In the past corporate non-resident landlords have experienced a beneficial tax profile for UK property profits. Rental profits are taxed a flat 20% rate of income tax, capital gains were exempt from UK tax and there were no inheritance tax consequences for the company owner.
Over time these advantages have been eroded. For example, non-resident corporate landlords are now subject to UK capital gains on gains made on residential properties. In 2017 the Government announced that non-residents would be liable to capital gains tax on disposals of commercial sites from April 2019. This brings all disposals into UK tax. The advantage that rental profits are taxed to the flat 20% rate remains.
Tax changes coming
From April 2020 there will be a transition by non-resident corporate landlords from income tax to corporation tax. Many will find this attractive as the flat rate of corporation tax will be 17%. The Government’s intention is to make this technical transition seamless and therefore capital allowances are expected to transfer between the taxes at tax written down value and any rental losses should be available to carry forward into the new environment.
Currently there is uncertainty about the compliance process. Income tax is calculated to 5 April annually whilst corporation tax is determined with reference to the company’s year-end. If the company does not have a 5 April year-end then in 2020 there is likely to be some element of time apportionment between income tax and corporation tax. The filing deadlines for these taxes differ. In addition, the dates of payment of corporation tax differ from those of income tax. Depending on the company’s profile this may accelerate or defer payment of tax on rental profits.
It seems slightly perverse that non-resident corporate landlords are subject to capital gains tax on all sales from April 2019 and subject to a shift in tax treatment from April 2020. Logic would suggest that these two changes should happen simultaneously.
Beware the potential sting in the tail
Although the move from a 20% tax regime to a 17% regime appears attractive there can be a sting in the tail for leveraged property acquisitions. For the non-resident corporate income tax does not have any restriction for interest deductions. From 2020 non-resident corporate landlords will be subject to the Corporate Interest Restriction (CIR) Regulations. These can restrict the interest deduction which a company can claim if its annual interest charge is more than £2m. In group situations the £2m is spread across the group. Larger property acquisition can easily result in interest payments in excess of £2m and therefore companies and groups may find that a move to corporation tax increases annual tax burdens. This is despite the reduced headline rate of tax.
Businesses should be using the period to the change to consider their strategies for a revised compliance environment and model their tax burden based on the corporation tax rules, including the impact of the corporate interest restriction.