Tax on property income in United Kingdom
Taxation Researcher | January 31, 2023
Tax Rate on Rental Income
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Global Property Guide research
Nonresident UK property owners are taxed on their properties located in the UK, subject to certain exemptions and reductions given in double tax treaties. Couples and registered same sex partners may be taxed either jointly or separately.
Route 1: Pay income tax upfront (withholding tax).
Non residents usually pay income tax in normal progressive rates , which must be withheld by the tenant or letting agent, if there is one. In cases where the landlord does not have a letting agent, and the weekly rent exceeds £100 (€133), the tenant must usually withhold taxes from payments made to a nonresident landlord.
Certain expenses may be deducted from gross rental income, including costs incurred for business purposes and not of a capital nature. However, only expenses incurred by the tenant or letting agents may be deducted. Letting agents and tenants are sent manuals by the Inland Revenue to guide them through the process of taxing the landlord. In the case of vague expenses, the tenant or agent must be ´reasonably satisfied´ that the expense is legitimate before deducting.
No personal allowances are available to those who choose this route.
Where there isn´t a letting agent, the process could be a considerable burden upon the tenant and tenants may simply refuse to participate, in which case the landlord may opt for the second route.
Route 2: Receive untaxed income now and pay tax later.
A nonresident landlord may opt to receive his rent untaxed, and choose to file a tax return instead. He will need to fill in form NRL1 (for individuals) or NRL2 (for companies) or NRL3 (for trustees, from the Centre for Non-Residents). Note that each spouse receives the benefit of allowances.
This option may be rewarding for those nonresidents eligible to claim UK allowances, who include:
- Commonwealth citizens (including British citizens)
- Citizens of a state within the European Economic Area (EEA)
- Present or former employees of the British Crown (including civil servants, members of the armed forces, etc.)
- UK missionary society employees
- Civil servants in a territory under the protection of the British Crown
- Residents of the Isle of Man or Channel Islands
- Former residents of the UK who live abroad for the sake of their health or the health of a member of their family who lives with them
- Widows or widowers of an employee of the British Crown
- Citizens of Bulgaria or Israel
- Individuals who do not fall within the above categories, but are entitled to claim by virtue of the conditions of a Double Taxation Agreement which the UK may have with their country of residence. Depending on the precise terms of the Agreement concerned, such an individual may be entitled to claim either as a resident national of the other country, or merely as a resident of the other country.
Under route 2, rental income is subject to the following income tax rates:
Income Tax 2023
|TAXABLE INCOME, £||TAX RATE|
|Up to 37,700||20%|
|37,700 - 150,000||40%|
|Source: Global Property Guide|
Taxpayers may deduct personal allowances
Taxation of UK Furnished Holiday Lettings
UK furnished holiday lettings are treated differently from other property lettings (including residential property lettings) for tax purposes.
A furnished holiday letting is available for lease to the public for at least 140 days during the year, and is actually let for at least 70 of those days. It is let at a commercial rate and it is not continuously occupied by the same person for more than 31 days within seven months of the same year. The 70-day rule can be satisfied even if some of the landlord´s units were let for less than 70 days so long as both the 140-day and 7-month rules are satisfied by all of them.
The landlord may deduct the costs incurred solely for earning business profits and claim capital allowances (normally, at more than 40% of cost in the year of purchase, and at 25% of remaining cost for the succeeding years) or renewals deduction for the capital assets he bought.
The landlord may offset losses against total income. He may also carry the losses forward for set off against future letting profits.
Capital Gains Tax
Individuals who are not resident in the UK are not liable to capital gains tax on the sale of UK property unless they have been resident in the UK within the past five years.
Capital gains are taxed at progressive rates, from 10% to 20%. The capital gains tax rate of 10% applies to capital gains up to the basic rate threshold and 20% on the capital gains above the basic rate threshold.
Indexation and tapering reliefs have been abolished along with the entire previous income-tax based CGT system. However, a £40,000 (€53,333) letting relief is available for each taxpayer.
If the house was the principal residence throughout the owner´s period of ownership, no CGT is payable, and proportional reliefs are available
What does "resident" mean? An individual is always deemed resident if he is present in the UK for more than 183 days.
UK residents who leave the UK. If an individual is a UK resident, and he goes abroad permanently, he will be treated as remaining resident and ordinarily resident if his visits to the UK average 91 days or more a year.
If an individual leaves the UK to work full-time abroad under a contract of employment, he is treated as not resident and not ordinarily resident if he meets all the following conditions:
- His absence from the UK and his employment abroad both last for at least a whole tax year
- During his absence, any visits he make to the UK
- Total less than 183 days in any tax year, and
- Average less than 91 days a tax year. (The average is taken over the period of absence up to a maximum of four years)
Regardless of employment, if an individual has left the UK permanently or for at least three years, he will be treated as not resident and not ordinarily resident from the day after the date of his departure providing
- His absence from the UK has covered at least a whole tax year, and
- His visits to the UK since leaving
- Have totalled less than 183 days in any tax year, and
- Have averaged less than 91 days a tax year
Council tax is a tax set by each locality on UK properties that may be used as dwelling, regardless of whether owned or rented. Fifty percent (50%) of the tax payable is based on the property band (A-H) to which the property belongs. The other 50% depends on the number of persons living in the property. If a person, of legal age, lives alone in the property, the taxpayer may avail of the Single Person Discount and the second 50% may be reduced to 25%.
Where there is an assured tenancy (the normal case) the tenant pays the tax. However if there are no tenants, property owners are usually liable for this tax.