From April 2020, non-resident companies with income from UK property will stop being charged UK income tax and will instead be subject to the UK’s corporation tax regime. This measure is designed to equalise the tax treatment of resident and non-resident companies receiving UK property income.
The changes will impact all non-resident companies that either carry on UK property business directly or through a tax-transparent collective investment vehicle such as a Jersey property unit trust. 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 This note looks at some of the key changes.
For those companies affected, the change will take place at the end of the 2019-20 tax year, with their income tax property business deemed to cease on 5 April 2020, and a new corporation tax business and tax period beginning on 6 April 2020.
For companies that do not prepare accounts in line with the tax year, a time apportionment of income and expenses will be needed for accounting periods that straddle the commencement date. Profits or losses arising in the period to 5 April 2020 will be subject to income tax, with any income arising from 6 April 2020 being subject to corporation tax. For example:
Any pre-5 April 2020 property business losses that the company has at the date of transition will be carried forward into its new corporation tax business. These losses will be recategorised 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 profits 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 finishes, the losses will be extinguished.
Losses generated 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 £5 million. If profits exceed £5 million, the brought forward losses that can be offset are limited to 50% of profits above £5 million. In addition, post-6 April 2020 losses can be surrendered as group relief, subject to certain conditions.
Financing is the area where some non-resident property companies may see the biggest difference under the new rules. Finance costs and interest will no longer be deductible as an expense in calculating property income. Instead, they will fall into the corporation tax loan relationships regime. Under these rules, profits and losses from loan relationship 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 CIR rules can be complex, and will need to be considered even if no disallowance of interest results, leading to an increased administrative burden for non-resident companies. In addition, companies with high levels of debt may find that a proportion of their finance costs are no longer deductible.
If a company has losses on derivative contracts, then the portion of the loss attributed to the period before 6 April 2020 will not be deductible for corporation tax purposes. If, following the move to corporation tax, a company has or intends to elect into the Disregard Regulations to disregard fair value movements, then just and reasonable adjustments will need to be made to ensure the correct amounts are brought into account over the term of the derivative contract.
The impact of these rules can be very complex and specialised advice should be sought.
Transitional provisions will be introduced to ensure that the change from income tax to corporation tax will not be treated as a disposal event for capital allowances. Balancing adjustments will not be required, and instead the 5 April 2020 income tax written down values will carry over to the 6 April 2020 corporation tax period.
The government has confirmed that non-UK 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.
Non-resident companies that invest in UK property through partnerships are currently considered to have a ‘notional property business’ comprising their share of the partnership profits or losses. To avoid income falling into tax twice or going untaxed entirely when the partnership profits are allocated, the basis period for the notional trade will be deemed to end on 5 April 2020 for income tax purposes, to allow for an accurate time apportionment of the partnership profits between the income tax and corporation tax regimes.
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 using the Inline eXtensible Business Reporting Language (known as iXBRL), together with accounts and tax computations. It has not been confirmed if accounts will need to be tagged for iXBRL. Although the government has suggested that online filing will reduce compliance costs, the extra administrative burden of ensuring accounts and returns are in the correct format will represent additional cost and complexity for some companies. There will also be transitional costs involved in becoming familiar with the new corporation tax regime and any relevant accounting changes needed. The filing obligations of non-UK resident corporate investors in UK property through widely held tax transparent funds remain under consideration by the government.
The tax payment dates for corporation tax also differ from those with which non-resident companies will be familiar. The due date for companies and groups with taxable profits up to £1.5 million 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. The government has recognised the need for transitional arrangements between the two payment regimes, but details have not yet been released.
The upcoming tax changes for non-resident companies holding UK property will be significant, with changes to almost every aspect of how tax is calculated, paid and reported to HMRC. While some of the details of the new regime are yet to be confirmed, non-resident landlords should seek advice sooner rather than later to ensure that they are ready for the changeover, including making sure they can calculate and apportion profits correctly if their accounting period straddles the implementation date, and ensuring that they are registered with HMRC.
For advice regarding any of the issues raised here, please contact your usual Saffery partner, or contact James Bramsdon.
This factsheet is based on law and HMRC practice at 1 January 2019.