Although in most cases an agent who receives rent for a landlord is treated by HM Revenue & Customs as simply an intermediary, the landlord being the one who is chargeable to the tax, there are instances where a tax obligation is placed on an agent – and where, additionally, the agent is obliged to inform HMRC of any client who receives rental income. That is when the Non-Resident Landlord (“NRL”) scheme applies: in short, when the landlord lives abroad.
Although HMRC refers to “non-resident” landlords, it is usual place of abode and not non-residence that determines whether a landlord is within the scheme or not. In the case of individuals, the Revenue normally regards an absence from the UK of six months or more as meaning that a person has a usual place of abode outside the UK.
Basics of the scheme
The NRL scheme puts into effect the legislation contained in the Taxation of Income from Land (Non-Residents) Regulations 1995 and applies to:
- letting agents who handle or control UK letting income on behalf of a landlord whose usual place of abode is outside the UK; and
- tenants who make payments directly to a landlord whose usual place of abode is outside the UK.
The scheme requires UK letting agents to deduct basic rate tax from any rent they collect for non-resident landlords on a quarterly basis, to 30 June, 30 September, 31 December and 31 March. The basic calculation in determining what to tax is rents received less deductible expenses, and in doing so, we are looking at a cash basis, so it is the date the letting agents/tenants actually receive and pay the rents or expenses that is relevant, not the periods for which the rents or expenses are due. This resulting “income less expenses” figure is then taxed at the basic rate of 20% and that sum is paid over to HMRC.
The non-resident landlord will get credit for this tax which has been paid and will be given a tax certificate prepared by the agent. The agent also has to complete and submit a quarterly return and then, after the end of each tax year, an annual return, which not only includes details about the landlords for whom tax has been deducted but also for any non-resident landlords who have successfully applied for approval to receive rents without tax being deducted.
Non-resident landlords can apply to receive their rent gross on the basis that:
- their UK tax affairs are up to date; or
- they haven’t had any UK tax obligations before they applied; or
- they don’t expect to be liable to UK income tax for the year in which they apply; or
- they are not liable to pay UK tax because they are sovereign immunes (these are generally foreign heads of state, governments or government departments).
Non-resident landlords who are eligible can apply for approval to receive their UK rental income gross at any time, and this includes applying before they have left the UK or even before the letting has started. So if you are ever in conversation with any client who says they are thinking of going abroad and renting out their house, you should make them aware that they will fall within the NRL scheme but point out that they could make things much easier simply by applying for authority for the rents to be paid gross.
Agents: gross benefits
Application is straightforward, by completing a form NRL1 which can be downloaded, with guidance notes, from the HMRC website. Approval is usually backdated to the beginning of the quarter in which the application is made, so it’s obviously better to apply sooner rather than later: apart from the obvious benefit of getting rent without having it taxed first, it makes the administration and associated paperwork the letting agents have to do much more straightforward when approval is in place.
It saves time in not having to (a) review the rents received and expenses incurred by every non-authorised landlord every quarter: that can be done at the end of the year for the annual return; (b) calculate the assessable amount and then the tax due on it, and paying it over to HMRC, and (c) complete the annual tax certificates each year for every “unauthorised” landlord.
It also saves the problems that arise when a landlord has arranged to have the net rents credited to his bank account every month, but gets less than he bargained for because of the retention for tax; or, even worse, has it all paid over to him and the agent then realises at some later point that it has to be included in the annual NRL return. This brings forth the problem of ensuring a bigger retention is kept back from the next rent payment, and having to explain to the client why that is, or of asking for the tax element to be handed back or – heaven forbid – of the firm meeting the tax cost in the interests of keeping face, and the client! Another reason in favour of clearly explaining the tax implications at the outset.
It’s worth mentioning, though, that, even where authority has been given by HMRC to have the rent paid gross, it is still liable to UK tax, so all non-resident landlords have to include the rental income in any tax return HMRC sends them.
The unsuspecting tenant
Anyone care to have a guess at what is meant to happen if there is no agent in place: how does the scheme apply when the tenant pays their rent direct to the non-resident landlord? Well, unless the rent is less than £100 per week, the tenant has to comply with the terms of the NRL scheme. They have to retain and pay over the tax each quarter, give the non-resident landlord a tax deduction certificate and complete an annual return.
I would imagine that in most cases, the tenant is unlikely to know all the expenses that will have been incurred by the landlord, as many – mortgage, insurance etc – would be paid by the landlord themselves, so in practice, they would just keep back 20% of the rent due, and send that off to the Revenue every quarter. I say “in practice”, but I actually have no knowledge of how many such cases exist, so perhaps I should say “theoretically”. In reality, I suspect there are a significant number of tenants and landlords who have never even heard of the NRL scheme, so “in practice” are likely to be doing absolutely nothing about it!
Firms, legal or otherwise, who are registered as a letting agent for the purposes of the NRL scheme will routinely be sent quarterly and annual returns and have to include in these, details for all clients who fall within the scheme. Unfortunately, however, unless these firms have a robust system in place to ensure that the person with the responsibility for completing the forms is kept fully informed, there is a danger that clients will be missed from the return.
To complete these properly, it is, therefore, essential to keep a note of:
- any new clients for whom rents are collected where the clients are, or will soon be, non-resident;
- any existing clients who have to date been UK resident and receiving rents from a UK property, but who are about to become non-resident;
- any clients who are already included within the NRL scheme who come back to the UK (and who are, therefore, no longer non-resident);
- any clients who cease renting out the property. And note, the cessation has to be a permanent cessation; it won’t apply if the property is simply vacant for an extended period.
And although it might seem like stating the obvious, it is necessary to know the client’s address abroad, their “place of abode”. Particularly with clients living some distance away, correspondence is frequently via email or telephone so there are no letters being sent out and no clear evidence of the foreign address, but very often agents don’t make the effort to note this. A UK address, even the former home to which they might eventually intend to return, or that of a parent or friend, is not appropriate, and neither a PO box number nor a “care of” address are sufficient for HMRC.
Armed with all the correct information, the quarterly and annual returns can then be completed and the correct amount of tax paid. It should be noted that it is the letting agents who must comply with the obligations under the NRL scheme, so the consequences of getting it wrong will impact on them. If incorrect returns are made, leading to insufficient tax being paid, there is a risk of penalties and interest being due which the letting agent, not the landlord, will have to pay.
There is an extensive set of “Guidance Notes for Letting Agents and Tenants” that can be downloaded from the HMRC site, and it gives detailed guidance on how to operate the Non-Resident Landlord scheme. Anyone who has any involvement with any clients who are non-resident and let out property in the UK, where they or their firm act as letting agent, should take the time to read these, so that they are aware of any action they might need to take to ensure compliance with their obligations under the scheme.
In this issue
- Players and winners
- Access to client money?
- Tax and residential property
- Trusts and the family business
- Planning: the next level
- Reading for pleasure
- Opinion: Tom Mullen/Alan Paterson
- Council profile
- Book reviews
- President's column
- Deed plan criteria
- Decision time for justice
- "Can do": can you?
- Taxes heading north
- When the agent answers
- Taking care of child cases
- Collective redress
- Making sense of hearsay rules
- Don't forget the register
- Alcohol: the healthy option
- Seeding scheme is a draw
- Scottish Solicitors' Discipline Tribunal
- Human trafficking: is the system responding?
- Power points and positive rights
- A way to apply yourself
- Society presents "ambitious plans"
- Law reform roundup
- Business benefits
- On the right track
- Ask Ash
- Business radar
- Legacies: the untapped potential
- Charity begins at law
- Love them and leave to them
- Those difficult relatives