The UK tax landscape has changed dramatically for companies owning and letting property in the UK.
Historically, any rental income received, net of costs, was charged to income tax but capital gains were excluded from the charge.
The position on residential property changed in 2015. Any gains on such properties are now chargeable to UK tax. Additionally, there is a requirement to notify HMRC of any sale within 30 days of the conveyance, with penalties for late returns.
Looking forward, from April 2019, any gains on UK land and/or property are expected to fall within the charge to UK tax.
Then HMRC are consulting on proposals that, from 6 April 2020, non-resident corporate landlords will come into the corporation tax, rather than income tax, regime. This has a number of implications:
- The companies, including those already known to HMRC through registration under the non-resident landlord scheme, are likely to need to re-register with HMRC for corporation tax. They will also need to re-file details of their tax agents, as automatic carry-over of the income tax authorisation is not envisaged.
- The change to corporation tax will be on 6 April 2020, immediately following the end of the income tax year 2019/20. The income tax property business will be deemed to end on 5 April 2020. A final income tax return is needed for 2019/20; and a ‘new’ corporation tax business and accounting period will be deemed to commence on 6 April 2020.
- If the corporate landlord has a different financial year end (which is likely) this may lead to overlap between ‘real’ and deemed tax basis periods.
- It seems probable that capital allowance values, if any, will just carry over, although this is not yet confirmed.
- Any unused income tax property losses will be carried forward as a new category of income tax loss ‘income tax property losses’. This will be available to offset against post-2020 property business profits only.
Corporation tax relief for management expenses will be available to non-resident corporate landlords. However, if the company carries on other activities, for example, if it owns non-UK properties or subsidiaries, relief will only be given for expenses directly linked to its UK property business.
Currently, non-resident landlords can claim relief for interest as an expense in working out income tax profits. The only limits on deductibility are the ‘wholly and exclusively’ condition and transfer pricing rules. From April 2020, the position will be very different:
- Firstly, financing costs will no longer be deductible as property business expenses but under the loan relationship regime.
- Secondly, landlords will need to consider the provisions that could limit deductibility of financing costs; the connected company and unallowable purpose tests will need to be considered as well as, in some cases, the rules on ‘hybrid’ arrangements. Finally, the distribution rules will be relevant to payments made by non-resident companies.
- Non-resident corporate landlords will also need to consider the new corporate interest restrictions. Broadly speaking, these limit tax relief for finance costs to a percentage of taxable profits, potentially as low as 30%, subject to a capped £2m interest capacity which may help to avoid restriction. However, the £2m is a group (not a company) limit.
- Finally, non-resident corporate landlords, therefore, face a much heavier compliance burden under corporate tax. Some, particularly those with high leverage and/or significant shareholder debt, may find that some of their finance costs are no longer deductible.
If you would like to discuss the changes in relation to your circumstances, please get in touch with your usual contact at Mercer & Hole.