Non-resident landlords – Beds are Burning. There’s a new tax system in town and it’s gunning for you. It will take money from you and give it to Revenue. And it will be up to you to get it back. The lyrics of the Midnight Oil song Beds are Burning are washing around in my head.
The time has come to say fair’s fair
To pay the rent, to pay our share
The time has come, a fact’s a fact
It belongs to them, let’s give it back
It’s all change from 1 July this year and a meeting I had this week brought up some interesting points. I met that James Doran fella. The ladies love him, and fellas are jealous of his smoking good looks and brooding charm. You’d know him from that tv programme, The Ball, with your woman from The X-Files. And those movies, 69 Shades of Grey. We will look at
- James Irish properties
- The problem
- Solution
- Pays to be tax compliant
James Irish Properties
James has 3 Irish properties. Two in Dublin and one in Kilkenny Young James didn’t understand the Irish Tax system too well. And sure, why should he, I hear you say? Sure, he should have people for that! His properties are in
- Lowfield Road Dublin 4. Bought for €200,000 in 2014. Rent is €1,500 per month.
- Middleearth Drive Dublin 6. Bought for €320,000 in 2019. Rent is €2,000 per month.
- Upper Hurley Road Kilkenny City. Bought for €225,000 in 2021. Rent is €1,250 per month.
James lives in London for most of the year and is resident in the UK for tax purposes. He has declared all the Irish rents in his UK Tax return and paid tax on them. Not being aware of his Irish Tax obligations he never paid tax on the rents here nor did he file any tax returns here.
It doesn’t make sense to him. Why would he pay tax in both countries on the same income? For us tax advisors we sometimes have to deliver bad news. But these actors have to be able to handle the truth. And the truth is that Ireland has primary taxing rights as the properties are here.
James must file an Irish Tax return and pay tax on the income here. To avoid double taxation, he would get a credit against his UK taxes for the Irish tax that he paid.
Sell one property
He was looking to sell his property at Lowfield Road as he’s aware that there’s some Capital Gains Tax Relief. His auctioneer thinks he’d get €450,000 for it. That makes sense but he needs to be sure he can qualify for this relief by meeting all the conditions.
The Problem
The problem for James is that he isn’t tax compliant here. He had rental income here since 2014 and hasn’t filed tax returns or paid the tax. One plan is to get things right going forward and let’s not worry about the past.
The second problem is that James may not qualify for CGT relief on the sale of Lowfield Road.
My view is the past can come back to bite you in many ways. Only sorting things out from now isn’t an option that I would favour. The reasons for that are
- James’ current rents are €4,750 per month. His letting agents will pay 20% of that, €950 per month, to Revenue. That is €11,400 in a full tax year. Let’s say he files his return and is due a tax refund of €3,000. Will Revenue give that money back to him?
- Revenue know that James has got rental income for all his properties. His letting agent must file a Form 8-3 every year. That form confirms the rent paid and the name, address, and tax number of the landlord.
- If James doesn’t declare the rent on Lowfield Road, he won’t qualify for the CGT Relief
Value of CGT relief
| Sales Proceeds Lowfield Rd | €450,000 |
| Costs of sale, legal, tax etc | €10,000 |
| Less cost of purchase | €200,000 |
| Gain | €240,000 |
| Exempt Part 7/9ths | €186,667 |
| Taxable Gain | €53,333 |
| Tax Payable 33% | €17,600 |
| Value of relief €186,667 x 33% | €61,600 |
The Solution
The best solution for James is to tidy up everything going back to 2014. The plan would be to do Income Tax returns for the last 4 years 2019 to 2022. Once they are out of the way then do a qualifying disclosure with Revenue to tidy up the years from 2014 to 2018. As a non-resident, James has some advantages in that
- The tax rate here is 20% on the rental profits
- There is no PRSI charge
- USC will apply but only once the rental profits are more than €13,000 and the rates are quite low
- Once he has filed his return and paid the tax, he can claim a credit for this in his UK Tax return
The big picture for him is that he wants to make sure he gets the CGT relief. After all, it’s worth over €60,000 to him. With the sale proceeds he’d like to clear the mortgage on Middleearth. That’s getting more and more expensive with all the interest rate hikes.
Bad news
With the good news out of the way, there is bad news that he must be aware of.
- The Tax liabilities for 2019 to 2021 will be subject to a 10% surcharge. This is because the returns are late.
- There will be interest and penalties on the tidy-up of the taxes from 2014 to 2018. Interest is at a daily rate, and the penalty will be lower when he gets to Revenue first.
2022 Tax return
Let’s look at the 2022 Tax return numbers to see how they pan out
| Rent €4,750 x 12 | €57,000 |
| Letting fees | €7,400 |
| Mortgage Interest | €5,000 |
| Repairs | €3,000 |
| Other – Insurance, RTB, etc | €2,100 |
| Rental Profit | €39,500 |
| Income Tax 20% | €7,900 |
| USC | €1,065 |
| Tax liability | €8,965 |
There is no surcharge for 2022 as the return isn’t late. Once there’s a tax assessment for 2022 and he pays the tax, he can use this for his UK return. Claim a credit for the Irish tax paid against his UK taxes for 2022/23.
2024 Tax return
We roll forward to 2024. This will be the first full year of the new Non-Resident Landlord Withholding Tax [NLWT] system. Taking the same figures as 2022 above we have
| Tax liability | €8,965 |
| NLWT deducted | €11,400 |
| Tax refund | €2,435 |
With the new NLWT system, James must file an Income Tax return. The onus is on him to file it and if he doesn’t, he won’t get his tax refund. Plus, if he files it late then the refund will be lower as there will be a surcharge on the tax liability.
Pays to be Tax Compliant
The clear message here is that it pays to be tax compliant. When you have a letting agent Revenue know that you are getting rental income. They know how much you got and when you got it. It’s only a matter of time before they catch up with you.
In James’ case, his main aim is to qualify for the CGT relief on the sale of Lowfield. Not being tax compliant puts over €60k at risk and it makes no sense to do that.
Our view here is to pay what you owe when you owe it but pay no more. The key is to maximise the expenses you claim to reduce the rental profit resulting in a lower liability. By being compliant you are avoiding
- Interest charges
- Surcharges
- Penalties
- Losing other reliefs
- Stress and worry about Revenue breathing down your neck
Don’t forget your Local Property Tax [LPT] obligations either. Revenue collect this tax and you get punished for not having it up to date. You can end up paying LPT twice if not careful and you won’t get it back. Also you can’t sell the property until the LPT is up to date.
So, James, Revenue have got you by the “liathroidi” and they won’t let you go until you give them what they want.
In their eyes, your money belongs to them. They won’t give it back until you pay your share.
Are you a non-resident landlord that wants to get things right? If so, Start here
