If you live overseas and rent out a property in the UK, your rental income is subject to taxation according to the rules of the Non-Resident Landlord (NRL) Scheme. However, many landlords remain unfamiliar with the NRL Scheme, and how it operates, until they receive a statement of account from their managing agent indicating that some of their rent has been deducted for tax. It can be particularly surprising for landlords previously based in the UK that have only recently relocated.
Our landlord guide to the Non-Resident Scheme will help you to understand how it works, your obligations, and what you need to do.
What is the NRL Scheme?
The NRL Scheme is a scheme for taxing the rental income of landlords who live overseas.
Under the rules of the scheme, letting agents acting on behalf of non-resident landlords must deduct tax from their rental income and pay this to HMRC every quarter. Where there is no managing agent, tenants who pay more than £100 a week in rent directly to the landlord must also deduct tax from their rent and pay this on their landlord’s behalf.
Tenants who pay less than £100 per week do not have to operate the scheme unless instructed otherwise by HMRC, but agents must operate the scheme regardless of whether the rent collected is less than £100 a week.
Agents and tenants do not have to deduct tax from the rent if the HMRC notifies them in writing that a non-resident landlord has been approved to receive their gross rental income without tax deductions.
Failure to deduct tax where required incurs significant financial penalties for agents and tenants, and landlords who do not settle their tax liability are at risk of prosecution for criminal tax evasion.
What is a non-resident landlord?
For tax purposes, a non-resident landlord is any property owner whose ‘usual place of abode’ is outside of the UK for at least six months of the tax year. A landlord’s ‘usual place of abode’ might be a place where they live for six or more months out of the year, but it does not need to be their main or permanent home.
Standard tax definitions of residence (e.g the Statutory Residence Test) do not apply in the case of non-resident landlords. It is this ‘usual place of abode’ and not non-residence that determines whether or not a landlord falls within the non-resident landlord scheme for tax purposes. It is therefore possible to be a UK tax resident and still be a non-resident landlord for the purposes of the scheme if you spend more than six months of the year outside of the country.
What is non-resident landlord tax?
There is no specific tax for non-resident landlords - this is a common misunderstanding. The NRL Scheme simply recovers UK income tax (20% of the gross rent less permitted deductible expenses - e.g agency fees or repairs).
Non-resident landlords do not have a special tax return either, they declare their rental income and expenses on the property pages of the standard UK self-assessment return (or file a corporation tax return if the property is owned by a registered company).
The government’s NRL guidance notes advise that the tax deducted at source under the NRL scheme is unlikely to be equal to your actual liability, because the scheme rules are different to the rules for calculating your tax liability as a landlord. When completing your self-assessed tax return, you can set off tax collected under the NRL scheme against your own tax bill, and claim back any excess tax deducted from your rental income.
How do I receive my rent without deductions?
Most non-resident landlords prefer to receive their gross rent to avoid cash-flow issues. If you would like to receive your rental income without tax deducted, individual landlords can complete and file an NRL1i form with HMRC.
Only the landlord can complete the form - an agent may be able to offer guidance, but they cannot file anything on your behalf. Applications may be refused where there are concerns that information provided is inaccurate or that a landlord won’t satisfy their UK tax obligations. This might be because your filing history isn’t up to date or because you have been sanctioned in the past for tax offenses. If neither of these circumstances apply then receiving approval should be straightforward.
Please note that receiving approval to receive your gross rent does not constitute a tax exemption - you will remain liable for paying tax on your rental income, but you will be responsible for settling the liability yourself rather than having the agent/tenant take care of this on your behalf.
Who can apply for approval to receive rent without deductions?
You can apply for approval to receive rental income without any tax deducted through the NRL scheme if:
- your UK tax affairs are up to date; or
- you have never had any UK tax obligations; or
- you do not expect to have any tax liabilities in the UK in the same year that the application is submitted.
I already file self-assessed tax returns. Do I still need to register with the scheme?
Yes, you still need to apply for approval to receive your gross rental income. Agents and/or tenants are obliged to withhold rent and pay tax on your behalf unless they are notified directly by HMRC that you have been approved to receive the rent in full.
I have already received approval to receive my gross rental income, why is my agent/tenant still withholding tax?
Agents and tenants cannot transfer the gross rent before without receiving confirmation that a landlord has been approved through the NRL scheme directly from HMRC. A notice held by an old agent or tenant cannot be transferred to a new agent or tenant.
If you instruct a new agent to act on your behalf, or start a tenancy with new renters, you will need to alert the HMRC and send them the details of your new agent/tenant so that they can notify them of your exemption under the scheme.
What happens if a property is jointly owned by landlords with different residency status?
If a property is jointly owned and one or more of the proprietors is a non-resident landlord, then the share of rental income attributable to any landlord living overseas falls within the scope of the NRL scheme.
Each owner is treated as a separate landlord with respect to their share of the rental income by the scheme, even if the joint owners are spouses. Any non-resident landlords must therefore make an individual application to the scheme to receive their gross share. For example, a husband and wife who jointly own a property and share a usual place of abode outside of the UK would need to make separate applications; if one party received approval but the other didn’t, the agent/tenant would have to withhold tax on half of the rental income.
Agents and tenants would also be obliged to withhold tax on the share of income subject to scheme regulations even if rent were transferred in one lump sum to one of the landlords based in the UK.
If you’re an overseas landlord looking for a trustworthy partner to handle your legal and property management obligations, we have recently launched our revamped property management service. You can learn more about our plans to disrupt the traditional property management sector here, or visit our website to learn more about our services.
If you would like to speak with us about your property needs, contact us via our website to find out how we can help.