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Changes to the taxation of UK property income of non-resident companies

Overview

With effect from 6 April 2020, non-UK resident companies that carry on a UK property business will be charged to corporation tax, rather than Income Tax on their profits. This change will align the treatment of resident and non-resident corporate landlords.

Whilst the headline rate of corporation tax is lower than the basic rate of Income Tax in the UK, and therefore the change will be welcomed by many, the calculation of taxable profits under corporation tax rules is different than under Income Tax rules, so there will be winners and losers from the change in regime.

What’s new?

For periods to 5 April 2020, non-UK resident companies generating rental income from UK real estate are taxed under Income Tax rules at a rate of 20%.

From 6 April 2020 corporate non-resident landlords are taxed under the corporation tax rules, with profits taxed at the prevailing rate of corporation tax, currently 19%.

The existing withholding tax requirement, which requires letting agents (or tenants where there is no letting agent) to withhold 20% tax from the landlord’s rental income and pay this directly to HM Revenue & Customs (HMRC) will continue to apply, unless the landlord has HMRC approval to receive rental income with no tax deducted.

Companies already registered as a non-resident landlord should have received a letter from HMRC setting out their new corporation tax reference number. These companies will be regarded as having notified HMRC of their chargeability to corporation tax.

Who will be affected by the rules?

Non-UK resident companies that generate rental income from UK real estate either directly or indirectly (for example through a partnership or unit trust) will be affected by the changes.

What will happen on the transition?

The non-UK resident corporate landlord will have a cessation of their property business for Income Tax purposes on 5 April 2020. There will be a deemed commencement of a property business for corporation tax on 6 April 2020. Companies that do not prepare accounts in line with the tax year will be required to apportion income and expenses between the two regimes where their accounting period straddles the commencement date.

The tax adjustments that normally apply on the cessation of a business will not apply in this situation and so income tax property losses (ITPLs) and capital allowance pools will continue into the corporation tax regime, with the losses available to shelter post 6 April 2020 property profits  from corporation tax.

What are the key differences in the taxation regimes?

Losses

Losses generated by a company within the corporation tax regime will be subject to the corporation tax loss restriction rules. This limits the amount of brought forward losses that can be relieved in a future accounting period to £5m, plus 50% of the profits in excess of £5m.

Financing costs

One of the biggest impacts is likely to be caused by the changes to the taxation of financing costs.

Under corporation tax rules financing costs fall into the ‘loan relationship’ regime and are calculated separately from the property business profits.

There are several specific corporation tax measures which restrict the amount of interest a company can claim a tax deduction for. The Corporate Interest Restriction (CIR) limits the interest deduction to 30% of taxable profits where the interest costs exceed £2m a year. In addition, companies with a high level of debt (or high interest rate) may find a proportion of their interest
costs are not deductible.

The transitional rules relating to foreign currency loans and derivative contracts are particularly complex and specialist advice should be sought.

Anti-hybrid rules

The UK has widely drawn anti-hybrid rules which can deny a deduction for expenses where it is made to or from a hybrid entity or relates to a hybrid instrument.

Financial Statements

The corporation tax rules are designed to work closely with the accounting treatment of items for financial statements prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP) or International Financial Reporting Standards (IFRS). Many non-resident companies do not prepare financial statements, or if they do they may not be compliant with IFRS or UK GAAP. In order to comply with corporation tax rules, non-resident companies will need to prepare UK GAAP or IFRS compliant financial statements covering periods from 6 April 2020.

Filing requirements

The non-UK resident landlord will still be required to complete the existing Form SA700 for the year ended 5 April 2020, and file this with HMRC by 31 January 2021. Going forward the non-UK resident landlord will file corporation tax returns for the period covered by the company accounts.

Non-UK resident corporate landlords will need to file UK GAAP or IFRS compliant financial statements with their tax return, and the financial statements will need to be tagged in iXBRL (a machine-readable language).

Tax payment dates

Under the current regime, Income Tax is payable on 31 January following the end of the tax year. In most cases, the non-UK resident landlord will also be required to make ‘payments on account’ towards this liability. Each payment is calculated as 50% of the prior tax year liability and is due on 31 January during the current tax year and 31 July following the end of the tax year.

Any balancing payment is then due for payment on the following 31 January, along with the first payment on account for the next year.

Under corporation tax rules companies will have different tax payments dates. For companies with taxable profits less than £1.5m (although this limit is divided by the number of associated companies in the corporate group), the payment date will be nine months and one day after the end of the accounting period.

Where a company has taxable profits of more than £1.5m it will be required to make estimated tax payments on a quarterly basis throughout the year. Interest will be charged where the instalment payments are underpaid.

The UK Government has recognised the need for transitional arrangements between the two payment regimes and therefore companies with accounting periods which straddle 6 April 2020 will be exempt from the quarterly payment rules for that accounting period.

Taxation of profits on disposal

Profits made on the disposal of UK property are also subject to UK tax. Gains on the disposal of residential property have been taxable since 6 April 2017, but with effect from 6 April 2019 gains on the disposal of commercial property are also subject to UK tax.

What should I do now?

Non-UK resident corporate landlords should review their property portfolios to understand how their tax profile is going to change under corporation tax rules.

Companies should make sure they are ready for the transition, including understanding how profits will be apportioned between the pre and post 6 April period, along with the impact on their filing deadlines and tax payment dates.

What should I do now?

We have a multi-disciplinary property team with deep commercial experiences across the sector. We can assist with reviewing your property portfolios and understanding how the transition to corporation tax will impact you or your businesses.

If you would like to discuss this in more detail then please contact your usual Blick Rothenberg contact or one of the individuals listed to the right of this article who will be able to assist you further.