HONG KONG residents who let property in Britain should be preparing for major changes to the way their rental income will be taxed, a senior tax consultant warns. Nick Hammans, a partner for Coopers & Lybrand, said from April 6 next year non-resident owners would be able to receive their rent without the deduction of 25 per cent tax. This will provide property owners with better cash flow and enable them to provide more realistically for their tax liability. Mr Hammans said: 'Landlords need to have applied for and received a certificate from the Inland Revenue enabling such rents to be received gross. 'If such a certificate has been received, the managing agent will no longer be assessed for tax on the rental income and tax reserves will not need to be retained by them.' But the income will still be subject to tax and non-resident owners will need to file annual accounts or returns. Mr Hammans added: 'Non-resident owners would be well advised to seek professional assistance in order to prepare annual accounts and tax computations, submit these to the Inland Revenue and agree the approximate tax liability.' The new rules also scrap the distinction between furnished and unfurnished accommodation. 'This means that losses from one letting may be set against profits of another.' Deductions can be made for expenses ranging from water rates, insurance of property and contents through to agent's fees or commission and accountancy fees. 'The expenses which may be deducted must be incurred wholly and exclusively for the purpose of the business of the letting of property.' This means that visits back to inspect the property or the cost of major repair works may not be deductible. Who will be able to apply for an exemption certificate to receive gross rents? Individuals, trusts and companies resident overseas will be able to apply for an exemption certificate. Non-resident companies with a branch or agency in the UK or who trade in the UK will not fall within this regime. The Inland Revenue has said it expects the majority of applications will be granted provided they have a good tax history, do not have tax arrears and satisfactorily complete the appropriate forms. There may be cases where there is a dispute with the Inland Revenue and it is possible that in certain other circumstances overseas landlords may not be given a certificate. Inland Revenue will have the right to withdraw exemption certificates. What happens when an exemption certificate is granted? Both the overseas landlord and the managing agent will be notified, enabling the rents to be paid gross. The overseas landlord will need to comply fully with self assessment, filing a return after the tax year ends and paying any tax on the due dates. When will it be possible to apply for an exemption certificate? Application forms are expected to be available shortly. Early completion and submission of the forms will ensure that certificates are in place by April 6, 1996. What happens if you do not qualify for an exemption certificate or if such a certificate is withdrawn? The managing agent will be obliged to deduct 25 per cent tax on net rents and pay this tax to the Inland Revenue quarterly. At the end of each tax year a schedule will be given to the overseas landlord giving details of gross rents, expenses paid, net income and tax deducted. The landlord will need to submit accounts to the Inland Revenue after the tax year ends, showing the actual position with a calculation of any under-or over-payment of tax. Certain agents would be able to assist. Will the managing agent have any annual reporting responsibilities to the Inland Revenue if you have an exemption certificate? Inland Revenue has indicated that managing agents will need to provide a list of all overseas landlords giving details of their name, property address, gross rental income, tax reference numbers and exemption certificate number. This will provide Inland Revenue with a cross referencing system to ensure that returns are made by the overseas landlord under the self assessment regime. It should be noted that this form of return is similar to information returns currently completed by letting agents in respect of landlords for whom they collect rent whether or not the landlord is outside the UK. How should you plan for the new regime? Overseas landlords should file and agree their accounts with the Inland Revenue for the fiscal year 1994/95 and any earlier periods which are outstanding as soon as practicable. An application form to receive gross rents from April 6, 1996 should be completed and submitted to the Inland Revenue later this year. Although the form may look simple, take care filling it in, particularly in light of declarations that need to be signed. You should advise your letting agent of the action you intend taking and ask them to liaise with your advisers. Discuss the implications of the new regime on your affairs with your tax adviser and the managing agent to ensure a smooth transition from the current to the new regime and the release of existing tax reserves.