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When it comes to paying tax on UK rental income, your residency status plays a significant role in determining what income is taxable.
IBISS & CO. property tax advisors have explained everything you need to know about paying taxes on UK rental income.
Understand Tax On Rental Income Residents vs. Non Residents
UK Residents: Tax on Worldwide Rental Income
If you are a UK resident for tax purposes, you must pay UK income tax on all your global rental profits, regardless of where your properties are located. This means any rental income you earn from properties outside the UK is also taxable in the UK.
Non-Residents: Tax Only on UK Rental Income
Contrary to UK residents, non-residents are not required to pay UK income tax on rental properties located outside the UK. However, non-residents are still obligated to pay income tax on any rental income derived from properties within the UK.
How Being a Non-Resident May Affect Your Tax Liability
Though a non-resident of the UK has to pay income tax on UK rental profits, it can be possible that you have to pay less tax than before. This scheme is designed by HMRC to ensure that non-residents who earn rental income from UK properties fulfill their tax responsibilities.
The Non-Resident Landlord Scheme
Before paying attention to tax planning, let’s talk about the Non-Resident Landlord Scheme that HRMC uses to collect tax from residents and mediators. If no UK agent is involved, tenants are responsible for deducting and paying this tax directly to HMRC.
Annual Rental Income Thresholds and Tax Deduction
Non-resident property owners get 20% tax deducted from their rental profit by their negotiators, and this tax is funded by HMRC quarterly. If no UK mediator is involved, the resident must deduct tax and pay directly to HRMC.
Residents have to fulfill the demands of the Non-Resident Landlord Scheme if the rent is £5,200 per year or £100 per week. This tax is paid directly to non-resident landlords outside the UK or to someone who is not a UK agent or in their UK bank account. If more than two people are residents under the lease, then the limit of £5,200 applies to both residents separately.
Tax Return Adjustments for Non-Residents
Whenever the non-resident completes their tax return, the tax paid to HRMC through the agent is subtracted from the landlord’s final tax bill. The additional can recover the additional tax.
Eligibility for the Non-Resident Landlord Scheme (NRLS)
Whenever the non-resident completes their tax return, the tax paid to HRMC through the agent is subtracted from the landlord’s final tax bill. The additional can recover the additional tax.
Rental Income Paid Without Tax Deducted
Non-residents can be a part of rental income paid gross with no tax deduction:
- If the personal allowance covers anybody’s rental income, they are not expected to pay UK tax.
- Their tax dealings must be up to date.
- They have never faced any UK tax responsibilities before.
How to Apply for Gross Payment
Property owners can receive their rent with no tax deduction by submitting the “NRL1” form.
HMRC Notification to Agents or Tenants
Once approved HMRC work informs the tenant or letting agent that the landlord can accept rental income with no tax deduction. This does not conclude that rental income is tax-free. It is still compulsory that UK income tax be comprised of the landowner’s yearly tax return if it is still not completed.
A paid rental income may be eye-catching if the landowner anticipates his final tax bill to be less than the tax abstracted by the resident or letting agent.
Tenant Responsibilities & Letting Agent
When dealing with non-resident landlords, tenants and letting agents have specific responsibilities regarding tax deductions and record-keeping:
20% Tax Deduction Requirement
Tenants and letting agents are required to deduct 20% tax from the landlord’s rental income. However, they may subtract various allowable expenses they have paid on behalf of the landlord, including:
- Electricity and gas
- Accountancy bills and fees
- Maintenance agreements
- Repairs and works
- Cleaning matters
- Legal possession fees
- Cost of rent collection
- Different contents and buildings insurance
- Advertisements are done for the hiring of new tenants
- Council tax when the property is empty
Providing Annual Tax Certificate
The tenant and letting agent must deliver the Landowner a yearly certificate presenting the total tax they paid. For this, you need to fill out the NRL6 form from HMRC.
Tax Reporting and Offset for Landlords
The non-resident landlords can set off the tax on the documents that shows their complete tax return against their tax bill. All other tenants and agents whose tax is deducted under this scheme must submit all information to HMRC.
Record-Keeping Obligations
Tenants and agents have to keep ample records for more than six years, including invoices as proof of expenses paid and rental income.
Exceptions for Intermediaries
If a non-resident landowner pays a mediator to find tenants but does not handle rental income, that person is not responsible for operating the Non-Resident Landlord Scheme. Tenants are responsible for this scheme.
If the resident finder gathers the rent for some period to recover its fee, he will have to operate the scheme if:
- The tax to be paid should be more than £100.
- They should collect rent for three months.
Read More: How to Save Property Tax?
20% Tax versus Actual Tax
The 20% tax deduction is different from your final tax by your letting agent or tenant for different reasons that may be:
- If you have a considerable amount of rental income, you may be subject to higher-rate tax at 40% or 45%. (Different rates are being applied in Scotland and other countries).
- You are permitted a personal allowance that shelters rental profits from tax, i.e., £12,500.
- Tenants and Letting agents cannot subtract payments paid by the landlord.
- Your additional property payments can be subtracted from your income.
Why Non-Residents May Pay Less Tax?
Though UK rental profits will be taxable even if you become a non-resident, you will probably have to pay less tax.
