Non-Resident Landlord Scheme – Tips And Traps

Sarah Bradford outlines the requirements imposed by the non-resident landlord scheme.

The non-resident landlords scheme (NRLS) is a tax deduction scheme for taxing UK rental income of non-resident landlords.

Where the let property is managed by a letting agent, the letting agent must deduct tax from the landlord’s UK rental income and pay it over to HMRC. Where there is no letting agent, the obligation to deduct tax and pay it over to HMRC falls on the tenant, if the tenant pays rent of more than £100 per week to a non-resident landlord. In certain circumstances, the non-resident landlord can apply to HMRC to receive the rental income gross.

Who is a non-resident landlord?

A non-resident landlord is a person whose usual place of abode is outside the UK and who receives rental income. A non-resident landlord may not be an individual – the scheme applies to landlords who are companies, trustees or partnerships. However, in the case of a partnership, each partner is treated as a separate landlord in respect of their share of the rental income.

For the purposes of the scheme, it is the landlord’s `usual place of abode’ which determines whether the landlord is a non-resident landlord, rather than the landlord’s residence status (as determined in the case of individuals by reference to the statutory residence test). For individuals, HMRC take the view that a person’s usual place of abode is outside the UK if they are absent from the UK for six months or more.

Trap:

The `usual place of abode’ rule means that a person who is UK resident for tax purposes may be a non-resident landlord for the purposes of the NRLS.

In the case of jointly-owned property, the scheme applies to the joint owner’s share of the rental income where the joint owner’s usual place of abode is outside the UK.

Letting agents’ obligations

The NRLS imposes various obligations on letting agents who manage the let property on behalf of a non-resident landlord. For the purposes of the scheme, a letting agent is someone whose usual place of abode is in the UK and who acts on behalf of the landlord in connection with the management or administration of the landlord’s UK rental business, and who has the power to receive rental income from that rental business and to control the direction of that income. The definition of `letting agent’ includes someone acting in a professional capacity, such as an estate agent, solicitor or accountant. It may also include a friend or relative of the landlord who provides the services listed above.

However, a person whose role is confined to the provision of legal services or advice or the finding of a tenant is not a letting agent for the purposes of the scheme. Where the landlord uses more than one letting agent, the obligations imposed by the scheme will normally fall on the last person in the chain. However, the agents can jointly elect to transfer responsibility for operating the scheme to another agent in the chain.

A letting agent who is required to operate the scheme must register with HMRC’s personal tax international (PTI) division within 30 days of the date on which they are first required to operate the scheme. Form NRL4I (available to download from the GOV.UK website) can be used for this purpose. Letting agents who fail to register within the required time fame may be charged a penalty.

Letting agents who have to operate the scheme must calculate the tax due to HMRC for each quarter and pay it over to HMRC within 30 days of the end of the quarter. They must also send a quarterly return (form NRLQ). The quarters run to 30 June, 30 September, 31 December and 31 March. The letting agent has the right to deduct the tax from the rent they pay over to the landlord, and to recover the tax from the landlord if the rent was paid without deducting the tax. Interest may be charged on tax paid late.

Tip:

The letting agent does not have to calculate and deduct tax and pay it over to HMRC, if HMRC have confirmed to the agent in writing that the landlord is approved to receive rental income gross.

Tax is calculated at the basic rate (currently 20%) on the amount of rental income for the quarter, less deductible expenses. Deductible expenses are those which the letting agent can be `reasonably satisfied’ are allowable expenses in computing the profits of the landlord’s rental business. This would include expenses such as:

accountancy expenses incurred in preparing accounts of the rental business;
advertising costs of attracting new tenants;
charges for inventories;
cleaning;
costs of rent collection;
council tax while the property is vacant but available for letting;
gardening costs;
ground rent;
insurance against loss of rents;
buildings and contents insurance
insurance claim fees;
allowable loan interest;
legal and professional fees;
letting agents’ fees;
maintenance charges;
maintenance contracts;
the provisions of services, such as gas, water and electricity;
rates;
rental warranties and legal expenses insurance; and
repairs which are not significant improvements to the property, such as painting and decorating, replacing roof tiles etc.

Tip:

If in a quarter expenses exceed rental income received, the excess expenses can be carried back to an earlier quarter, with any balance being carried forward to a later quarter.

Trap:

Some expenses are not deductible. These include expenses paid by the landlord personally, expenses which have accrued in the quarter but which have not been paid, capital allowances and any personal allowances due to the landlord.

Example: Tax payments and returns

In the quarter to 30 June 2015, a letting agent registered for the NRLS collects rent of £3,000 on behalf of a non-resident landlord. The letting agent pays out deductible expense amounting to £800 in the quarter. The landlord must deduct tax of £440 (20% (£3,000 - £800)) and pay it over to HMRC by 30 July 2015.

The letting agent must also complete an annual return each year (form NRLY) and send it to HMRC PTI division by 5 July following the end of the year. The year runs from 1 April to 31 March for the purposes of the NRLS. Form NRLY is available to download from the GOV.UK website. Penalties may be charged for a failure to make a return or for an incorrect return.

The letting agent must also provide the non-resident landlord with a certificate of the tax liability under the scheme. This too must be provided by 5 July. The tax paid under deduction is set against the landlord’s actual liability.

Tenants’ obligations

If there is no letting agent operating the scheme, the obligation to deduct tax and pay it over to HMRC falls on the tenant if the rent paid by the tenant is more than £100 per week. As for a letting agent, tenants required to operate the scheme must register with HMRC PTI division, deduct tax each quarter and pay it over to HMRC, together with a quarterly return, complete an annual return and send it to HMRC and provide the non-resident landlord with a certificate of tax liability under the scheme.

Rental income paid without deduction of tax

Non-resident landlords can apply to HMRC PTI to receive their rental income gross if:

their tax affairs are up to date;
they have never had any obligations to UK tax; or
they do not expect to be liable to UK tax for the tax year for which the application is made.

The application is made on form NRL1i where the landlord is an individual, form NRL2i where the landlord is a company and on NRL3i where the landlord is a trustee. The forms are available to download from the GOV.UK website.

Approval of the application does not mean that the rental income is exempt from tax; simply that it can be paid without deduction of tax. Where HMRC approve an application to pay rental income gross, they will send a notice of approval to the landlord and to his or her accountant or tax advisor where they hold approval to do so. They will also send a separate notice to the letting agent or tenant authorising them to pay the rental income to the landlord without deduction of tax. The letting agent or tenant should not pay the rental income gross unless they have received HMRC approval to do so.

Practical Tip:

The NRLS imposes obligations on the letting agent or tenant and penalties may be charged for failure to meet those obligations. Where the landlord meets the conditions for gross payment, it may be preferable to apply for approval for rents to be paid gross, although the landlord remains responsible for paying any tax due on the rental income to HMRC.