UK: The UK Income Tax Position For Non-Resident Landlords

Non-UK residents investing in UK rental property may not realise that although gains made on selling property are generally not subject to capital gains tax, rental income is always subject to income tax at the basic rate (currently 22%).

This income tax must be deducted from the rent by the tenant or letting agent, unless the landlord has registered with HMRC to receive rents gross. If so, the landlord is taxed on rent less allowable expenses.

Allowable expenses can include:

• agents’ fees
• rent and service charges
• insurance
• accountancy fees
• maintenance costs
• interest incurred on loans taken out to acquire or improve a property.

Allowances broadly equivalent to depreciation on capital expenditure, such as plant, equipment or furnishings in commercial property may also be available. A similar, although less generous, wear and tear allowance of 10% of rent is available for furnished residential property.

Rental losses in one year can be carried forward to lessen rental profits in a subsequent year thus reducing future tax liabilities.

This tax regime applies regardless of whether the property is owned by a nonresident individual or company.

The first step is to apply for approval from the Centre for Non-Residents in Nottingham to receive rental income with no tax deducted. Approval is normally granted to anyone who is not in arrears with their UK tax obligations.

Without this approval, the Non-Resident Landlord Scheme requires the letting agent (or the tenant if there is no agent) to deduct tax from the rental income on a quarterly basis. Although the agent may deduct any allowable expenses he/she incurs, making a quarterly return is an onerous obligation and the agent is not permitted to deduct other eligible expenses borne by the landlord, such as interest.

Special care should be exercised where a property is jointly owned by UK and non-UK residents, for example, in a limited partnership. This is because the obligation to withhold income tax at source may have arisen without the UK resident partners being aware of it.

Assuming approval is given, the landlord will then be required to submit an annual tax return. For the tax year to 5 April 2006 the deadline is 31 January 2007. Tax is due in instalments – for example, for the year to 5 April 2006, instalments were due on 31 January and 31 July 2006, with a final payment due on 31 January 2007. Taxes or returns paid late can incur interest and penalties.

Smith & Williamson deals with the tax affairs of a large number of non-resident landlords and can assist with the initial planning and structuring, applying for approval to receive income gross, calculating tax liabilities, filing tax returns and dealing with Her Majesty’s Revenue & Customs (HMRC) enquiries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.