Head of Corporate Tax at Blick Rothenberg, Genevieve Morris, said, “The taxation of UK residential and commercial property has been transformed over recent years, impacting on UK and non-UK resident individuals and companies.”
“With effect from 6 April 2020, non-UK resident companies that carry on a UK property business will be charged to corporation tax in the UK, rather than pay income tax on their profits. This change will align the treatment of resident and non-resident corporate landlords but is likely to increase the tax liabilities of the largest non-resident landlords.”
She added, “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 some landlords, 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.”
Fortunately, there is a de-minimums, so if a business is paying less than £2m pa in interest the rules are unlikely to apply.
Morris gave an example, “Crucially, once the non-resident corporate landlords are subject to corporation tax, rather than income tax, they will be subject to the ‘Corporate Interest Restriction’ (CIR) rules. These rules, which only apply to companies, restrict the amount of tax relief that can be claimed for interest.”
“However, assuming a property purchase of £100m (not unrealistic for some of London’s real estate), which has been funded with £70m of debt. Taking an interest rate of 5%, would give simple interest of £3.75m pa.”
“Under the current rules the non-resident landlord would be able to claim a deduction for the full amount of interest against the rental profits generated from the property.”
She added, “But under the corporate tax rules this interest will be restricted. There are detailed calculations to establish the amount which is tax deductible, but potentially this could be reduced to just £2m, resulting in an additional UK tax liability of £300k.”
“Fortunately, there is a de-minimums, so if a business is paying less than £2m pa in interest the rules are unlikely to apply. However, the £2m is a group limit so if there are other UK related companies, the non-resident landlord with less than £2m of interest could still be impacted.”