The Non-resident Landlord Scheme (NRLS) taxes the UK rental income of people whose ‘usual place of abode’ is outside the UK.
A ‘letting agent’ includes anyone who manages property on behalf of a non-resident landlord.
Letting agents of a non-resident landlord must deduct tax from the landlord’s UK rental income and pay the tax to HMRC, unless you opt to tax under the non-resident landlord scheme.
If the landlord does not have letting agent, you will also need to operate the NRLS. If you’re a tenant who pays rent of £100 a week or less, you do not have to use the Scheme unless you’re told to do so by HMRC.
Non-resident landlords can apply to HMRC for approval to receive rental income with no tax deducted. HMRC will give approval and register the landlord for self-assessment if their UK tax affairs are up to date or either:
- they have never had any UK tax obligations
- they do not expect to be liable for UK tax for the year in which
the application is made
What is a non-resident landlord?
Non-resident landlords are people who have UK rental income and whose ‘usual place of abode’ is outside the UK.
For the purposes of the NRLS, landlords may include:
- individuals
- companies
- trustees
- partnerships
Each partner is treated as a separate landlord for their share of the rental income.
Usual place of abode
The NRLS applies to you if your usual place of abode is outside the UK.
This may be the same as your place of residence for tax purposes, but not always.
For individuals, HMRC normally regard an absence from the UK of 6 months or more as meaning you have a usual place of abode outside the UK. It is possible for you to be resident in the UK but have a usual place of abode outside the UK.
A company will normally have a usual place of abode outside the UK if either:
- its main office or other place of business is outside the UK
- it was incorporated outside the UK
The usual place of abode is within the UK for the purpose of the NRLS where:
- a company is regarded as resident in the UK for tax purposes, even though it may be incorporated outside the UK
- a UK branch of a non-resident company must pay Corporation Tax
Trusts are regarded as outside the UK, if all the trustees have a usual place of abode outside the UK.
If one or more of the trustees has a usual place of abode within the UK, the trust is not a non-resident landlord for the purposes of the NRLS.
Rental income
A letting agent using the NRLS must calculate tax each quarter on the rental income received, less deductible expenses they’ve paid. You should take into account:
- all rental income you received in the quarter
- rental income you did not receive in the quarter, but which is paid to a third party (including the non-resident landlord)
If you’re a tenant using the Scheme, you must calculate tax each quarter on the rental income you paid in the quarter. You should take into account:
- all rental income you paid to the non-resident landlord in the quarter
- all rental income you paid to third parties in the quarter, unless the payments are ‘deductible expenses’
You should take into account all rental income received or paid in the quarter, even if it relates to rent due for an earlier or later period. Do not calculate tax for a quarter on rental income that was due in
the quarter, but was not paid in the quarter.
Information about the taxation of income from UK property can be found in the Property Income Manual.
Examples of rental income
Rental income includes a variety of receipts from land and property.
Rental income includes:
- income from letting furnished, unfurnished, commercial and domestic premises, and from any land
- where property is let furnished, any separate sums from the tenant for the use of the furniture
- rent charges, ground rents and feu duties
- premiums and other similar lump sums received on the grant of certain leases
- income from the grant of sporting rights, such as fishing and shooting permits
- income from allowing waste to be buried or stored on land
- income from letting others use land — for example, where a film crew pays to film inside a person’s house or on their land
- grants received from local authorities or others contributing to expenditure which is an allowable expense, such as repairs to a let property
- rental income received through enterprise investment schemes
- income from caravans or houseboats where these are not moved around various locations
- insurance recoveries under policies providing cover against non-payment of rent
- service charges received from tenants for services ancillary to the occupation of property (other than those falling within Section 42 of the Landlord & Tenant Act 1987)
Income which is not rental income
There are certain receipts which come from the use of land that are not rental income. These include:
- income from woodlands managed on a commercial basis
- income from:
- mines and quarries (including gravel pits, sand pits and brickfields)
- ironworks, gasworks, salt springs or works, alum mines or works and water works and streams of water
- canals, inland navigations, docks, and drains or levels
- rights of markets and fairs, tolls, bridges and ferries
- railways and other ways
- lettings of tied premises by traders
- income from carrying out a trade — for example, running a hotel
Deductible expenses
You should take into account expenses you pay on behalf of the landlord that you can be ‘reasonably satisfied’ are allowable expenses in calculating the profits of the landlord’s rental business.
