The Non Resident Landlord Scheme (NRLS) was introduced in 1996 by HMRC. The purpose of the scheme was to ensure that non resident landlords pay their taxes on time. Millions of people live outside the UK, but they have made investments in the UK buy to let properties. In case of non compliance, it was challenging for HMRC to pursue those individuals. Therefore, the non resident landlord tax scheme was introduced to ensure that the tax has been deducted at the source if an individual is a non resident landlord. The Non Resident Landlord Scheme (NRLS) puts the onus on the letting agent/tenant an obligation to deduct tax from the rent before paying the non resident landlord. In this blog, we will discuss in detail the non resident landlord tax scheme, who this applies to, how the scheme operates, and the responsibilities of tenants or agents. If you manage a UK property on behalf of a friend or relative, you may have responsibilities under Non resident landlord scheme as agent.
Who is non resident landlord?
A non resident landlord is a person who owns a UK property which generates rental income for him, but he doesn’t live in the UK. HMRC usually treats an individual as a non resident landlord if he has lived abroad for more than six months and receives UK property income.
The UK tax system doesn’t apply tax to non residents. Non residents usually pay their taxes in the country they are residents. However, if the non resident receives any UK sources of income, particularly UK property income, it applies non resident landlord tax even though they are non resident.
What is non resident Landlord Scheme (NRLS)
The non resident landlord scheme was designed to ensure that letting agents or tenants deduct taxes at source from the gross rent of a non resident landlord. A letting agent who manages a UK property on behalf of a non resident landlord is required by HMRC to deduct tax from your UK property income before transferring the remaining balance to you. If a non resident landlord doesn’t have any letting agent, the tenant who pays more than £100 per week in rent needs to operate non resident landlord tax scheme (NRLS). If you pay rent £100 or less per week, you do not need to use NRLS tax unless HMRC requests. The letting agents are required to operate the Non resident landlord scheme (NRLS) regardless of the rent they collect.
How the Non resident Landlord Scheme (NRLS) operates?
Under the Non resident landlord tax scheme, the basic rate of tax must be deducted by the letting agent or tenant from the rental income of landlords whose usual place of abode is outside the UK. In the UK, the basic rate of tax is 20%. The letting agent or tenant has the responsibility of paying the deducted tax to HMRC. The remaining balance of funds after the deduction of basic rate tax, letting agent fees and other charges are paid to the landlord.
The letting agent usually sends a monthly statement showing how much gross rent received from the tenant, the tax deducted, and other expenses incurred or reimbursable on behalf of the landlord.
Under the non resident landlord tax scheme, non resident landlords have the option to receive their rental income without deduction of any tax. For this, they must apply with HMRC to receive their rental income with no tax deducted. If certain conditions are met, HMRC will approve the application, and non resident landlords will receive UK rental income with no tax deducted. HMRC normally approves the application if:
- The non resident landlord form is completed correctly and has provided all the necessary information.
- They are satisfied that the non resident landlord will be compliant with all the UK tax obligations.
The approval by HMRC of receiving rent with no tax deducted doesn’t mean that you are not required to pay any UK tax. The non resident landlord needs to complete their annual self assessment tax return and ensure that they pay their taxes on time.
Tax deduction under the Non Resident Landlord Scheme (NRLS)
Unless HMRC has approved that the non resident landlord can receive his rent as gross, the estate agent has the responsibility to deduct the basic rate of tax (20%) from the rent before making payment to the NRL. The estate agent will make the payment of the tax deducted to HMRC on a quarterly basis. The basic rate of tax will be applicable to the gross rent minus any expenses incurred, which are allowable expenses for calculating rental profits. The expenses which the agent usually incurs are estate agent fees, repairs, management fees,
advertising costs etc.
Example:
| £ | |
| Gross rent collected by the agent | 1,000.00 |
| Less: Estate agent fees | (100.00) |
| Repairs incurred | (200.00) |
| 700.00 | |
| Basic rate tax (20%) | (140.00) |
| Rent payable to Non resident landlord | 560.00 |
In the above example, the basic rate tax deduction of £140 is payable to HMRC. The non resident landlord will receive £560 into his bank account.
Approval to receive rental income gross with no tax deducted
The non resident landlord can request HMRC to receive his rental income as gross. He needs to send the non resident landlord tax form, called NRL1 form to HMRC. This can be submitted online or by completing a paper form and sending it in the post. HMRC will give approval and register non resident landlords for self assessment. Once the permission is granted to receive the rental income gross, the non resident landlord will be required to submit self assessment tax return every year.
Property jointed owned by spouses or civil partners
The UK tax system treats spouses as separate for tax purposes. Each person is required to file their taxes with their share of income. If the property is jointly owned by spouses, each would be required to file their return based on their share of income. If they would like to receive rental income as gross, both need to submit their separate application forms to receive the rental income as gross. If one spouse or civil partner usually lives outside the UK, the NRLS tax rules will apply to that spouse only.
Commonly asked questions:
Am I a non resident landlord in the UK under the non resident landlord scheme?
If your usual living place is outside the UK, you will be generally considered a non resident landlord under the Non resident Landlord Scheme (NRLS). There is no such information in terms of the number of days or months which will make you non resident. The legislation will consider you as non resident landlord if you usually live outside the UK. In practice, HMRC usually treats a taxpayer as non resident landlord if the person usually live abroad more than six months.
It is important to note that there is a difference between a person who is treated as non resident landlord under NRLS and a non resident for UK tax purposes. The rules governing the non resident landlord scheme are different from those governing an individual’s tax residency status. In short, if you usually live outside the UK, you will considered as non resident landlord under the Non resident landlord scheme (NRLS).
Does Non resident Landlord Scheme apply to me?
If you usually live for more than six months outside the UK, then Non Resident Landlord Scheme (NRLS) rules will apply to you.
Who pays tax on jointly owned property? My husband and I own a property jointly. Can we file a joint tax return?
If spouses or civil partners own a buy to let property jointly, both are required to submit a separate tax return showing their share of rental income and expenses. The UK tax system treats spouses or civil partners separately for tax purposes.
What are UK personal allowances?
The UK personal allowance is the amount of money which can be earned in the UK tax free. Currently, the UK personal allowances are £12,570 per year, which means an individual who is resident in the UK can earn up to £12,570, and there will be no tax payable.
Can non resident landlords claim UK personal allowances?
The UK personal allowance is available to individuals who are residents of the UK. They are not usually available to non residents. However, the UK personal allowances are available if you are a British citizen or EU national, or in some circumstances, due to a double taxation agreement between two countries.
