Landlords who own rented property in the UK, but spend more than six months living abroad, are classed as ‘non-resident landlords’.
In this situation, there are strict tax rules in place for landlords, tenants, tenant finders and letting agents under the mandatory Non-Resident Landlord Scheme (NRLS), introduced in 1996 to ensure that UK income tax is paid on UK rental income.
Breach of the rules can lead to hefty fines, so it’s vital that all concerned understand the requirements.
Our comprehensive guide explains everything you need to know about the scheme, who it applies to and what they need to do.
- Who is classified as a non-resident landlord?
- What is the Non-Resident Landlord Scheme?
- What do non-resident landlords need to do under the NRLS?
- Obligations of tenants under the NRLS
- Obligations of letting agents under the NRLS
- Tenant finders and the NRLS
- What are the penalties under the NRLS?
A non-resident landlord is someone who owns and rents out property in the UK but lives overseas for more than six months in any tax year.
If HM Revenue and Customs (HMRC) judges that a landlord’s “usual place of abode” is in another country, even if they have UK tax residence, they are classed as a non-resident landlord.
- people posted abroad in the armed services, or other Crown servants, such as diplomats and ambassadors.
- companies and trustees which have their main place of business, or a registered office, outside the UK.
Using a PO Box or ‘care of’ address in the UK will not be accepted by HMRC as a usual place of abode.
Where a property is jointly owned, with one owner living in the UK and one classed as a non-resident landlord, income tax payable will usually be split in proportion to the share ownership of each landlord. Only the part owned by the non-resident landlord is subject to the NRLS.
The HMRC Non-Resident Landlord Scheme is used to tax the rental income from UK-based properties of landlords who live overseas for more than six months of the year running from 1st April to 31st March.
Even though the landlord lives overseas, the income is taxed by the UK government even if the rent is paid into an overseas bank account.
But because of the potential difficulties for HMRC in pursuing tax due from those living overseas, under the NRLS there is a legal duty on the tenant or letting agent to withhold the tax before the rent is paid to the landlord.
The withheld tax is then paid to HMRC every three months.
When the overseas landlord completes a UK Self Assessment Tax Return, any tax withheld by the tenant or letting agent is available as a deduction against their UK tax liability.
However, non-resident landlords who fulfil certain criteria can register with the NRLS and apply to have their rent paid in full and pay the tax themselves via their tax return.
Non-resident landlords who wish to receive their rental income from tenants in full without the tax already deducted, must register with the NRLS.
Landlords can apply if:
- their UK tax affairs are up to date;
- they have not previously had any UK tax obligations;
- they do not anticipate having any UK tax liabilities in the same tax year, such as if their total income falls below their personal allowance.
The application to receive rental income gross can be completed online or by post by completing the NRL1. Each shareholder in a jointly owned property is required to complete their own form.
Once registered, non-resident landlords must settle their own tax liability after reporting their income and expenses on the UK property pages (SA105) of the self assessment tax return.
There are no particular obligations on landlords who do not register with the NRLS, instead the onus is on the tenant, letting agent or tenant finder to deduct any tax due before paying rent to the landlord.
How much tax do I pay as a non-resident landlord?
A personal allowance of £12,570 (for 2021/22) can be deducted from the non-resident landlord’s profit before normal income tax rates are charged on rental income.
The base rate of 20% is charged between £12,571 and £50,270, increasing to 40% up to an income of £150,000, and 45% above that.
For companies non-resident landlord corporation tax is paid at 19%.
What other tax implications are there for non-resident landlords?
It’s important for non-resident landlords to remember that they are liable to pay tax on income from UK-based rented properties even if they also pay tax on the income in another country.
If you are resident in another country for tax purposes, you may well be liable to pay tax on your entire income in that country.
In that case you may be able to claim credit for the UK tax against the tax you pay in your country of residence. This will depend on the tax rules of the company you are residing in.
You may also be liable to pay capital gains tax on the sale of UK property if you live overseas.
As a tenant, you have certain obligations if you:
- pay rent directly to a non-resident landlord, and not to a letting agent;
- pay more than £100 a week in rent;
- receive a notice from HMRC.
Assuming you satisfy these criteria, you must register with HMRC by writing to them within 30 days of the start of the tenancy, providing your name and address and the names and addresses of the non-resident landlords. This doesn’t apply if HMRC have advised that you do not need to register because your landlord has been accepted to submit with their own tax payments.
