From April 2020, non-UK tax resident companies with income from UK property will no longer be charged UK income tax and will instead be subject to the UK’s corporation tax regime.
When the changes come into force, these companies will need to calculate their profits in accordance with corporation tax principles, which may represent a significant change from the current method of calculation.
We consider some of the implications in more detail below.
Timing and a Potentially Reduced Charge to Tax
For affected companies, the change will take place at the end of the 2019-20 tax year. The income tax property business will be deemed to cease on 5 April 2020, with a new corporation tax business and tax period beginning on 6 April 2020.
- Profits or losses arising in the period to 5 April 2020, will be subject to income tax (up to 20%), with any income arising from 6 April 2020 being subject to corporation tax at the rate of 17%.
Treatment of Losses
Any pre-5 April 2020 property business losses, that the company has at the date of transition, will be carried forward to the new corporation tax business. These losses will be re-categorised as ‘income tax property losses’ (ITPLs) and will be available for offset against post-6 April 2020 UK property business profits, but not against the company’s income from other sources or against capital gains. Additionally, they will not be available for surrender as group relief.
ITPLs will be offset automatically against the relevant profit of future periods, in priority to post-6 April 2020 losses, and will not be subject to the 50% corporation tax loss cap (see below). It will not be possible to disclaim them. If the property business ceases trading, any un-utilised losses will be lost.
Losses, suffered by the company after it comes within the corporation tax regime will be subject to the usual corporation tax loss relief rules. In general, these rules allow losses to be carried forward to be used against future profits, subject to a limit of £5million. The brought forward losses that can be offset are limited to 50% of the profits if these are above £5million. In addition, post-6 April 2020 losses can be surrendered as group relief, subject to certain conditions.
Financing Costs – the Treatment of Loan Finance
Financing is the area where some non-UK resident property companies may see the biggest impact of the new rules. Finance costs and interest will fall into the ‘corporation tax loan relationships regime’. Under these rules, profits and losses from loan relationships are calculated separately from any other income the company may have and are categorised as ‘trading’ or ‘non-trading,’ depending on the use of the loan finance in question. For property companies, they will normally be treated as ‘non-trade loan relationships’.
In recent years, there have been changes to limit the deductibility of interest for corporation tax purposes, most notably the corporate interest restriction (CIR) rules. These are designed to limit tax relief for finance costs and interest to a percentage of taxable profits.
The restriction can apply where the net tax interest expense of group companies (or standalone companies), within the charge to UK corporation tax, exceeds £2million (adjusted where a period of account is different to a 12 month period). In these circumstances, the allowable deduction will be a figure based on 30% of the companies’ earnings before interest, taxes, depreciation and amortisation (EBITDA), or a group ratio.
The CIR rules can be complex and will need to be considered, even if no disallowance of interest results. This will lead to an increased administrative burden for non-UK resident companies.
In addition, companies (or groups) with high levels of debt may find that a proportion of their finance costs are no longer deductible and there could therefore be a significant increase in the tax burden.
The Treatment of Management Expenses
Non-UK resident companies will be able to claim a deduction for management expenses related to their property income. To be deductible, the costs must be directly linked to their UK property business. No deduction will be allowed for costs related to managing non-UK property or subsidiaries.
Administration: Filing of Tax Returns and Payment of Tax Due
Companies affected by the change will need to register for corporation tax with HM Revenue & Customs (HMRC). This will apply even where companies are already registered with HMRC under the Non-Resident Landlord Scheme.
Taxpayers will need to complete a final self-assessment return in the normal way to report the proportion of income arising up to 5 April 2020. A corporation tax return will need to be filed for period commencing 6 April 2020 and for subsequent accounting periods.
Corporation tax returns will need to be filed online together with accounts (this is likely to be the case even if the jurisdiction in which the non-UK resident company is established does not require preparation and filing of accounts) and tax computations. It has not been confirmed if accounts will need to be data tagged for ‘iXBRL’ (the format in which HMRC now receive all accounts). This extra administrative burden of ensuring accounts and returns are in the correct format, could represent additional cost and complexity for some companies.
The tax payment dates for corporation tax also differ from those with which non-UK resident companies will be familiar. The due date for companies and groups with taxable profits up to £1.5million falls nine months and one day after the end of their accounting period. Those with higher profits will need to pay their tax in quarterly instalments, two of which are due before the end of the accounting period.
ATED-related Gains; Non-resident Gains and Gains on an Interest in UK Land
From 6th April 2013 to 5th April 2019, the ‘Annual Tax on Enveloped Dwellings’ (ATED) related gains of a non-UK resident company, in relation to high value disposals of residential property, were chargeable to capital gains tax at a rate of 28%, subject to the ATED annual charge. From 6 April 2015 to 5th April 2019, closely held non-UK resident companies were also chargeable to capital gains tax on disposals of UK residential property at a special rate of 20%.
- Both of the above charges were repealed from 6th April 2019 and replaced with ‘non-resident capital gains tax’ (NRCGT), a corporation tax charge on gains on disposals of interests in UK land (including commercial and residential property), and on indirect disposals of UK land. In relation to property disposals since 6th April 2019, companies need to register for corporation tax and may need to submit a corporation tax return to declare the disposal, within 30 days.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.