Keep the taxman happy while renting your property from afar

Woman in a hammock on a tropical beach ©iStockphotos
File that return before you chill out

Renting out your property should be a good way to earn extra cash. Just don’t forget to pay your tax.

Most of us dream at some point of what it would be like to up sticks and move to another country, and every year thousands of us act on that dream. During the year to June 2017, for example, 342,000 people living in the UK chose to move elsewhere, 26,000 more than the previous year, according to the Office for National Statistics. If you’re keen to join them, but want to keep your UK property to rent out, just make sure you’re aware of the tax implications.

If you live abroad for six or more months per year, HM Revenue & Customs (HMRC) will automatically treat you as a non-resident landlord, even if you are technically resident in the UK for tax purposes. As a non-resident landlord, you can pay tax in one of two ways. If you let your property through an agent or property manager, they must adhere to the non-resident landlord scheme (NRL), and deduct basic-rate tax from your rent (after any expenses they’ve incurred) before transferring it to you. Where a property is jointly owned, the share of rental income that goes to the non-resident landlord falls within the NRL scheme.

If your tenant pays you directly, and pays more than £100 per week, they must also operate the NRL scheme. (Note that agents must deduct the tax regardless of the amount of rent they collect.) At the end of the tax year, they’ll provide you with a certificate stating how much tax they’ve deducted and, if applicable, you can offset this against your tax bill.

If you’d rather pay the tax via your self-assessment return, you need to apply to HMRC for permission to do this, using form NRL1i. If the tax office approves your application, it will tell your letting agent or tenant not to deduct rent at source, and you will instead have to declare your income through your tax return. This option obviously allows you to keep hold of the cash for longer, but may be less convenient than having tax deducted at source.

Wait a minute, Mr Postman

Whichever option you choose, you need to declare your rental income to HMRC, unless it tells you not to. Just be aware that you won’t be able to use HMRC’s online services – you will have to send your return in via post, using software, or through your accountant. You will need to fill in the “residence” section (form SA109) and the “property” section (form SA105). The deadline for filing a paper tax return is earlier than that for filing digitally – 31 October rather than 31 January.

Be aware that in this situation you may be taxed twice on your property income – both in the UK and the country in which you now live. However, depending on where you live, it may be possible to claim some of this back via a double-taxation agreement. This can take the form of full or partial relief before you’ve paid the tax, or a refund after you’ve paid it. Go to www.gov.uk/government/collections/tax-treaties to look up the relevant agreement. If the tax rates differ between the two countries, you will have to pay the higher of the two.

As each tax treaty is agreed between the UK and the other country in question, the UK’s departure from the European Union should not affect these arrangements. Although it is possible to apply for this relief or refund yourself, if your circumstances are complicated you may want to take financial advice to ensure you claim everything to which you are entitled.