The Ultimate Expat Guide to Paying UK Tax on Rental Income

As a Brit earning rental income from UK property, it's important to be aware of your tax obligations as an expat. This article helps you stay compliant to UK tax laws, whilst reducing the burden of tax on rental income.

Resident or non-resident for UK tax purposes

If you spend six months or more abroad each year, HM Revenue and Customs (HMRC) will consider you a ‘non-resident landlord.’ Additional rules may apply depending on your personal situation. Only UK income is taxed for non-residents.

What counts as rental income in the UK?

In the UK, rental income refers to the funds given to you by your tenants.

• Rent
• Payments for a bundle of services, like utilities, cleaning, repairs, and gardening
• Renters' insurance reimbursements
• Any additional payments related to renting the property

Renting out a furnished property? Don't forget, you might owe taxes on the income from the furniture and household items too!

How much tax do you pay on rental income?

After deducting any "allowable expenses" from your total rental income and accounting for your tax allowances and other taxable income, HMRC will use the information you provided in your self-assessment tax return to determine how much tax you owe.

Your tax liability is calculated by adding the taxable profits from all of your rental properties in the UK, if you have more than one. You will pay more tax if your total taxable income is higher.

Once your entire taxable income has been determined, you will be taxed based on whatever income tax band you belong to. For the 2023–2024 tax year, the income tax band tax rates are as follows:

• Personal Allowance: Up to £12,570, taxed at 0%
• Basic rate: £12,571 to £50,270, taxed at 20%
• Higher rate: £50,271 to £125,140, taxed at 40%
• Additional rate: Over £125,140, taxed at 45%

For every £2 of net income over £100,000, the Personal Allowance is reduced by £1, and if your net income is £125,140 or more, you are not eligible for the Personal Allowance. Scotland has slightly varying income tax rates and bands.

Income from a jointly owned UK property is typically divided and taxed 50/50 by a married couple or civil partners, unless you can provide HMRC with proof of uneven ownership.

Do you have to inform HMRC that you're leaving the UK?

Notify the UK tax authority, HMRC, if you're bidding farewell to the UK for good or embarking on a full-time overseas adventure lasting a whole tax year (6 April to 5 April).

You can notify HMRC by:

1. Completing form P85 if you don't typically file a self-assessment tax return. Self-assessment: HMRC's way of collecting Income Tax from landlords, sole traders, and more.

2. Completing the SA109 supplementary page alongside your self-assessment tax return. To file your taxes, you'll need to go old school with a hard copy, embrace technology with tax software like Taxd, or seek help from a UK accountant.

NOTE: As a non-resident in the UK, you're exempt from paying UK tax on income or gains earned outside the country.

Do rentals in the UK have to be taxed?

Renting out property or land in the UK can often result in revenue for foreign nationals being liable to UK income tax. The amount of your other income and rental revenue will determine a lot of things.

After receiving all of the money, you have two options for paying the tax: either you or your tenant (under the Non-resident Landlords Scheme, if their rent exceeds £100 per week), or leasing agents can take out the tax, pay it to HMRC on your behalf, and then reimburse you for the remaining amount. The latter is more typical of landlords who don't reside in the UK; at the end of the tax year, you will receive a certificate detailing the amount of tax that has been withheld, which will assist you in filing your self-assessment tax return.

You must apply by completing form NRL1 if you wish to use self-assessment to pay tax on your rental income. In the event that HMRC accepts your application, it will notify your renter or leasing agency not to withhold taxes from your rent, and you will be required to file a self-assessment tax return in order to record all of your rental income. If you have a history of filing your taxes or paying your taxes after the deadline, HMRC will not approve your application.

NOTE: As an expat, if you sell land or property in the UK and have a gain, you will have to pay Capital Gains Tax. If you're a private landlord, you don't have to register for VAT or pay national insurance on your rental revenue.

How do you register as a Landlord to undergo self-evaluation?

The first £1,000 of rental income is tax-free for you because of the property allowance. Just a heads up, though. Determine what is more tax-efficient for you, since if you claim the property allowance, you cannot claim “allowable expenses.”

You must get in touch with HMRC and be instructed on how to disclose your rental income if your total yearly income falls between £1,000 and £2,000.

You are required to disclose your rental income through self-assessment if it totals between £2,500 and £9,999 after permissible expenditures have been subtracted.

NOTE: In order to avoid penalties, you must register by October 5th, if you haven't already, for the UK tax year (April through April 6th), during which you received taxable rental income.

