Taxing overseas landlords: the non-resident landlord scheme

Commercial real estate in the UK is often owned by people and companies who are not UK resident.  This is for a variety of reasons, including the desirability of the UK as an investment destination. However, this can make the collection of tax challenging. As a result, HMRC operates the Non-Resident Landlord Scheme ("NRLS") to protect tax on income generated by UK real estate assets for non-resident landlords. The NRLS can require managing agents or tenants to withhold tax (at a rate of 20%, being the basic rate of income tax) from any rental income paid to a non-UK based landlord.

When does the NRLS apply?

The NRLS applies to any landlord who receives rental income from UK real estate and whose "usual place of abode" is outside the UK. For an individual, this means that the landlord has been absent from the UK for 6 months or more (and for trusts, if one or more trustees has their usual place of abode outside the UK). If the landlord is a company, NRLS will generally apply if the landlord is incorporated, or has its main office or place of business, outside the UK.  However, a company will be considered UK resident (and NRLS will not apply) if it is UK resident for tax purposes or has a UK branch that pays corporation tax.

Who operates the scheme?

As a tenant, you will need to operate the NRLS if you pay rent directly to a non-UK resident landlord, and the rent is more than £100 per week. However, you will not need to operate the scheme if:

• The rent is £100 or less per week;
• You pay rent to a UK letting agent or other person appointed by the landlord to collect the rent – in this situation, the UK agent is responsible for operating the NRLS; or
• The landlord has applied for and received approval from HMRC to receive rental income without tax deducted.

How do I operate the scheme?

If you are required to operate the NRLS, you will need to start by registering with HMRC. Once this is done, tax will be due to HMRC each quarter (for the periods ending on 31 March, 30 June, 30 September, and 31 December).  Within 30 days after the end of each quarter, you will need to file the appropriate return form and pay any tax due to HMRC. 

In broad terms, the tax due is calculated as follows:

• First, work out how much rent you will pay in the quarter.  This is any sums paid directly to the landlord, and any sums paid to third parties that are equivalent to paying rent (for example, if the landlord asks you to settle a debt with a third party instead of paying rent for a given period).
• Secondly, deduct any "deductible expenses".  These are any non-capital expenses that relate to the landlord's property management business that you have paid, such as maintenance costs and professional fees relating to the property.
• Finally, calculate how much tax to withhold.  This should be 20% of the rent due, less deductible expenses.

It is important to prepare this calculation in advance of paying rent each quarter, so that you know how much tax to keep back from the rent.

What should I consider?

It is important to establish who the rent is paid to if the landlord is not a UK registered company. If you are taking a new lease and the landlord is an overseas entity with no UK letting agent, you should factor operating the NRLS into your commercial considerations. Operating the NRLS imposes an administrative burden on you. Do you (or your organisation) have the appropriate skills and resources to deal with NRLS correctly? If not, you may need assistance from external professionals, such as an accountant.

If the landlord claims to have registered with HMRC to receive the full rent without deductions, you should not assume this prevents you from needing to withhold sums on account of tax.  You require a notification from HMRC authorising you to pay the rent gross (that is, without deductions).

NRLS is ultimately a tax obligation, so must be taken seriously. However, HMRC's guidance makes it clear that they do not expect tenants to be tax experts, or to make special enquiries to establish whether the landlord is non-resident. Taking reasonable steps to establish and comply with your obligations is likely to be enough for HMRC.

If you are taking a lease of commercial premises, speak to our experts for further advice.

What the Non-resident Landlords Scheme is - GOV.UK