United Kingdom: Taxes and Costs

United Kingdom: Taxes and Costs

EFFECTIVE TAX RATE ON RENTAL INCOME MONTHLY INCOME €1,500 nil €6,000 9.2% €12,000 12.0% Click HERE for worked sample. SOURCE:   Read disclaimer Rental Income There are two possible routes for non-residents owning and renting out property located in the UK: Route 1: Pay income tax upfront (withholding tax). Unless non-residents take specific steps (see below) they will be taxed on net rental income sourced from the UK at a flat rate of 22%, 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, the tenant must usually withhold taxes from payments made to a non-resident landlord. This system applies separately to the rental income of joint-owners. 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. This process is a considerable burden upon the tenant, and many tenants may simply refuse to participate in which case he may opt for the second route. Route 2: Receive untaxed income now and pay tax later. A non-resident 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 non-residents 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 regime. 2005 INCOME TAX   TAXABLE INCOME, £ (€) MARGINAL TAX RATE Up to 2,150 (€3,157) 10% 2,150 to 33,300 (€48,892) 22% on band over €3,157 Over 33,300 (€48,894) 40% on all income over €48,892 In the case of those entitled to allowances, taxable income is computed after deducting allowances: 2007 PERSONAL TAX ALLOWANCES   CATEGORY TAX ALLOWANCES , £ (€) Personal allowance 5,035 (€7,393) Personal allowance for people aged 65 – 74 7,280 (€10,689) Personal allowance for people aged 75 and over 7,420 (€10,894) Council Tax The council tax is a local tax, based on the property value. There is one council tax bill for each dwelling, whether it is a house, bungalow, flat, maisonette, mobile home or houseboat, and whether it is owned or rented. Each dwelling is placed on a "valuation list" by the local council, and assigned to one of eight "valuation bands"; from A to H (the list will show only the band to which your home has been allocated, not its actual value). Each year the local council will also assign the amount of tax. Property owners are the persons usually liable for this tax, except in cases of assured tenancy when the tenant pays the tax. Capital Gains Tax Individuals who are both not resident and not ordinarily resident in the UK are liable to capital gains tax if their property exceeds £8,800 (€12,920). Income tax rates apply. No capital gains tax if you’re selling your primary home.