There is an obligation on letting agents and tenants to operate the non-resident landlord scheme (NRL scheme) under certain conditions.
Letting agents of a non-resident landlord must:
- deduct tax from the landlord’s UK rental income; and
- pay the tax to HMRC.
Tenants (where there is no letting agent) 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.
Who are non-resident landlords?
Non-resident landlords are persons:
- who have UK rental income, and
- whose ‘usual place of abode’ is outside the UK.
For these purposes individuals, companies and trustees can be non-resident landlords. For partnerships each partner is treated as a separate landlord.
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 purposes of the NRL scheme. It is also possible for both spouses or one spouse and not the other to be non-resident for the purposes of the NRL scheme.
It is for the letting agent or tenant to determine the ‘usual place of abode’ of the landlord. If this is in doubt the letting agent or tenant should get more information from the landlord to satisfy themselves on the point.
Letting agents’ and tenants’ obligations
Letting agents and tenants who have to operate the NRL scheme must:
- register with HMRC’s Personal Tax International (PTI)
- account quarterly for any tax to HMRC Accounts Office, Shipley
- complete an annual information return:
Letting agents and tenants who have to operate the NRL scheme must provide to PTI by 5 July each year for the year to 31 March an Annual Information Return on form NRLY
- where they are required to account for tax, provide their non-resident landlords with a certificate each year by 5 July following the end of the year to 31 March
- when the non-resident landlord completes their UK self assessment tax return for the year to 5 April in which the relevant 31 March falls they can set off the tax shown on the certificate against their overall UK tax liability
- keep sufficient records to show that they have complied with the requirements of the scheme.
Letting agents and tenants are not required to calculate or pay tax on the rental income of a non-resident landlord if HMRC has told them in writing that the landlord is approved to receive the rental income with no tax deducted.
Tenants have the right to deduct any tax they have to pay under the scheme from their rent, or from any other money owing to the non-resident landlord. They also have the right to recover from the landlord any tax they have to pay under the scheme where they did not deduct it from their rent or other money owing.
Non-resident landlords can apply to receive rental income with no tax deducted
Most non-resident landlords who wish to receive their rental income gross (with no tax deducted by the agent or tenant) can apply to PTI for approval using one of the following forms:
- NRL1i – if the applicant is an individual
- NRL2i – if the applicant is a company
- NRL3i – if the applicant is a trustee (including corporate trustees).
If approved, then rental income will be paid gross, however it is still liable to UK tax in the normal way. Non-resident landlords can apply for approval to receive their UK rental income gross on the basis that:
- their UK tax affairs are up to date
- they have never had any UK tax obligations
- they do not expect to be liable to UK tax for the tax year in which the application is made.
If approved, PTI will send a notice of approval to receive rental income gross to the non-resident landlord. They will also send a copy to the non-resident landlord’s accountant or tax adviser if they hold authority to do so. A separate notice will be sent to the letting agents or tenants named on the application form authorising them to pay rental income to the non-resident landlord without deducting tax.
PTI may refuse an application from a non-resident landlord if it is not satisfied that:
- the information provided in the application is correct
- the non-resident landlord will comply with their UK tax obligations.
PTI may withdraw approval from a landlord if:
- it ceases to be satisfied that the information provided in the application is correct
- it is no longer satisfied that the non-resident landlord will comply with their UK tax obligations
- the non-resident landlord fails to supply information requested by PTI.
If approval is withdrawn, PTI will issue a notice to the non-resident landlord stating their reasons for the withdrawal and the date from which it is effective. PTI will also notify the letting agent or tenant of the date from which they should start deducting tax from the rents they pay to the non-resident landlord.
If PTI refuse an application, or withdraw approval, the non-resident landlord can appeal against the refusal or withdrawal.
Where there is a change of letting agent or tenants (if no letting agent) a notice held by the previous letting agent or tenant cannot be transferred to the new letting agent or tenant. New letting agents or tenants must deduct tax until they receive a notice from PTI. The non-resident landlord can apply to PTI for such a notice by writing to them with details of the new letting agent or tenant.
If a non-resident landlord dies the HMRC approval notice to pay rent gross automatically ceases to have effect. Then letting agents and tenants who continue to pay rent should deduct tax unless the new payee:
- does not have a usual place of abode outside the UK
- is someone for whom they already hold an approval to receive their rent gross.
Letting agents and tenants who have to operate the NRL scheme are usually required to submit quarterly and annual returns as described above. They must also provide other information when requested to do so by PTI. Letting agents and tenants must make available for inspection all books, documents and other records that they have or control as PTI may reasonably require to enable them to be satisfied that the letting agent or tenant is meeting his or her obligations under the scheme.
Letting agents and tenants should retain records for six years after the end of the year to 31 March to which they relate.
The maximum penalty chargeable for failure to provide information is initially £300, however if the failure continues after that penalty is imposed, there are further penalties of a maximum of £60 for each day on which the failure continues after the day on which the original penalty was imposed.
PTI may charge penalties where letting agents and tenants submit incorrect quarterly or annual returns also if returns are not submitted when required. The maximum penalty for an incorrect return is £3,000 but it is common for the penalty to be reduced for various factors.
The obligations of the letting agents and tenants to operate the NRL scheme are separate from those of the non-resident landlord to disclose the rental income on their tax return and pay their tax. If PTI discover that a letting agent or tenant has failed to account for tax under the scheme when required to do so they will normally seek to recover the tax from the letting agent or tenant.
However, if the letting agent or tenant is able to show that the non-resident landlord has already paid any tax due on the rental income or has no tax to pay on it, PTI will normally be prepared to agree to recover only interest and penalties from the letting agent or tenant. PTI cannot disclose to letting agents or tenants whether a landlord has paid his tax, due to confidentiality.
You can find more on ACCA’s Technical Advisory webpages.
Article contributed by ACCA