Offshore companies holding UK property have long been taxed in a different way to UK companies.
Difference in tax treatment between offshore companies and UK companies holding UK property
Capital gains tax
The main disparity had been that offshore companies did not have to pay tax on capital gains when selling UK property, whereas UK companies did. This changed in two tranches – firstly for residential property in April 2015, and then for commercial property in April 2019. My colleague Richard Verge covered the latter change in his article last year on UK commercial property owned by non-residents .
Income tax vs corporation tax
The second major difference is that offshore companies renting out UK property are subject to income tax on their profits, not corporation tax. From 6 April 2020 this is changing, increasing the alignment of tax treatment between offshore and UK companies. The new rules and their implications are detailed below.
Finally, this article will consider what differences remain between offshore companies and UK companies holding UK property.
The move to corporation tax for non-resident landlord companies
The 2019/20 tax year will be the last for which non-resident corporate landlords will need to file income tax returns (SA700). From 6 April 2020 such companies will instead need to file corporation tax returns. This involves different tax rules, transitional arrangements and an administrative burden.
New regime, new rules
For smaller companies the move to corporation tax is likely to be an advantageous one. Most notably there will be a drop in tax rates from 20% income tax to 19% corporation tax. Payment of tax will be simpler, with one payment due 9 months after the year end. However, large companies may fall into the more complex quarterly instalment regime.
Companies with significant finance costs (in excess of £2m per year for the group) will be hit by the corporate interest restriction rules. Broadly, these limit tax relief for finance costs to a percentage of taxable profits, potentially as low as 30%.
Financing costs will no longer be deductible as property business expenses; instead non-resident corporate landlords will enter into the loan relationship and derivative contract regimes.
Moreover, brought forward losses will only be able to be set off in full against the first £5m of profits in a given year; profits in excess of this can only be relieved by up to 50% using brought forward losses. There is no such restriction for income tax losses.
Existing income tax losses preserved in the switch to corporation tax. Although they can be set against profits under the corporation tax regime, they are still income tax losses and therefore their future use against profits will not be restricted as above. However, they cannot be set off against future capital gains.
If the company has profits in its final income tax return, HMRC have confirmed to us that no payments on account will need to be made and should be reduced to nil in the 2019/20 return.
Capital allowances are straight forward – the rules deem them to continue as normal.
Non-resident corporate landlords will need to file a SA700 income tax return for the year ended 5 April 2020 by 31 January 2021, after which they will be in the corporation tax regime. HMRC are currently writing to all non-resident landlord companies to inform them about this change, issuing a unique tax reference (UTR) for corporation tax.
Where a company’s year end isn’t 5 April, the period will be split in two. For example, where the year end is 31 December, the period 1 January 2020 to 5 April 2020 will be in the old income tax regime and the period 6 April 2020 to 31 December 2020 will be in the new corporation tax regime. For the year ended 31 December 2020, they will need to:
• File an SA700 return by 31 January 2021 (and pay their final income tax payment) for the period 1 January 2020 to 5 April 2020; and
• File a corporation tax return by 31 December 2021 (and pay corporation tax by 1 October 2021 if not large) for the period 6 April 2020 to 31 December 2020.
Once in the corporation tax regime, all non-resident landlord companies will need to produce iXBRL-tagged accounts, for submission with the corporation tax return.
Non-resident landlord scheme
Currently, non-resident corporate landlords must apply to receive rents gross, otherwise tax at 20% must be withheld on rent payments. This will continue to be the case, although as the non-resident landlord scheme isn’t strictly compatible with the corporation tax regime, there are question marks about how it will apply in practice.
What differences remain between UK companies and offshore companies?
For non-UK domiciled individuals, who are not yet deemed domiciled, holding UK commercial property via an offshore company will keep it out of the UK inheritance tax net. However, such a structure is already ineffective for UK residential property, so it would not be surprising if UK commercial property followed suit in due course.
The other difference is with stamp duties. SDLT can currently be avoided by selling the company holding UK land, rather than selling the land itself. Instead, shares in UK companies attract stamp duty. By contrast, shares offshore companies can in principle be sold without any stamp duty.
However, in February 2019 HMRC consulted on a 1% SDLT surcharge for non-UK purchasers of UK residential property, which was proposed to include offshore companies and certain UK companies with non-resident shareholders. This was quietly dropped, but was included in the Conservative manifesto in November 2019 at a rate of 3% so may be announced in the upcoming Budget.
The scales have long been tipped in favour of offshore companies; they may tip the other way in the not-too-distant future.