This section gives guidance on which expenses can be taken into account when you calculate the tax due. These expenses are called ‘deductible expenses’.
HMRC’s Property Income Manual, gives further information about allowable expenses.
Allowable expenses of a rental business — basic test
In calculating the profits of a rental business, expenses are allowable where they are:
- incurred wholly and exclusively for the purposes of the rental business
- not of a ‘capital’ nature
Examples of expenditure which is of a ‘capital nature’ are the cost of:
- land
- buildings
- improvements
- alterations
Find more information about what is an expense of a capital nature is in the Property Income Manual.
Examples of allowable expenses for rental businesses
The following expenses paid by you will normally be deductible expenses if they meet the basic test:
- accountancy expenses (incurred in preparing rental business accounts but not for preparing personal tax returns)
- 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
- ground rent
- insurance against loss of rents
- insurance claim fees
- insurance on buildings and contents
- interest paid on loans to buy land or property, except VAT, — no interest can be deducted on residential property
- interest paid on loans to build or improve premises, except VAT — no interest can be deducted on residential property
- legal and professional fees
- letting agents’ fees
- maintenance charges made by freeholders, or superior leaseholders of leasehold property
- maintenance contracts (for example gas servicing)
- provision of services (for example gas, electricity, hot water)
- rates
- rental warranty and legal expenses insurance
- water rates
- repairs which are not significant improvements to the property, such as:
- damp and rot treatment
- mending broken windows, doors, furniture, cookers, lifts, for example
- painting and decorating
- replacing roof slates, flashing and gutters
- repointing
- stone cleaning
VAT
The deductible expense is the amount inclusive of VAT, if any expenses that are deductible in working out the profits of the rental business either:
- had VAT charged on them
- the VAT cannot be relieved as ‘input tax’ because, for example, the landlord is not registered for VAT
Approval to receive rental income with no tax deducted
How non-resident landlords can apply Most non-resident landlords who wish to receive their rental income with no tax deducted should apply for approval to HMRC.
Landlords whose tax affairs are dealt with by HMRC’s Public Departments 1 office should apply to their tax office. The addresses and telephone numbers are shown on the application form for individuals.
The application must be made on one of the following forms:
- NRL1i – if the applicant is an individual
- NRL2i – if the applicant is a company
- NRL3i – if the applicant is a trustee (including a corporate trustee)
Non-resident landlords can apply to HMRC for approval to receive rental income with no tax deducted.
HMRC will give approval and register the landlord for self-assessment if:
- their UK tax affairs are up to date
- they have never had any UK tax obligations
- they do not expect to be liable to UK tax for the tax year in which the application is made
Sovereign immunity
If you’re exempt from UK tax due to sovereign immunity, apply to HMRC to receive your UK rental income with no tax deducted.
You do not need to complete an application form. Apply by writing to HMRC. If possible, enclose a copy of the letter in which HMRC confirms your ‘sovereign immune’ status.
Changes of letting agent or tenant
If HMRC has not been told about a change, the new letting agent or tenant will not hold a notice from them that lets them pay rent without deducting tax. In such cases tax should be deducted from the rental
income of a landlord that has a valid approval.
If these circumstances apply after 31 March in any year, you as the letting agent or tenant should complete an annual return and provide a certificate showing the tax deducted.
If you’ve received a notice before 31 March and have deducted tax from the landlord’s rental income at any point since the previous 1 April, you can choose to:
- contact HMRC to discuss the recovery of any tax deducted for the relevant quarters (recording transactions where any money is recovered and paid to the landlord)
- agree with the landlord to issue a certificate after the end of the year to cover the tax deducted and to make no further deductions during the year
For any enquiries on the non-resident landlord scheme please contact Giles Morison.
