Understanding NRL Requirements with Ernst & Young

Non-resident Landlord (NRL) Requirements

Last month, we covered capital gains tax relief homeowners can obtain on their main property and, particularly, the reliefs available for those who have been absent from their property for reasons including employment abroad.

It is a natural follow on to discuss the tax requirements for individuals who move abroad and rent out their UK property. We have found that affected clients, generally, are unaware of these rules which are not well advertised…

While you might be living it up in sunnier climes, it unfortunately doesn’t mean that you are exempt from UK taxes. Any profits made from renting your property will still be subject to income tax as, generally, you will continue to be liable for UK taxes on UK source income.*

Without taking any action, under the Non-Resident Landlord scheme, tenants or letting agents (Rettie’s, of course!) have an obligation to deduct a flat rate of 20% of gross rental income and pay this directly to HMRC. This payment is effectively paid on a landlord’s behalf and acts as a credit in their name.

The 20% deduction at source does not account for any deductible expenses you may have on the property such as repairs, maintenance or letting agent fees. It also does not account for any personal allowance that could be available (currently you can earn up to £12,570 as a UK or EEA citizen without paying tax). If the rental income is your only UK source income, the likelihood is that 20% tax at source any income tax liability on your rental profits, but you would need to complete a self-assessment form each year to recover any overpaid tax. If you have additional UK sourced income and the property is in Scotland, your rental income would be subject to your marginal rate at Scottish rates of income tax (up to 48%) depending on the level of income.

The alternative is to make an application through a NRL1 form to HMRC to receive the rental income gross. By making the application, you are committing to reporting any rental profits on an annual UK self-assessment return and paying any taxes due on time. The application is usually accepted within 30 days of submission.

Example:

Jock, a UK citizen, owns a property in Edinburgh and relocates to Dubai. He decides to rent out his four-bedroom house for which he receives gross rental income of £18,000 per annum. His deductible expenses are £4,000 per annum. This is Jock’s only UK source of income.

Without NRL1 form

The tenant or letting agent would deduct 20% (£3,600) at source and pay this directly to HMRC. This will be treated as a credit on Jock’s behalf but he will need to complete a self assessment return to recover any overpaid tax.

With NRL1 form

Jock’s self assessment return would need to be submitted by 31 January following the tax year (ending 5 April) to which the rental profits relate.

The application process is relatively straightforward, particularly if you have previously completed annual returns. If you haven’t, you would need to apply for a Unique Taxpayer Reference (UTR) through the UK’s Government Gateway portal before making an application. Generally, it is worthwhile to make a NRL1 application to ultimately save you a large cashflow disadvantage and a significant administrative hassle.

*Please note that Scottish properties are generally subject to the Scottish rates of income tax (SRIT). We have assumed SRIT to apply for the purposes of this article. Please also note that tax regimes in other jurisdictions can vary widely. It is possible that UK rental income could be taxable on residents of certain jurisdictions although double tax relief usually applies so as not to be taxed twice. Professional tax advice should be obtained covering both jurisdictions to ensure the correct tax is paid and reported in each relevant territory.