Tax for Non-Resident Landlords (NRL)
If a landlord has a rental property in the UK and their usual place of abode is outside the UK then they will be taxed as a non-resident landlord. This means that income tax is payable to HMRC on any profits.
Non-Resident Landlords who use a Letting Agent
Under the NRL rules the default position is that 20% tax is to be withheld from landlords if they receive their rental income from a letting agent. The agent can deduct allowable expenses from the rental income before deducting the 20%.
- The property has rental income of £1,000 per month and letting agent charged £100 management fees, the letting agent would transfer £720 to the non-residential landlord and withhold £180 of tax (£1,000 rent > less £100 fees > Less £180 of tax – 20% of £900)
- If there were management fees and other repair expenses that totalled £300 that month then the letting agent would transfer £560 (£1,000 rent > less £300 > less £140 tax – 20% of £700)
The letting agent then needs to follow strict rules, making a return to HMRC each quarter detailing the tax it has withheld and paying it over to HMRC, as well as making an annual return.
Is there an alternative to letting agents withholding tax?
Yes, landlords can apply to HMRC for Gross Status whereby the tax isn’t withheld. Landlords simply need to complete a NRL1 form with HMRC and, once approved, a copy of the approval number is sent to the letting agent so that they can start paying gross rents across. The approval process is normally fairly straightforward and quick, so if a landlord completes the NRL1 form nice and early an approval number should reach their letting agent before the first rent is received so no tax needs to be withheld.
It’s worth noting that if there are joint owners of a property then both owners need to apply for gross status separately.
What if a landlord doesn’t use a letting agent?
If a landlord manages a property themselves and receives rent directly from a tenant, this works in exactly the same way as with a letting agent with one exception; If the rents are less than £100 a week per tenant then no tax needs to be deducted.
If the rents are more than £100 a week per tenant then the tenant will need to withhold the tax and complete a quarterly return to HMRC and pay the tax to them on a quarterly basis, as well as the requirement to make an annual return. Again, if a landlord’s tax affairs are in order they can apply for gross status to remove this hassle for their tenants. In most cases non-resident landlords will instruct a letting agent to remove any burden on their tenants.
The fines and penalties for not complying can be quite onerous – £3,000 is the maximum penalty for a letting agent or tenant who submits an incorrect return.
Thanks to Russell & Russell for their advice on Non-resident landlord matters. Russell & Russell are a firm of proactive accountants who utilise the latest technology to assist their clients to take home more of what they earn and to understand their numbers. If you would like to find out more about their services, contact Stuart Clark on 0141 332 6331 [email protected]