Buy-to-lets in the UK can be incredibly profitable and attract a lot of entrepreneurs. They also scare off a lot of potential landlords because they’re taxed in a unique way.
If you are a non-resident landlord in the UK, you will have to pay income tax on the rent you get from your properties. You will need to do this through Self Assessment which might be intimidating at first.
Our guide will help you figure out how much you owe and give you an insight on how to get ready for the UK tax year.
First things first.
Am I a resident or non-resident in the UK for tax purposes?
HM Revenue and Customs (HMRC) will classify you as a ‘non-resident landlord’ if you live abroad for six months or more per year (other rules might apply based on the taxpayer’s personal circumstances).
Non-residents are solely taxed on their income from UK sources. They are not taxed on their international income in the UK. Residents typically pay UK tax on all of their earnings, whether they are earned in the UK or elsewhere.
💡 Non-resident individuals who rent a property and receive income from it in the United Kingdom must register with HM Revenue & Customs (HMRC) and file a Self-Assessment Tax Return each year.
Non-resident landlords who fail to register and file UK tax returns may be subject to fines and interest for late payment of UK tax or late filing of returns.
What is considered a rental income?
Rental income is classified as any money you receive from your tenants for:
- Use of furniture
- Cleaning of public areas
- Hot water
What taxes do you need to pay as a non-resident landlord in the UK?
Even though you may not consider landlords as being self-employed, you must complete and submit a Self Assessment tax return to HMRC if you receive income that is not taxed at source (via PAYE).
There are several sorts of landlord taxes in the UK to be aware of:
- National Insurance contributions (NICs)
- Tax on rental income (income tax)
- Stamp Duty Land Tax
- Capital Gains Tax
Not all of them are paid through Self-Assessment. Stamp Duty Land Tax, Capital Gains Tax, and Income Tax are all forms of landlord tax in the United Kingdom. These are the three most important.
However, you don’t pay them all at once. When you buy an investment property, you must pay Stamp Duty, and when you sell it, you must pay Capital Gains Tax.
The only taxes that landlords in the UK pay on rental income are the income tax and NICs.
Income tax and national insurance contributions are paid on a yearly basis and are depending on the amount of money you earn from renting out your homes. You must register for Self Assessment and file a tax return each year to pay your income tax and NICs.
Income tax is known by a variety of names, including landlord income tax, property income tax, and buy-to-let income tax. However, they all refer to the same tax.
You’re taxed on your net rental income, or profit, which is calculated by summing all of your rental income from different properties and subtracting any rental income tax exemptions, relief, or allowable expenses (total rental income minus allowable expenses).
💡 Each year, the first £1000 in rent you get from your renters, is tax-free rental income also known as property allowance. In other words, if you earn less than £1,000 a year, you don’t have to report it to HMRC.
If your rental income exceeds £1000, you’ll need to file a self-assessment tax return. You’ll also have to decide whether to take the property allowance or deduct expenses from your rental revenue.
If you earn between £1,000 and £2,500 in rental income each year, you should contact HMRC.
You will have to report your rental income on a Self-Assessed tax return if you earn:
- from £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
What are the rates for rental income taxes?
The rate at which you’ll pay tax on rental income is determined by your Income Tax Band. Your rental income is subject to the same income tax rates and thresholds as your personal income.
The Income Tax rates are:
|Income Tax Band||Taxable Income 2020 – 2021||Income Tax Rate 2020 – 2021||Taxable Income 2021 – 2022||Income Tax Rate 2021 – 2022|
|Personal Allowance||Up to £12,500||0%||Up to £12,570||0%|
|Basic Rate||£12,501 – £50,000||20%||£12,571 – £50,270||20%|
|Higher Rate||£50,001 – £150,000||40%||£50,271 – £150,000||40%|
|Additional Rate||£150,001 and above||45%||£150,001 and above||45%|
If your income is below the basic rate threshold of £12,570, you won’t have to pay any tax on your rental income.
To determine your tax bracket you will need to subtract any applicable allowances or expenses.
How do I lower my UK property taxes? How to reduce my buy-to-let taxes?
💡 Make yourself aware of the tax allowances that apply to your personal circumstances and talk to your tax professional about how to save money on taxes.
What are the deductible expenses for rental income? ⬤
There are a variety of expenses that are tax-deductible for landlords. Your expenses must be spent “wholly and solely” for the aim of renting out real estate and these expenses can be deducted from your overall taxable profit.
Some of them are:
- replacement of some domestic items (from April 2016)
- landlord insurance
- running costs – water rates, Council Tax, gas, and electricity
- general property repair and maintenance costs (but not improvements)
- accounting and letting agents’ fees
- legal fees for lets of a year or less
- legal fees for renewing a lease for less than 50 years
- costs like business phone calls, advertisements, and stationery
- vehicle running costs (only for your rental business)
Additionally, you can also claim:
- light and heating costs
- letting agent fees
- service charges
- ground rent
- cleaning costs
- advertising costs
⚠️ A number of changes have been made to the way you can deduct mortgage costs from rental income. Mortgage interest tax relief has been decreased to 25% for 2019-20, and will be zero for 2020-21. It has been replaced by a 20% tax credit on mortgage interest payments.
The government introduced a new tax relief, called a “tax credit”. The tax credit you receive for your finance costs is simply a basic rate decrease from your income tax liability.
