Non Resident Landlord Tax Free Allowance
If you have rental property in the UK but live overseas you may still be eligible for a tax free allowance.
Based on CBRE research, between 60-70% of London property owned by non residents is tenanted. Assuming, similar numbers across the country, then based on numbers from the Land Registry we could be looking at over 180K buy to lets and a lot of non resident landlords.
Those landlord’s are going to fall into one of three groups:
- Those that aren’t eligible for a tax allowance
- Those that are eligible and that are taking full advantage of that fact
- And those that are eligible but that are not taking advantage of that fact
Make sure you don’t fall into group 3!
What is the tax free allowance?
Perhaps, the best thing about the UK tax system is the personal allowance. It is a threshold below which you don’t pay tax.
There are different types of allowance to accommodate different types of tax, but the most important taxes for landlords are income tax and capital gains tax. This is because rental income is liable for income tax and any gains you make when selling a property may be liable for capital gains tax.
UK residents and some non residents are eligible for both allowances meaning they only need to pay tax above a certain level.
And in fact, due to the personal allowance many landlords don’t pay tax at all.
Are you eligible?
If any one of the following applies to you, then the allowance should be available:
- You have a British passport
- You are a citizen of a European economic area (EEA*) country
- You worked for the UK government at any time during the tax year in question
*EEA countries include the following:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Iceland, Liechtenstein, Norway, and the UK.
Are you classed as a Non Resident Landlord?
The UK Government i.e. HM Revenue and Customs (HMRC) treat you as ‘Non Resident Landlord’ if you spend 6 months or more abroad annually.
This means it is possible for you to be considered UK resident for tax purposes in other situations yet still be classed as a non resident here.
And this isn’t impacted if you jointly own a property. Your share of any gains you get from property you jointly own with somebody else could still be liable for taxes.
How Much is Allowance is Available?
If you are a landlord, you should receive income in the form of rent from your tenants. Rent is taxable above a certain threshold. Below that threshold you don’t pay.
The personal allowance for income tax is just over £12.5K currently.
Consequently, eligible landlords won’t pay tax on rent received as long as it is below £12.5K. That’s £25K for a couple.
A lot of landlords that just let out one or two properties avoid paying income tax because their rental income is below the threshold.
If you sell a property in the UK you may be liable for capital gains tax. In other words, the profit you make is classed as a capital gain, and capital gains above a certain threshold are taxed.
Currently, the capital gains tax personal allowance is £3000. (Not so long ago, it was much higher).
The pace at which house prices increase, and the fact that the capital gains allowance is less than the income tax allowance means any landlord who sells is more than likely going to need to pay capital gains tax.
That said, you can easily avoid it by simply not selling your property!
Remember: A major advantage of capital gains is the fact you only pay tax on realized gains and you don’t have to realize them to enjoy them. Say you buy a £100K house using £25K deposit and £75K from the bank. If that house doubles in value, and your financial standing remains the same, you should be able to borrow £150K from the bank ie get your hands on an extra £75K tax free!
What is the Non Resident Landlord Scheme?
The Non Resident Landlord Scheme is the method used by HMRC to collect income tax from rents received by property owners who live outside the UK for 6 months or more.
In short, you either leave it to your tenant or agent to deduct your tax or you can apply directly to HMRC to receive income tax without any deduction.
I’m sure it goes without saying that most landlords take this approach. The only downside is you have to complete a self assessment tax return.
Doing this yourself can be time consuming and complicated, but if you’ve got plenty of time on your hands you can download the forms yourself from here.
The next approach is to get some software to help you. Taking the best part of a day to fill paper forms becomes about half an hour when taking the app/software approach. I’ve compared some tax software packages here.
Alternatively, if you want to minimize the chance of errors and maximize your time, you can pay somebody to do everything for you. I’ve talked more about that here.
If you are not resident in the UK and are eligible for the personal allowance you can use form R43 (which you can find here) to make your claim.
Do I need to contact HMRC when I sell a property?
All non-residents need to inform HMRC of all property or land sales within 30 days.
You must do this regardless of whether or not you make or lose money i.e. all property / land sales by non-residents need reporting no matter what.
Luckily this is a straight forward procedure. You can complete a Non Resident UK Capital Gains Tax Return. You can find this here.
Don’t report late otherwise you may be fined and the later you report, the greater the fine.
- 0-6 months costs £100
- 6-12 months costs an additional £300 or 5% of any tax due (whichever is greater)
- 12+ months cost an additional £300 or 5% of any tax due (whichever is greater)
You may also be eligible for additional late penalties and interest if you miss any payment deadlines.
