Overseas Landlords and UK Property

Many people overseas purchases properties in the UK to rent out, capitalising on rising UK real estate prices whilst benefiting from the rental yields. The UK will tax the rental profit arising from any property situated in the UK, regardless of the residence of the owner or the tax treatment in the country of residence.

Profit is calculated as rental income less any allowable deductions, such as maintenance and repair costs, mortgage interest, letting agents or management fees.

In addition, a “wear and tear” allowance of 10% of the rental income is allowable as a deduction for properties which are let fully furnished.

Tax is charged at 20% on profit up to £31,785 (2015/16), 40% between £31,786 and £150,000 and then 45% thereafter. Certain individuals may also be able to claim allowance of £10,600.

For any landlord who is not UK resident, the UK tax authorities will impose a withholding tax of 20% on rental income, applied by the letting agent or in some cases the tenant.

A non-resident entity, whether it is an individual, a trust or a company, remains liable to UK tax on rental profits arising from UK sited properties. There is a special scheme that non-resident landlords must register under.

A non-resident landlord can apply at any point to H M Revenue & Customs (HMRC) to receive their rents with no tax deducted. HMRC will approve applications as long as the landlord is up-to-date with their UK tax affairs or they do not expect to be liable to UK tax for the year concerned. HMRC must also be satisfied that the landlord will continue to be compliant with their UK tax obligations. If successful, the landlord can receive their UK rental income without having tax deducted. However, the rents are still liable to UK income tax and may need to be reported via a self-assessment tax return.

Non-resident Landlord Scheme (NRLS)

There is an obligation on letting agents and tenants to operate the Non-residents Landlord Scheme (NRLS) under certain conditions. Letting agents of a non-resident must deduct tax from the landlord’s UK rental income and pay the tax to HMRC. Tenants (where there is no letting agents) who pay rent of more than £100 a week to a non-resident landlord must also deduct tax from the landlord’s UK rental income and pay the tax to HMRC.

To avoid the negative cash-flow effects of the withholding tax, a landlord may be able to register under the Non-resident Landlord Scheme (NRL scheme).

If approval is granted, no withholding tax is applied and rental income is paid gross to the landlord.

This does not exempt the rental income from UK tax, but does help with cash-flow. A non-resident landlord will still need to complete UK tax returns and pay tax as normal as the year end.

An individual will be regarded as having a ‘usual place of adobe’ outside the UK if absent from the UK for six months or more. It is therefore possible for an individual to be resident in the UK for tax purposes and to be a non-resident landlord for the purposes of the NRL scheme.

Where letting agents or tenants have no reason to believe that a landlord has a usual place of abode outside the UK, they are not required to make any special enquiry and they then would not have to operate the scheme.

For jointly owned property (including husband-and-wife cases), each individual is treated as a separate landlord. It is possible for some of those landlords and not others to be non-resident landlords for the purpose of the NRL scheme. It is also possible for both spouses or one and not the other to be non-resident for the purposes of the scheme.

Receiving gross rental income can have the following advantages for a non-resident landlord:

• Cash-flow – rather than having tax deducted at source, the tax is payable on 31 January following the end of the tax year in which the rents were due. For example, the tax due on rents received in 2015/16 would not be payable until 31 January 2017 (subject to the payments on account systems).
• Correct amount of tax – the letting agent/tenants is not allowed to deduct expenses paid by the landlord directly in arriving at the profit figure on a higher profit figure, leaving the landlord to then reclaim overpaid tax through the self-assessment system.
• Personal allowance – where the non-resident landlord has their personal allowance available (currently £10,600) then no tax should be due on the profits within this amount. The personal allowance is currently available to all British nationals or residents of certain non-EU member states may be able to claim the personal allowance by virtue of the double tax treaty held within UK.
• Cost – the obligations on the letting agent/tenant to operate the deductions of tax can be demanding   and may result in additional charges.

Non-resident Landlord Company
It is possible for overseas personas to own UK properties through a non-UK resident company. This has several benefits, including:

• Maximum income tax rate of 20% on the rental profit;
• Inheritance tax protection on the value of the UK property.

If residential property is to be held through a company, consideration should be given to the rules concerning corporate enveloping of UK residential property, known as the ‘Annual Tax on Enveloped Dwellings’. If the company is renting the property to an unconnected party, there should not be any applicable tax payable but an annual return would need to be filed to claim the relevant relief.

Companies that have their main office or other place of business outside the UK, and companies incorporated outside the UK, normally have a usual place of abode outside UK. However, companies regarded as a resident in the UK for tax purposes do not have a usual place of abode outside the UK for the purposes of the scheme, even if incorporated outside the UK.

The UK branch of a non-resident company, where that branch is within the charge to Corporation Tax, does not have a usual place of abode outside the UK for the purposes of the scheme.

Trustees have a usual place of abode outside the UK if all the trustees have a usual place of abode outside the UK (following the rules for individuals and companies as outlined above). If one or more of the trustees does not have a usual place of abode outside the UK, the trustees are not a non-resident landlord for the purposes of the scheme.

In addition to all of the above areas, landlords also have to be aware of the ever-changing tax legislation.

Capital Gains Tax (CGT)
Currently non-resident landlords are liable to UK CGT where they dispose of UK property. Currently you will get an annual exemption of £11,100. Any gains above £11,100 for tax year 2015/2016 will be liable for capital gains tax at 18% for a basic rate tax payer and 28% for the higher rate tax payer. 

Inheritance Tax (IHT)
IHT is assessed on property sited in the UK, irrespective of where the owner is resident or domiciled. Consequently, properties in the UK could still be exposed to UK IHT at

40% where the overall estate exceeds the nil rate band (currently £325,000 each).

Commercial Property
There are additional considerations where commercial property is purchased, including whether capital allowances for integral features / plant and machinery can be claimed, and the format of any lease agreement. VAT will also be a consideration where acquiring commercial property.

Southbrook Business Solutions Services
We can provide assistance on all of the above matters and planning to minimise the overall tax exposure. We act for a number of clients who are not resident in the UK but let out UK property. We assist in the completion of the relevant forms to register the owner for the NRL scheme to prevent withholding tax and also complete the UK tax returns to report the income in a timely manner and claim al allowable costs.

We can also advise on the most appropriate ownership structure to hold the property, whether that is personally, in a company or through a trust. The UK tax rules in this area are complex and care must be taken to ensure efficient income tax structuring on the rental profit does not prejudice capital taxes, such as capital gains tax, stamp duty land tax and inheritance tax.