Corporation Tax – The new challenges for non-resident landlords

Many non-resident landlords are beginning to experience the impact of Corporation Tax changes introduced more than a year ago for the first time.

From 6 April 2020, all non-UK resident companies are chargeable to Corporation Tax rather than to income tax on profits of a UK property business and ‘other UK property income’.

Under these new rules, the non-resident company is chargeable to Corporation Tax on the profits of its UK property and, separately, on profits on loan relationships or derivatives that enable the company to generate the property income.

The latter is dealt with as non-trading loan relationships, rather than as part of the UK property business. This means that it is only loan relationship debits and credits that relate to the UK property businesses that are within the scope of UK Corporation Tax.

Therefore, if the non-resident company carries on other activities (for example, it owns non-UK properties), it will be necessary to stream the relevant UK and non-UK loan relationship debits and credits.

It will be important that businesses now review their internal accounting systems to ensure the correct amount of interest can be allocated to the UK business, particularly for companies with multiple or complex loan facilities in operation.

Broadly, the rules that apply to non-resident companies from 6 April 2020 mirror the existing regime that applies to UK-resident companies carrying on a UK property business, but with transitional rules to accommodate the difference in regimes until fully implemented.

Non-resident landlords are subject to the provisions of the non-resident landlords scheme (NRLS). The NRLS has continued to apply to non-UK resident company landlords from 6 April 2020.

Any income tax deducted under the NRLS can be offset against the Corporation Tax liability of the company in respect of that rental income.

The rules differ significantly from those enforced before 6 April last year. Under the old rules, non-resident landlords were subject to income tax on UK property rental income. Non-resident companies were subject to a flat rate of income tax (20 per cent) on the rental income.

Depending on the level of the income, non-resident individuals were subject to tax at the default income tax rates of 20 per cent, 40 per cent or 45 per cent.

Although the rules have already been in place for more than a year, they are now only just being felt by many non-resident companies as they reach the Corporation Tax return deadline, which is due 12 months after the end of the accounting period it covers, and the Corporation Tax payment deadline, which is nine months and a day after the end of the accounting period.

The main challenges that we have identified following this rule change seem to be:

  • Registration for Corporation Tax should be automatic but this isn’t always the case in reality forcing companies to contact HMRC;
  • HMRC are taking quite a lot longer to reply than usual to registration requests;
  • Agent authority needs to be reapplied and there is no automatic cross-over;
  • Some form of accounts information will need to be submitted with the return and not all overseas jurisdictions produce these.

In addition to the taxation of the rental income, non-resident investors holding UK real estate will also need to consider the tax consequences of any eventual disposal of the property.

Since 6 April 2019, all disposals of UK property by non-residents (commercial or residential) were brought within the scope of UK tax.

This includes direct disposals of UK commercial and residential land, as well as disposals of interests in certain entities which derive 75 per cent or more of their gross asset value from UK land.

These changes to Corporation Tax mark a significant alteration in the taxation of non-resident corporate landlords in the UK.

As a result, it brings non-resident companies into the complex Corporation Tax regime and will, for many, likely increase compliance time and related costs.

Given the significance of these changes and the impending deadline for Corporation Tax returns and payments, non-resident landlord companies should seek advice at the earliest opportunity. To find out how our experienced team can assist you, please contact us.

Posted in Business, Property Construction, Property Tax.