Income Tax on rental income for non-resident landlords

Rental income earned by non-resident landlords is taxable and quarterly as well as annual returns need to be filed with HMRC.

The quarterly return is a calculation of basic rate tax due on rent paid for the quarter and is accompanied by payment of the tax. Where the agent makes the return, deductible expenses are allowed in calculating the tax. However, from 2017 there will be a gradual reduction in tax reliefs for landlords and care will need to be taken to claim the correct deductions.

Where the tenant makes the return, the tax is calculated on the gross amount of the rent. If the tenant is the UK representative, unless otherwise instructed by HM Revenue & Customs, he does not have to deduct tax if the rent is less than £100 per week.

However, the overseas investor can opt to receive rent gross under the non-resident landlord scheme. To do this, he must make an application to HM Revenue & Customs and inter alia satisfy them either that he has complied with all his UK tax obligations to date, or that no forms are due. The non-resident must undertake to operate self-assessment in respect of his rental income and otherwise comply with his tax obligations. Any authorisation which HMRC makes  for gross payments to be made is revoked if these undertakings are breached.

Overseas landlords investing in UK rental property are treated as carrying on a UK property business. The profits are computed in the same way as trading profits, and this means inter alia interest payable on loans to purchase or improve the property are allowable.

It used to be said that for interest to be allowable the loan had to have been incurred to fund the acquisition or improvement of the property; borrowing for non-business purposes on the security of let property was not thought to qualify for interest relief. But HMRC’s published view is that they see such borrowing as a withdrawal of working capital and so may accept the ensuing interest as a deduction providing total borrowing does not exceed the value of the property.

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