Non-Resident Landlord Scheme (NRLS) explained

The Non-Resident Landlord Scheme is a tax scheme created by HMRC to ensure that people who rent out UK properties but themselves are not considered a tax resident in the UK pay the correct amount of tax on any income received. This article explains the obligations of non-resident landlords, agents acting for non-resident landlords and also the tenants of non-resident landlords.

There are millions of properties in the UK owned by people who do not live in the UK who subsequently rent out their properties, whether intentionally as buy-to-let investments or because the owner is reluctant to sell their UK property to ensure they always have a UK base.

Non-residents landlords are often British expats however the number of non-British landlords has increased in the past decade or two as UK property becomes an increasingly attractive investment opportunity offering excellent annual return on investments as well as above inflation and interest rate growth in value.

One aspect of owning UK property and renting it out which is often overlooked is that both the income and the gains on the property are subject to UK tax rules, even if the property owner is considered a non-resident.

The problem for HMRC has always been that it is difficult to track non-residents making it easier for landlords to illegally evade their UK tax obligations.

For this reason, in 1996, the UK Government introduced the Non-Resident Landlord Scheme which is designed to ensure that either the agent or the tenant of properties that earn over £100 per week withhold some of that income to ensure that the tax can be collected at source in the UK.

In addition, and an often overlooked requirement for non-resident landlords, is that landlords whether they are tax-resident in the UK or not, are required to submit a UK Self-Assessment tax return. This is the case whether tax is due or not.

What is a Non-Resident Landlord?

Understanding who is a non-resident landlord is not as straightforward as being a general non-UK resident as determined by the Statutory Resident Test.

The requirements for being considered a non-resident landlord are more loosely determined as someone who rents out a UK property who is not considered to regularly live in the UK. While there are no specific laws to determine this, if a person rents a UK property and spends more than six continuous months outside the UK they would likely be considered a non-resident landlord.

It is therefore possible to be both a UK tax resident according to the Statutory Residence Test and also a non-resident landlord.

So, if you spend a significant period of any tax year outside the UK and rent a UK property, it’s vital that you understand your UK tax obligations and the Non-Resident Landlord Scheme.

Tax obligations of Non-Resident Landlords under the NRLS

Complete a Self-Assessment Tax Return

In nearly all cases, non-resident landlords are required to complete a Self-Assessment Tax Return for every tax year if receiving income from renting out a UK property – whether tax is owed or not.

Withholding income and paying tax quarterly

The Non-Resident Landlord Scheme issues a legal obligation for either the tenant or the letting agent to deduct and withhold tax from any payments due to the landlord. This tax must then be paid to HMRC every quarter.

When reporting income via a Self-Assessment Tax return, any tax already paid to HMRC under the NRLS will also be deducted from any tax due.

Exemptions from withholding tax at source

HMRC may determine that if income from rental property is low enough that there are no reporting requirements. HMRC will confirm in writing whether you are exempt from quarterly reporting and payments, so you should assume that either your tenant or your letting agent is required to report and pay tax quarterly unless you have been previously advised.

Determining your tax resident status

While NRLS will often also be considered non-residents of the UK for tax purposes under the Statutory Residence Test, it is vital to know and understand where you are also considered to be a tax resident as this will determine where you are required to pay tax on your income and gains.

If you are considered a tax resident of the UK, your worldwide income will be subject to UK tax rules. However, if you are considered a non-resident of the UK, only income and gains arising from the UK will be subject to UK tax rules. You will, however, therefore be likely to be a tax resident in another jurisdiction. If this is the case, you should seek help to ensure you understand how any rental income is taxed in your country of residence.

If there is a double tax treaty with the UK, it might be possible to avoid paying tax on rental in both the UK and your country of residence, but you should seek help with this to ensure you do not incur any fines for underpayment or failing to correctly report any rental income.

UK tax rates for rental income

Rental income received by non-resident landlords is considered as UK income and is therefore subject to standard UK income tax rules, including the personal allowance and standard UK income tax bands.

In addition, the first £1,000 of income from property rental will be free of UK tax providing there are no expenses claimed against the property.

Rental income over £2,500 must be reported to HMRC if you are not claiming any allowable property expenses, while income over £9,999 must be reported to HMRC if you are claiming allowable property expenses.

Property expenses can include agent fees, maintenance, solicitors’ fees, insurance, cleaning, gardening among others. If you are unsure, it is always advisable to check whether an expense can be claimed against the rental income of the property.

All income from rental properties is also subject to the standard personal allowance, currently £12,570 for tax year 2022/23, which means that while you have to report the income to HMRC, you will not have to pay tax until the taxable amount is over £12,570 in the tax year.

Once your taxable income after deductions is over £12,570 you will be subject to tax on your rental income of:

• £12,570 - £50,270: 20%
• £50,271 – £150,000: 40%
• £150,001 and above: 45%

If you are considered a non-resident of the UK for tax purposes, only your UK arising income will be subject to UK income tax.

Reporting your UK rental income as a non-resident landlord

Unlike UK residents, you cannot simply complete your Self-Assessment Tax Return online. As a non-resident you will be required to complete your Self-Assessment Tax Return as well as forms SA109 and SA105. You can either do this by post, online software that supports online reporting or engage a HMRC approved tax specialist to file your returns and forms for you.

Failure to comply with the filing deadlines will result in potential fines, so it is important to understand the tax deadlines and what your obligations are as a non-resident landlord.

It is recommended that you formally engage a UK tax specialist who will be able to assist you and clarify your responsibilities – as well as file any current or previous tax returns as required.

Next step: Speak to a UK non-resident tax specialist

While it is possible to navigate the NRLS and your UK tax obligations, if you are unsure about any aspects, previously believed you are simply exempt from paying UK tax on rental income because you consider yourself to live abroad or simply want reassurance, it is best to seek formal help.

Experts for Expats can provide you with a free introduction to a UK tax specialist who has significant experience assisting non-resident landlords get their tax filing up to date, ensure the correct taxes are paid and help you avoid any unnecessary fines.

Through our free introduction, you will be entitled to an initial consultation with our trusted tax partner. This is limited to around 15 minutes and can be conducted by phone, online meeting or email and will help you understand if you have responsibilities under the Non-Resident Landlord Scheme or not.

If you decide that you need further assistance, our partner will provide you with a no-obligation quote which you can proceed with if you wish.

Request your free introduction to a trusted UK tax specialist >