What expenses for rental income are not deductible? ⬤
- your full mortgage payment
- mortgage interest
- calls, which not related to your property rental business
- personal expenses not related to your property rental business
- renovations or home improvements
Should landlords pay National Insurance on rental income?
Yes, if renting out properties is your main job and you earn more than £6,475. To understand if renting out your property is considered as running a business, according to gov.uk the following should apply:
- your main job is being a landlord
- you are renting out more than one property
- you are buying new real estate to let out
Even if you manage your property yourself, you don’t have to pay national insurance if you’re not renting out a property as a business.
What about Corporation Tax for landlords?
For the sake of letting a property, some landlords choose to form a limited company. That’s because profits are taxed at 19% instead of the higher individual income tax rates – despite the fact that owning a limited business comes with extra costs and paperwork.
If this is the case with you, you’ll then follow the process for paying Corporation Tax.
How does the Self Assessment process work?
You will need to register for Self Assessment by 5 October in the tax year, after you started receiving your rental profit.
💡 Register as soon as possible because if you do not register by the deadline, you might be fined by the HMRC.
Then, prepare your paperwork. You should keep hold of relevant:
- Contracts/tenancy agreements
- Documents from the purchase of a property
- Bank statements
- Rent books
- Mileage logs and vehicle costs if you use one in relation to a property business
What is the non-resident landlord scheme?
The NRLS is a program that taxes the rental income from property in the UK of non-resident landlords whose regular place of abode is outside the UK.
To comprehend the NRLS, it is necessary to realize that if you live abroad but receive income from letting out a property in the UK, this income is typically taxable in the UK, just like any other income derived from a property in the UK.
This is true regardless of whether you are a resident or non-resident of the United Kingdom for tax reasons. Under the NRLS, the UK law aims to collect tax on rental revenue before it is paid to the overseas landlord.
The tax year runs from 1 April to 31 March for the purposes of the NRLS.
The NRLS imposes duties on the rental agent (if there is one) or the tenant. The UK letting agent is required to withhold tax on rental earnings before it is paid to the foreign landlord. If there is no UK rental agent, the renter must withhold tax personally if the rent paid to the overseas landlord exceeds £100 per week.
Any tax withheld by the rental agent or tenant is subsequently deducted from the foreign landlord’s UK tax liability when they file a UK Self Assessment tax return.
⚠️ Even if there is no tax to pay, non-resident landlords are usually required to file a Self Assessment tax return.
Form NRL6 is issued to the landlord as evidence of tax remitted to the HMRC. If the landlord wants to receive his rent without any deduction, he or she must complete a form NRL1, and submit the same to HMRC for approval.
Am I considered a non-resident landlord for the purposes of the NRLS?
It is critical to understand that being a non-resident landlord for the purposes of the NRLS is not the same as being a non-resident landlord for UK tax purposes.
⚠️ It is possible to be considered as a non-resident landlord for the purposes of the NRLS while being a UK resident for tax purposes, which can be very confusing.
If you have a rental income from the UK, and a usual place of abode outside the country, you will be treated as a “non-resident landlord” for the purposes of the “non-resident landlord scheme”.
💡 The good news is that if you have questions, the property tax experts at PTI are ready to answer them all.
What obligations do I have as a non-resident landlord, under the NRLS?
The NRLS does not impose any specific obligations on non-resident landlords. On the other hand, if you have UK property income, you will typically be required to file a UK Self Assessment tax return, on which you should subtract any NRLS tax paid from your UK tax obligations.
However, under the NRLS, you can register to receive your rental revenue gross (i.e. without any withholding tax withheld by the letting agent or renter).
What is the tax deadline for landlords in the UK?
For paper tax returns, the deadline is 31 October after the end of the tax year, and for online tax returns – 31 January. The deadline is the same for paying the tax you owe for the 2020/21 tax year is 31 January 2022.
How to file your UK tax return online and pay your property tax online?
As discussed above, unless HMRC instructs you otherwise, you need to declare your income from renting out your property on a Self-assessment tax return.
HMRC’s online services are not available to you. Instead, you should:
- send your tax return to the HMRC by mail
- take use of commercial software
- enlist the assistance of a tax professional, such as PTI
However, with PTI, you can file your UK tax return online and make a property tax online payment.
What if you are late?
⚠️ If the return is not filed by the due date, there is an automatic non-refundable penalty of £100 (usually 31st January following the end of the tax year).
⚠️ If the return is more than three months late, a penalty of £10 is imposed for each day the return is late, up to a maximum of ninety days. If the return is more than six months late, there will be an additional penalty of £300 or 5% of the liability, whichever is higher.
⚠️ There will be an additional penalty of £300 or 5% of the liability if the return is lodged more than twelve months after the deadline (i.e. 31st January 22 months after the end of the tax year).
Who can help me file my UK self-assessment tax return?
We understand how difficult dealing with the UK tax authorities can be. However, assistance is on the way! You don’t have to be concerned about filing your UK tax return anymore.
Property Tax International (PTI) specializes in real estate taxes and our tax experts will assist you in filing your UK property tax return online and pay your property tax bill online. We’ve been completing international tax returns on behalf of our clients for over 20 years.
Why choose us?
- With PTI you can file your UK property tax return online and make an online property tax payment.
- We will respond to all of your inquiries. PTI offers multilingual email and phone support.
- Our tax experts will manage the complicated UK property tax return filing on your behalf and liaise with the tax authorities.
- You will reduce your UK property taxes, save money and maximize your profit from your UK rental property.