Example
David is a UK tenant and earns up to £55,000 and rental profits of £20,000. As a taxpayer, David pays 40% tax on his rental profits,which is £8,000. He got a job abroad, settled there, and became a non-UK resident. His foreign salary is not related to UK tax. Only his UK rental profits are UK income now. The first £12,500 of 2020/21 is tax-free or is covered by personal tax allowance. The £2,500 is taxed at 20%: £500. The tax on his rental income has decreased from £8,000 to £500. This is the effective tax rate,which is just 3%.
Before David became a non-resident, his basic-rate band and personal allowance were consumed by his salary. But now, as he is a non-resident, this can be against his rental profit.
Renting Out Home
Suppose you want to rent out your home anytime in your life if you move overseas. The rental profit you’ll be getting will be taxable, but some of this might end up tax-free, which is possible because of income tax personal allowance.
Example
- Warner got a job offer in China and moved there with his spouse. The couple decided to rent out their UK house for £3000 per month. This family does not have any other source of income from the UK.
- John and Abram are British residents and are permitted a UK personal allowance of £12,500. Their allowances fully cover the annual rent of £25,000. In this matter, there is no UK tax to be paid.
Although their rental income is £25,000, their tax on rental profit will be less if the expenses are tax-deductible. The expenses do not affect the consequences as the couple’s rental income is covered by personal allowances.
Splitting Rental Income – Couples
Couples choose optimal ownership split for their properties to minimise the income tax. This split is possible after you become a non-resident.
Example
Den and his wife Olivia live in Manchester. Den earns a salary of £50,000. His wife Olivia does not work but manages the couple’s property and earns a rental income of £40,000 per year. The couple kept all properties in the name of Olivia to save themselves from income tax. If they split rental income equally and adequately, then Den would have to pay £20000, that is 40% of £50,000, whereas Olivia would pay £8,000,which is 20% of £40,000. They saved a total of £8,000 in tax.
Mortgage Issues for Non-Residents Renting UK Property
If you are willing to rent out your home in the UK after becoming a non-resident of the UK, you must need your lender’s permission. You may be charged a fine or some time limit, or you could be subject to a higher interest rate if you did not ask for permission. Borrowers also need to notify lenders of their new addresses.
Tax Relief on Mortgage Interest
For many years, the government limited the financial costs paid by landowners (including non-resident landowners) and tax relief on interest to those who own residential properties.
Residential landowners get 20% tax relief deducted from their final tax bill. These rules do not apply to commercial properties or properties belonging to any company. It may be possible that tax change will have no or less impact on non-resident landlords.
Example
William is a UK inhabitant enjoying a salary of £50,000. His rental income is £50,000, and property expenses are up to £5,000, so his taxable rental profit is £45,000. He pays £15,000 in mortgage interest, which is not deductible. William is a higher-rate taxpayer and pays 40% tax on the £45,000, which is – £18,000 from his rental profit. He also gets a tax discount of 20% of his interest,which is £9,000. On his rental income, he pays a sum of £9,000. This £9,000; could be fully deductible, as it was in the past.
The main point is that William would have paid the same tax even if his mortgage interest was tax-deductible, as it was a decade ago. In simpler words, he is not affected by the restriction of mortgage tax relief. He pays 20% tax on his rental income, but at the same time, he receives a 20% tax reduction.
Overseas Lenders
If you deal on a mortgage with an overseas lender on UK property, the interest will depend upon the UK withholding tax if interest comes from a UK source. The withholding tax may be applied for an exemption if there is any double tax agreement between the UK and the place where the lender is raised. This is full of complexity, but your advisor can guide you best in this.
Overseas Tax Implications
Rental income will be taxed in the country you will shift. Though every country has different rules, the tax you will pay in the UK will be used as a credit against your overseas tax bill. It is quite possible to move to any country with no income tax or any country taxing foreign income.
If you plan to shift to any country where tax is lower than the UK, you still have to pay other overseas taxes if the UK tax bill is small (i.e., personal allowance covers rental income).
If the rental income you are getting is taxed overseas, you do splitting or any tax planning to lessen your UK tax bill. It is important to value both the overseas and UK tax implications of any tax reduction planning you are thinking of for such intentions.
Non-Resident Companies
The government imposed a 2% surcharge on UK residential properties in Northern Ireland and England purchased by non-resident companies, individuals, partnerships, and trusts from 1 April 2021. This surcharge is added to the standard Stamp Duty Land Tax (SDLT) rates. Therefore, non-resident individuals who purchase property in Northern Ireland or England are subject to the following rates:
Received an HMRC Nudge Letter for Undeclared Rental Income? What to Do Next
Stamp Duty Rates for Non-Residents:
- Up to £125,000 — 7%
- £125,000 to £250,000 — 9%
- £250,000 to £925,000 — 12%
- £925,000 to £1.5m — 17%
- Over £1.5m —— 19%
The statutory residence test for extra charge on non-residence is not determined. Persons who live in the UK for more than 183 days become UK residents during a continuous period of any year which starts 364 days before the property transaction and finishes 365 days after it.
Expert Assistance for Non-Resident Tax Planning
If you have more questions regarding rental income or property tax, you can take help from our leading tax advisors in London. IBISS & CO has extensive experience in the UK and international tax, and we work alongside our clients to help them meet their legal and financial obligations. Contact us for a free 15-minute tax accountant consultation.
