Expatriates relocating overseas commonly decide to retain a UK property asset as a long-term investment, to avoid selling in poor market conditions or to generate a passive rental income. They may also own several properties as part of their asset portfolio.
While this can have several advantages, it is important that any UK property owner living abroad and earning a rental income understands the Non-Resident Landlord Scheme and whether this applies to their real estate assets.
The HMRC-managed tax scheme means non-tax residents often remain subject to British tax obligations based on the income generated within the UK, even if this contrasts with their general tax residency position.
What Is the Non-Resident Landlord Scheme?
This tax regulation aims to ensure that overseas property owners, who do not necessarily need to be British citizens or expats, are taxed on earnings from a UK-based property asset. Unlike many other taxes, levies may apply irrespective of whether you are a tax resident elsewhere.
Many expats who have completed the Statutory Residence Test and have concluded that they are not UK residents assume that the Non-Resident Landlord Scheme, or NRLS, doesn’t apply since they are subject to taxation on their worldwide income and assets as a permanent resident in another country.
However, property owners who live overseas for at least six months may be categorised as non-resident landlords, including those who split their time between the UK and other countries.
In most cases, letting agents or tenants are obligated to deduct tax from the rental income they pay or collect and remit those deductions directly to HMRC as a withholding tax. This process ensures that non-resident landlords living overseas cannot bypass their UK tax obligations.
You will also need to submit a self-assessment tax return each year, whether or not there is any tax to pay. Non-resident landlords must include forms SA109 and SA105 with their submission.
Managing Tax Liabilities as a Non-Resident Landlord
Few exceptions apply, although there are some limited exclusions for properties let for up to £100 per week or less. Landlords can apply for permission through the NRLS to receive UK property gross income without having an agent or tenant withhold tax from the total.
HMRC will generally only grant this approval if the non-resident landlord submits an application and:
- Has never had to pay UK taxes, or
- Is not expected to be liable for UK tax in the relevant tax year, or
- Has brought their tax affairs completely up to date.
Otherwise, the NRLS requires the letting agent or tenant to account for the relevant tax liability every three months during the tax year, at the end of June, September, December and March. Letting agents must continue making deductions unless they have been informed in writing that the landlord can receive income without tax deducted.
Criteria for a Property Owner to Be Considered a Non-Resident Landlord
HMRC will categorise a UK property owner as a non-resident landlord if they primarily live overseas or have a principal residential address outside the UK and earn rental income.
The tax office will usually treat any period spent abroad of six months or more as an indication that your ‘usual place of abode’ is not within the UK – even if, for all other tax purposes, you remain a UK tax resident.
UK tax will normally apply following these deductions and allowances:
- Any rental income of £2,500 or above is reportable as taxable income for landlords not claiming allowable expenses. For landlords reporting their rental income less deductible expenses, rent paid is reportable from £9,999 and above.
- A deductible expense might include maintenance, insurance, letting agent’s fees, legal services, gardening and cleaning.
Rental income is taxed against the standard UK income tax rates, with the annual personal allowance of £12,570 applied. Earnings within the basic rate tax band are taxed at 20%, increasing to 40% and 45%.
The Impact of the NRLS on Expat International Tax Liabilities
Even if a landlord applies to HMRC and receives consent to receive UK rental income without having tax deducted, they are still normally obligated to submit returns, reporting their rental income and expenses. The landlord remains responsible for reporting property income and may be required to start paying UK tax if their earnings change.
The next consideration for expats living in another destination as tax residents is how an NRLS tax liability related to their UK tax affairs will link to their overall tax position.
Generally, if you live in any country outside the UK long-term you are subject to tax on your income and assets worldwide according to that country’s regulations. However, if you live in a country with a double taxation agreement with the UK, you will not need to pay tax twice on the same income in both the UK and your country of residence.
Verifying whether this applies and claiming any exemptions correctly is important. In most cases, you can claim UK tax relief or only pay tax on your rental income in the UK, but you must report this to the respective tax authorities to ensure you are making the right declarations and income tax payments.
Claiming Exemption From the Non-Resident Landlord Scheme
If you receive UK rental income and believe this is too low to be taxable, we recommend seeking professional advice. There is the potential to attract penalties and fines if HMRC expects to receive a self-assessment tax return or for a letting agent or tenant to make deductions from rental income at source, and this does not happen.
Most expat landlords will be subject to UK tax if they have a regular abode outside the UK, with the only common exclusion applied to those with sovereign immunity – a far from standard scenario.
Speaking with a tax specialist who understands the legislation both in the UK and your chosen home country is worthwhile. We can advise on your tax obligations under the NRLS, how this may impact the profitability of a UK-based rental property, and ensure you remain compliant with your tax reporting obligations.
For more information about the NRLS, how to assess your residency position as an overseas expat or for help to understand the tax charges linked with international UK property ownership, please get in touch with your closest Chase Buchanan office at your convenience.
*Information correct as of February 2024