Many non-UK residents own UK property. The UK tax law in this area has changed rapidly and significantly in recent years and the rules are now complex. This poses challenges for non-UK resident owners who are often unaware of such developments.
The following outlines the current UK tax requirements, for a Portuguese resident individual, if they rent out and/or dispose of UK property.
UK Income Tax
If the UK property (residential or commercial) is rented out, the rent less allowable expenses is liable to UK Income Tax. Often, non-UK residents do not realise that they are liable to tax in the UK on such income. Liability remains no matter how long the owner has lived outside the UK, even if they never intend to go back.
Many owners will be entitled to the standard “tax-free” personal allowance of (currently) £12,570, in which case, only if their UK profits exceeds this allowance, will UK tax be due.
In the UK, there is a requirement for tax to be withheld (by either tenant or agent) on rent paid to a non-UK resident. However, it is possible for a non-resident owner to register as a Non-Resident Landlord (NRL) with HMRC. This enables the owner to receive the rent in full, achieving a cash-flow advantage. However, this does not mean that the rent is exempt from UK tax, the liability to tax on the rental profits remains and an annual Self-Assessment UK Tax Return (“Return”) must be filed.
Annual UK Return
Currently, it is not possible for non-UK residents to use HMRC’s Self-Assessment software to file their annual Return online, although many mistakenly think that they can, by erroneously filing with HMRC as a UK resident (which can lead to further issues!). Non-UK residents must either complete a paper Return and send it to HMRC by post, or use commercial UK tax software that supports their non-UK resident filing position, often by engaging the services of a suitable tax adviser.
There are fines imposed for late filing and late payment of any tax.
UK Capital Gains Tax (CGT)
Capital gains made on the disposal of UK property, directly or indirectly held, are chargeable to UK tax, regardless of the residency of the owner. This has been the position from April 2015 for directly held UK residential property and from April 2019 for directly held commercial property and indirect disposals.
The applicable rate of CGT depends on the circumstances, for example whether the property is residential or commercial, whether it’s a direct or indirect disposal, and whether it’s a disposal by an individual or entity.
Generally, for individual owners of UK property, where the gain exceeds the individual’s annual CGT exemption of (currently) £12,300, and they own the property directly, gains on UK residential property are taxed at 18% or 28% and gains on UK commercial property are taxed at 10% or 20%.
When calculating the gain or loss arising on the sale, only the gain made since April 2015 (residential) and since April 2019 (commercial) is liable to UK tax. Therefore, the owner is able to substitute the purchase price with those market values if this gives a more beneficial result.
From April 2020, on disposal of a UK property, non-UK resident individuals are required to file a CGT on UK Property Account online. The timeframe for reporting is now 60 days from the date of conveyance (this was extended from the previous 30-day timeframe in the recent UK budget, the change effective from 27 October 2021), CGT on any gains may also need to be paid within this time period. Interest and penalties apply for late filing and/or payment.
For non-UK residents, there is no exemption from filing this CGT Account even if no capital gain (and hence no tax) arises on the disposal of the property. This position is different for UK residents.
HMRC guidance indicates that UK Government Gateway login details are required to file this Account. However, many non-UK residents may not be able to set up a Government Gateway account, for example, if they do not have a UK National Insurance number or UK Unique Tax Reference. In such cases, it is possible to access this CGT reporting service using an alternative process.
Annual UK Self-Assessment also required
A non-UK resident individual may feel quite satisfied that they’ve “ticked their UK compliance box” after submitting the CGT Account and paying any CGT, within the required timeframe. However, they also need to file their annual UK Self-Assessment Tax Return in which details of the property disposal and CGT Account must be included.
Portugal/UK Double Taxation Agreement
For residents of Portugal, the Double Taxation Agreement (DTA) in force between Portugal and the UK continues to generally give the UK the right to tax such UK rental profits and UK capital gains on the disposal of UK property. Therefore, the DTA does not exempt a resident of Portugal from complying with their UK tax obligations.
If Portuguese tax is due on the profits/gain made on the UK property, then double taxation relief should be available to eliminate any double taxation.
The widening UK tax landscape
The UK tax landscape for non-UK resident owners of UK property extends beyond income and capital gains and all areas should be considered on review. For example, most holdings of UK property now fall within the UK’s Inheritance Tax regime, whether held by UK domiciled or non-UK domiciled individuals (and regardless of residence status).
The need to review
Any residents of Portugal owning UK property should review their UK tax position, in order to plan for the future and to avoid being caught unawares. A review undertaken in good time can save considerable cost and anxiety in the long term.
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