HOW MUCH UK RENTAL INCOME IS TAX-FREE IF YOU'RE A UK LANDLORD LIVING OVERSEAS?

It's a dream that many people have. Move to another country, somewhere sunnier, to work or retire. For those who choose to live their dream, living overseas is often made possible to a greater or lesser extent by rental income they earn from UK property, one or more, which may include the former family home.

Rental income from UK residential property when you live overseas is subject to UK Income Tax rules, while making a profit (a “gain”) from selling UK property or land can also mean you owe Capital Gains Tax.

AIA strategic partner, GoSimpleTax have produced a guide which is intended to help you safely navigate all of the above.

Read on to:

• Find out about the Non-Resident Landlord Scheme.
• Learn how much UK rental income is tax-free if you’re an ex-pat landlord living overseas.
• Find out how much tax you’ll pay on UK rental income.
• Discover what allowances and reliefs you can claim to reduce your tax bill.

The Non-Resident Landlord Scheme

People from the UK who live abroad for six or more months a year and rent out UK property may be considered “non-resident landlords” by HMRC, regardless of whether they’re a UK resident or not for tax purposes. Introduced to ensure that UK Income Tax is paid on UK rental income, the Non-Resident Landlord Scheme (NRLS) requires landlords, tenants and letting agents to obey strict rules if they’re to avoid being fined.

Under the NRLS, the tenant or letting agent is legally obliged each month to deduct any tax due before the landlord living overseas is paid any rent. All of this deducted tax must be paid in full to HMRC every three months.

When the ex-pat landlord completes their UK Self Assessment tax return, the tax their tenant or letting agent has paid to HMRC can be claimed as a deduction against the landlord’s UK tax liability. Non-resident landlords can apply to have rent paid to them directly in full, so that they can pay the tax themselves via their Self Assessment tax return. To do this, you apply by filling in form NRL1, which you then send to HMRC.

How much UK rental income is tax-free?

• You don’t pay tax on the first £1,000 of income you earn from UK property rent, it’s your tax-free Property Allowance, whether you live in the UK or overseas.
• If you own a UK rental property with others, both or each of you can claim the £1,000 Property Allowance and deduct it from your share of the gross rental income to help reduce your tax bill. This is instead of claiming actual allowable expenses related to the rental property, you cannot claim both.
• Income Tax payers also get a tax-free Personal Allowance of £12,570 a year (2022-23 tax year). You don’t pay tax on your income – from all taxable sources – until it goes over the Personal Allowance threshold.
• If you’re not a UK resident, you may be able to claim the Personal Allowance at the end of each tax year in which you earn UK taxable income, this depends on your country or residence and the terms of any double taxation treaty in place with the UK. You do this by sending the R43 form to HMRC.
• If you’re a high-earner, the Personal Allowance decreases by £1 for every £2 above £100,000 net income and if your income is £125,140 or more, you don’t get any Personal Allowance.
• Claiming for “allowable expenses” for costs you incur to maintain and rent out your property can reduce your tax bill. Allowable expenses can include fees you pay to a letting agent, lawyer or accountant, insurance, maintenance, repairs, cleaning and gardening costs, etc.
• If your rental property is furnished or part-furnished, you may be able to claim Replacement Domestic Items relief for replacing sofas, beds, carpets, curtains, white goods, sofas, crockery, cutlery, etc, as long as the quality is the same or similar. If the quality is higher, you can only claim for the amount you would pay for a like-for-like replacement.

Need to know! You cannot claim for allowable expenses if you claim the Property Allowance. If you have a lot of allowable expenses, it would be better to claim for them, rather than the Property Allowance.

How much tax is due on rental income?

If your property rental income is only £1,000-£2,500 a year, contact HMRC, because you may be told to not bother reporting it. If your total property income is £2,500 to £9,999 after “allowable expenses” (see above) or £10,000 or more before allowable expenses, you must report it via a Self Assessment tax return (SA100).

• The Basic Rate of Income Tax (20%) is payable on total taxable income between £12,571 and £50,270.
• The Higher Rate of Income Tax (40%) is payable on income between £50,271 and £150,000.
• The Additional Rate of Income Tax (45%) is payable on income of more than £150,000 (2022-23 for all figures).

Taxable income from all sources must be detailed when completing your Self Assessment tax return, because this will determine how much Income Tax you pay (not just your rental income). Private residential landlords who aren’t running property rental businesses don’t pay National Insurance on their rental income. If you were running a professional property rental business, letting out numerous properties, National Insurance may be payable. 

Need to know! If a letting agent or tenant already deducts tax before paying the remainder of the rent to you, you do not have to pay HMRC any more tax on your UK rental income.

How to report UK rental income

In most cases, you must complete and file a Self Assessment tax return if you earn taxable income from renting out UK property. However, you can’t do this via HMRC’s online portal if you’re non-resident in the UK.

Instead, you must download and fill in a Self Assessment tax return (and the SA109 and SA105 forms) and send them to HMRC by post or use commercial Self Assessment software that supports online reporting.

Further Advice

If you require further advice on tax related matters go to the AIA Tax Insights Page, or alternatively visit the AIA GoSimpleTax Partner Page.