For tenants under the scheme there are a few things you will need to do.
- Calculate the tax you need to withhold from your rental payments.
- Use form NRLQ to pay the tax to HMRC within 30 days of the end of each quarter.
- Submit a report to HMRC and the landlord each year by the 5th July using form NRLY.
- Provide a certificate of tax liability (NRL6) to the landlord each year by 5th July.
- Keep records for four years of rent paid (with dates and amounts), any correspondence with the landlord, and full details of any expenses incurred on behalf of the landlord.
Tenants have the right to deduct any tax they have to pay from their rent or from any other money owing to the non-resident landlord.
They also have the right to recover from the landlord any tax they pay under the scheme where they did not deduct it from their rent or other money owing.
See the government guidance on tenants paying tax on rent to landlords abroad.
How to calculate the tax to withhold and pay to HMRC
Tenants will need to do a simple calculation to work out how much tax to withhold and pay to HMRC each quarter.
Add up the rent paid in that quarter, then take away any expenses paid on behalf of the landlord (such as for maintenance and repairs), and multiply by 20% (the basic rate of tax).
What if there is more than one tenant?
The NRLS only applies to tenants named on the tenancy agreement. If two or more people share a property but only one of them is the named tenant under the lease, then the £100 per week threshold applies to that person for the total rent paid.
Where there is more than one tenant the £100 a week threshold applies to each tenant’s share of the rent.
If two joint tenants pay a total of £180 a week rent; their individual £90 a week share falls below the threshold where the NRLS becomes applicable.
If the weekly rent was £250, then each of them would need to separately register with the NRLS and fulfil the requirements.
What do tenants do if there is more than one landlord?
If the property you rent is jointly owned, then effectively you are paying a share of rent to each landlord (or part owner), and the £100 a week threshold should apply separately to each of them.
Therefore, if you rent a property owned equally by two non-resident landlords for £160 a week, you are paying each of them £80 a week which is below the threshold of the NRLS.
However, if you were paying £250 a week in the same circumstances you would be required to register with the NRLS and deduct from the rent paid to pay the tax due to the HMRC.
Where a property is jointly owned by a UK-based landlord and a non-residential landlord, you will still need to pay tax to HMRC for the latter’s share of the rent if it is greater than £100 a week.
If you are formally operating as a letting agent in the UK and receive rent on behalf of a non-resident landlord you need to register with the NRLS.
This includes professionals fulfilling a letting agent’s tasks such as estate agents, solicitors and accountants, as well as UK-based friends or relatives of the non-resident landlord helping them manage their rental property.
Unlike with tenants, there is no £100 a week threshold for those classed as letting agents and they should withhold tax on all rents they receive for a non-resident landlord.
Letting agents can register online using form NRL4 or by post, and must do so within 30 days of the start of the tenancy.
They must provide their name and address, their tax reference number and the name of their Tax Office.
Letting agents must:
- send quarterly returns to HMRC;
- send a rent information report form NRLY to HMRC and form NRL6 to the landlord by 5th July each year;
- retain records of rent paid, correspondence and expenses for four years.
In addition, letting agents must file an annual return even if the landlord has successfully applied under the NRLS themselves and is liable for the tax due.
A tenant finder is someone who receives a fee for finding a tenant for a landlord but does not handle or control any subsequent rental income or does so for only a short period.
For example, a tenant finder may charge a fee of £700 and recover it from the first two months’ rent of £500 a month.
Thereafter, the tenant will pay the monthly rent directly to the landlord.
In these circumstances, a tenant finder is not treated as a letting agent under the NRLS, and does not have to withhold tax on rents as long as:
- the period for which rent is collected is no more than three months;
- the tax payable would be no more than £100.
If the amount is more than £100, or more than three months’ rent is collected, the tenant finder must register with the NRLS and deduct the appropriate tax.
The maximum penalty for filing an incorrect return is £3,000. With four quarterly returns and one annual return, this could potentially be charged five times in one tax year.
On top of that, failure to provide information can incur additional penalties of £300 plus £60 per day, while interest can be charged on a failure to make payments.
For a non-resident landlord who is responsible for paying the tax themselves, they would incur penalties for submitting or paying a tax return late.
Tax payable depends on your individual circumstances and the laws concerning these can change.