Many people overseas purchase properties in the UK to rent out, capitalising on rising
UK real estate prices whilst benefiting from the rental yields. The UK will tax the rental
profit arising from any property situated in the UK, regardless of the residence of the
owner or the tax treatment in the country of residence.
Profit is calculated as rental income less any allowable eductions, such as maintenance and repair costs, mortgage interest, letting agent or management fees.
In addition, a “wear and tear” allowance of 10% of the rental income is allowable as a deduction for properties which are let fully furnished.
Tax is charged at 20% on profit up to £31,865 (2014/15), 40% between £31,866 and £150,000 and then 45% thereafter. Certain individuals may also be able to claim the personal allowance of £10,000.
For any landlord who is not UK resident, the UK tax authorities will impose a withholding tax of 20% on rental income, applied by the letting agent or in some cases the tenant.
Non-resident Landlord Scheme
To avoid the negative cash-flow effects of the withholding tax, a landlord may be able to register under the Non-resident Landlord Scheme (NRL scheme).
If approval is granted, no withholding tax is applied and rental income is paid gross to the landlord.
This does not exempt the rental income from UK tax, but does help with cash-flow. A non-resident landlord will still need to complete UK tax returns and pay tax as normal at the year end.
Non-resident Landlord Company
It is possible for overseas persons to own UK properties through a non-UK resident company. This has several benefits, including:
- Maximum income tax rate of 20% on the rental profit;
- Inheritance tax protection on the value of the UK property; and
- No UK capital gains tax on sale of the company shares.
If residential property is to be held through a company, consideration should be given to the rules concerning corporate enveloping of UK residential property, known as the ‘Annual Tax on Enveloped Dwellings’. If the company is renting the property to an unconnected party, there should not be any applicable tax payable but an annual return would need to be filed to claim the relevant relief.
There are additional considerations where commercial property is purchased, including whether capital allowances for integral features / plant and machinery can be claimed, and the format of any lease agreement. VAT will also be a consideration when acquiring commercial property.
Blick Rothenberg Services
We act for a number of clients who are not resident in the UK but let out UK property. We assist in the completion of the relevant forms to register the owner for the NRL scheme to prevent withholding tax and also complete the UK tax returns to report the income in a timely manner and claim all allowable costs.
We can also advise on the most appropriate ownership structure to hold the property, whether that is personally, in a company or through a trust. The UK tax rules in this area are complex and care must be taken to ensure efficient income tax structuring on the rental profit does not prejudice capital taxes, such as capital gains tax, stamp duty land tax and inheritance tax.
This information is available to download using the link to the right.