Ways to fill out your tax return for self-assessment

You must file a self-assessment tax return to HMRC in order to report your taxable rental income, unless instructed otherwise by HMRC. The issue is that you are unable to utilise HMRC's online tax return filing services if you are an expat residing abroad. You can do two things.

Option one is to complete a paper tax return and mail it to HMRC. Just 4% of taxpayers still file their self-assessment tax returns on paper. Inexperienced taxpayers are more likely to make mistakes when filing self-assessment tax returns, even though HMRC offers instructions on the process. The forms must be filed three months early, by midnight on October 31.

Option two is to use an HMRC-recognised tax software like Taxd to file your self-assessment tax return. It's reasonably priced, and the prompts save you time, trouble, and even money by specifying exactly what data you must enter and where. Taxd is a great way to effortlessly file your return in a tax-efficient manner.

NOTE: Don't forget, the online self-assessment filing deadline is January 31st at midnight! Don't miss it or you may end up paying a £100 fine. The longer you wait, the higher the fine climbs.

What expenses can you claim as an overseas landlord?

Many expenses, often known as "allowable expenses," can be subtracted by HMRC from your rental income if they are "wholly and exclusively" related to renting out your UK property. You can deduct part of the expenditures in situations when there is mixed usage, such as with your cell phone, provided you can accurately determine what percentage of the overall cost was linked to the property.

Landlords are permitted to incur the following costs:

• Upkeep and repairs of the property (ex, repairing windows or roof tiles)
• Ground leases and, if necessary, service fees
• Renovating in between leases
• Insurance (public liability, contents, and building, for example)
• Gas, electricity, water rates, and council taxes (if you pay them instead of your renter)
• Costs of cleaning and gardening
• Management/letting agent fees
• Legal expenses (e.g., for legal advice regarding collecting overdue rent, etc.) for rentals lasting less than a year
• Direct costs (such as phone calls, stationery, and advertising for prospective renters) associated with accounting and bookkeeping
• Expenses for getting rid of outdated equipment or furnishings, etc.

It is not permissible to deduct the cost of replacing equipment or furniture if you rent out a fully or partially furnished UK property. However, in the event that you replace a couch, bed, curtains, carpets, white goods, china, cutlery, etc., you may be eligible for Replacement Domestic Items relief. If you purchase anything that is more valuable than the original, you can only be reimbursed for the cost of a like-for-like replacement.

Building an extension is not a permitted cost since it constitutes a "capital improvement," which raises the property's worth. If you sell your UK property in the future, you might be entitled to deduct capital expenses from your capital gains tax, so be sure to save thorough records of all your spending and evidence of purchase.

Tax returns should be filed by non-resident landlords even if there is no tax due. The landlord receives Form NRL6 as proof that taxes have been sent to HMRC. The landlord must fill out form NRL1 and submit it to HMRC for approval if they wish to get their rent without any deductions.

NOTE: Unfortunately, you can't deduct mortgage capital repayments as an expense. In the past, deducting mortgage interest and finance costs from rental income helped lower your Income Tax bill. However, since recent years, you now receive a 20% tax credit instead. Don't forget to ask your mortgage provider for permission before renting out your UK property.

For most non-resident landlords with rental income within the basic rate (20%) band, you will in theory see the full tax benefit.

Final Words

Tackling the UK tax system can be quite an adventure, especially for expats balancing foreign residency and UK rental income. Luckily, the self-assessment system simplifies the process of declaring and paying UK tax on rental income. Expats can ace their taxes and boost rental income by knowing the rules, registering right, and making smart deductions.

With Taxd, you can handle your UK tax obligations with confidence and understand the self-assessment system.

FAQs

1. What is an NRL1 Form?

The NRL1 form tells HMRC that you want your UK rental income paid without deduction of UK tax. Typically, letting agents or tenants deduct tax when they pay rent to a non-resident landlord.

2. Why do overseas landlords need to fill out an NRL1 Form?

Overseas landlords who receive rental income from UK properties often end up paying more tax than they need to. This is because tax is typically deducted at 20% of their income, regardless of expenses or personal allowances. By completing the NRL1 form, non-UK resident landlords can inform HMRC that they want their UK rental income paid without any deduction of UK tax.

3. How to submit the NRL1 Form?

If you've lived in the UK before and have a Government Gateway ID, you can apply online, fill out the required information and submit it electronically. However, for those who have never lived in the UK before, they can complete an online form, print it out and send it to HMRC via post. After submission, it usually takes around 30 days for HMRC to process and approve the application.