Non-Resident Landlords

If you leave the UK and let your property here, your letting agent (or the tenant where there is no agent) should deduct basic rate (20%) tax from the rents paid after deduction of certain expenses, under the non-resident landlord scheme (NRL). This ensures that at least some tax is paid on the income in the UK.

You can avoid having 20% tax deducted if you successfully apply for approval under the NRL scheme from HMRC. Approval will be granted where your UK tax affairs are up to date, or you don't expect to be liable to pay UK tax in the year you apply.

The NRL scheme applies if the landlord's usual place of abode is not in the UK. This is not the same as being not resident in the UK for tax purposes. An absence from the UK for as little as six months can be enough to establish your usual place of abode as being outside the UK.

The NRL scheme applies to members of the armed forces and diplomats, just as it does to any other non-resident landlord. It also applies to overseas trusts and companies, which must have income tax (not corporation tax) deducted from their rental income.

If your UK property is let as holiday accommodation, you may need to register for VAT in the UK as holiday lets are subject to standard rate VAT. As an overseas person you have a zero turnover threshold for VAT registration, so you may have to register for VAT immediately on letting holiday accommodation. However, where a UK letting agent manages the property on your behalf, the VAT registration threshold of £79,000 applies for that landlord.

Letting Relief Explained

If you have let a property which was once your main home, or was treated as your main home as you lived in job related accommodation, letting relief can help reduce the tax you pay on the eventual sale. This tax relief cannot apply to a buy-to-let property that has never been occupied by the owner.

The property must be let as residential accommodation, not as office space, or operated as a trade such as bed and breakfast. If only part of the property is let, that let part must not form a self-contained annexe such as a granny flat.

The tax relief for letting is given in addition to exemption from tax for gains arising in respect of any periods when you occupied the property as your main home. This exemption is also extended to cover the gain arising in respect of the last 36 months of ownership.

The letting tax relief is the lower of three amounts:

- The part of the gain exempt because it was used as your main home;
- the gain attributed to the let period; and
- £40,000 per owner.

Example

Julie owned a property for 13 years, but lived in it for only the first 18 months as her main home. After that it was let for ten years and remained empty before sale. The gain is £130,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:

Capital gain before tax relief: £130,000

Exemption for main home for 18 months, plus last 3 years of ownership: £45,000

Relief for letting is £40,000 as is the lower of:

- £45,000 for period of residence or deemed residence
- 10 x £10,000 actual let period
- and £40,000 maximum lettings exemption

Net gain chargeable: £130,000 - £45,000 - £40,000 = £45,000