Tag Archives: non-resident corporate landlords

Non-resident corporate landlord changes

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.

The transition

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.

Compliance

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?

Inheritance tax

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.

Stamp duties

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.

Non-resident corporate landlords tax changes coming

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.

Be prepared

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.

Non-resident corporate landlords: New Consultation in 2017

Who is affected?

This would affect;

non-resident companies receiving UK taxable income not through a permanent establishment in the UK or
non-resident companies receiving rental income from investment property in the UK.

The stated purpose is to deliver equal treatment for all companies.

Clearly we will need to await further details to understand what is being proposed.

Pros and Cons

On the one hand, bringing non-resident companies into the corporate tax regime will reduce their tax rate from 20% to 17% in the medium term. There may also be increased scope to claim certain expenses of running the company rather than limiting expenses to those related to the property rental activity.

However, on the negative side, two new rules are being introduced for corporation tax in April next year which could adversely affect the tax position of non-resident corporate landlords.

Firstly, a cap will be imposed on loan interest deductions where the group-wide net interest costs exceed £2 million.
Secondly, in some circumstances there will be restrictions on the ability to use brought forward losses.
In addition whilst the Autumn Statement referred to taxable income, one cannot exclude the possibility that capital gains will also be brought into the net and be taxed.

Non resident landlord scheme

In relation to the loan interest cap, the original consultation on this matter had focused on corporation tax although it was recognised that there was an issue relating to corporate landlords who were paying income tax on rental income under the Non-resident landlord scheme. The treatment of non-resident corporate landlords in respect of the interest relief cap had not been settled.

In conclusion

It may be that subjecting non-resident corporate landlords to corporation tax is a neat solution to extending the interest cap to these companies. However, whilst the interest cap will take effect in April 2017, it seems likely that the application of these rules to non-resident corporate landlords would take effect in April 2018.

Watch this space.