Cape Blue

The NRL1 allows you to receive your rent gross in the UK, it does not mean that you will not pay UK (or US) tax on the profit.

To stop overseas landlords making profit on renting UK property and not paying any UK tax, the tax man requires either the letting agent or the tenants themselves to deduct tax and pay it to them. The NRL1 is a permission for the landlord to receive the rent gross and is given to overseas landlords that they trust to pay the tax - if you don't pay, the NRL1 is revoked.

Basically your rental income, minus applicable costs (mortgage interest, agents fees, insurance, corgi, wear & tear etc) gives you your profit. If this is less than the UK personal allowance of circa GBP7K (and you have no other income using up the personal allowance) then you are paying no UK income tax on the rent. If it is above the personal allowance you pay the marginal amount.

The trouble comes in the US (assuming you are earning an income above the US personal allowance), the profit from the UK property letting is added to your income and is taxed at your marginal rate on the whole of the profit (but note that the allowances in the US are more generous, inc depreciation). If you did pay any tax in the UK this amount is deductible.

dbj1000

Isn't this board great? Top quality advice!

khem180

Absolutely - thank you for such thorough responses. The whole rental-income thing has now opened a new can of worms though, so I'm as confused as ever (not because of the explanation above, I'm just reaching information overload right now!) - at least if I file for an extension I'll have more time to work it all out!
I'm pretty sure we don't make much (if any) profit on our rental income. I know we were approved for non-resident landlord status, but if the amount we make make is less than the allowance, do we still have to fill in a UK tax return? Is this something we have to do off our own back, or will HMRC send us a return sometime this month regardless?
Aaargh! Why is it so complicated?! I'm tempted to file dual-status now, so we don't have to bother with any of this. If we can't file jointly though, is that any better than just filing as non-residents? Back to square one!!
Can anyone who's been in a similar situation tell me whether they were definitely better off filing as residents (first year choice - particularly H1B/H4)?

rew1000

I can't swear to it, but if I recall correctly I ran the numbers both ways (dual-status or non-resident) and it was best to be resident for the portion of the year that we were here (i.e. dual-status). Looking at what I can find now, it could be because as a non-resident, you can't claim an exemption for your spouse, so being resident would allow you to deduct an extra $3,650 from your income before calculating tax.

I imagine that if you had significant non US-sourced income after your arrival in the US, it could work out better to be non-resident, as non-residents only pay tax on US-sourced income.

I didn't run the numbers on opting to be treated as resident for the entire year, as I wasn't aware of the foreign earned income exemption so didn't want to be dual-taxed on my UK income. The only advantage I can see for doing it this way would be the ability to file as married filing jointly. Also, I'm not clear from my reading that you could opt to be treated this way.