to UK tax on rental income arising from the UK.
In many cases, a personal allowance will be available and there could be no tax to pay. However, a landlord still has to file a Tax Return even if there is no tax. This is because it will be necessary to complete residency pages of the form. The residency questionnaire would, as a minimum, state that a person is not UK resident, the basis on which the personal allowance is being claimed and the corresponding country code. To join the non-resident landlord scheme, explained below, it is a condition that tax affairs are up to date. The approval status could be withdrawn by HMRC for non-compliance. The let property campaign disclosure would be suitable for non-residents who need to bring their affairs up to date without suffering unnecessary penalties. The penalties are lower for an unprompted, or voluntary disclosure.
Many non-resident landlords will be entitled to a UK personal allowance. This includes UK nationals, EU citizens and residents of many other countries. HMRC have confirmed that EU citizens will remain entitled to the personal allowance post Brexit. Nationality is determined by the holding of a valid British passport or passport of the country to which that person has citizenship.
Certain jurisdictions do not provide a personal allowance under the terms of the double tax treaty with the UK. The most significant are China and the USA. Countries regarded as low tax jurisdictions (commonly known as tax havens) rarely confer eligibility.
For a non-resident landlord, UK rental profits will be regarded as overseas income in that person’s country of tax residence. It is therefore possible that UK income will be taxable in the country to which a person is resident. It is also possible that any UK tax suffered at source would be available to reduce liability to local tax. Coman&Co can only provide advice on a person’s liability to UK tax. However, this observation is made in order that landlords liable to UK tax can assess whether this would increase their overall tax burden. As a minimum, the possibility of tax relief merits further enquiry with a local tax advisor.
A non-resident landlord who is not part of the non-resident landlord scheme will have tax deducted at source. Tax is withheld at the basic rate, which is 20% at the time of writing. The letting agent withholds the tax and pays it over to HMRC. For those landlords who do not use a letting agent, the withholding of tax is supposed to be operated by the tenant. The tendency is for landlords to use letting agents especially if not resident. In practice, it is exceedingly rare for a tenant to be obliged to carry out tax collecting. This is because as explained below, most landlords will join the non-resident landlord scheme. Letting agents are required to register and report to HMRC about their clients and any tax withheld on non-residents.
HMRC regard an individual as a non-resident landlord if abroad for more than 6 months a year, even if UK tax resident. The 6-month rule is used to determine either deduction of tax at source from rents; or admission to the non-resident landlord scheme. As a separate matter, liability UK is tax is determined by UK residency. Typically, it will be necessary to be physically absent from the UK for more than 6 months to be a non- resident for tax purposes.
Tax withheld at source will be available to reduce any eventual tax liability. For non-residents entitled to a personal allowance, this would probably result in a tax refund. The reason is that tax is withheld at 20% but there is no tax liability on profits below the personal allowance.
On successful admission to the non-resident landlord scheme, a landlord will be eligible to receive rents gross. The scheme therefore offers a cash flow advantage. An application to join the scheme is made via form NRL1. The form often completed by a letting agent, or tax adviser working on behalf of the landlord.
HMRC will approve a landlord on the basis that their tax affairs are up to date, or on the basis that they do not have any tax liability. Where a landlord falls behind on filing of a Tax Return or payment of tax, the non-resident landlord scheme approval can be withdrawn. Once regularised, the scheme can be reapplied for.
A letter of approval will be posted to the landlord and should be forwarded to the letting agent. If not enrolled in the NRL scheme, a letting agent could already have deducted tax at source since the start of the tax year. Once approved, the letting agent will often refund any tax deducted at source. Any withheld tax not refunded by the letting agent would be deducted from liability on completion of the respective Tax Return.
Since 6 April 2015, all non-residents have been liable to UK capital gains tax. It is possible to use market value in April 2015 instead of original cost to determine the chargeable gain. Many property owners will benefit from this rebasing where values have risen between date of purchase and 2015. It is a requirement to report to HMRC within 30 days of completion date.
Liability to income tax is determined by rental profits. Typical deductions from expenditure include: buildings insurance, service charge, letting agency and accountancy fees. It is possible to deduct travel costs where exclusively for a business purpose. A tax reducer is available for mortgage interest. Where profits are less than the personal allowance, there is no tax benefit in claiming specific expenses, and it could be quicker to deduct the £1,000 allowance.
Coman & Co. are expert tax advisors for non-resident landlords. We can assist with:
- Applications to have rents deducted gross.
- Preparation and filing of the annual UK Tax Return.
- Advice on changing regulations and the best ways to minimise tax and avoid penalties.
- UK residency for tax purposes.
- Capital gains tax and inheritance tax implications of being non-resident.
- Implications of joint ownership, for instance with a husband or wife.
- We are well equipped to deal remotely and act as agent in dealing with HMRC on behalf of our clients.