Coming within the scope of corporation tax
On 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income became chargeable to corporation tax. This transforms the way that Non-Resident Landlords (NRLs) handle their UK tax affairs. These changes were brought in by Finance Act 2019.
What does this mean for NRLs?
1. Tax rate
NRLs are subject to corporation tax on income at 19% for the year starting 6 April 2020, and income tax no longer applies
from this date. Corporation tax applies to chargeable gains arising on the disposal of UK property from 6 April 2019.
2. Changes to tax relief for interest payments
Under the income tax rules, interest payable on a loan used to finance a property was likely to have been treated as a tax-deductible business expense for NRLs. Under corporation tax, interest and finance charges are instead treated as non-trade deficits, which can be offset against financial income with the excess available to offset against rental profits. The loan relationship and derivative contract regimes now apply and these rules are very detailed. Issues may arise, particularly in respect of connected party lending. It is only loan relationship debits and credits that relate to the UK property business that are within the scope of corporation tax; interest income and expenses relating to non-UK businesses are generally outside the scope of UK tax.
NRLs that have entered into swaps to hedge their financing arrangements need to consider the derivative contract rules and the impact of fair value accounting under GAAP. Amounts on derivative contracts that relate to the period before 6 April 2020 and were not relievable under the income tax rules are not deductible for corporation tax. This may apply to amounts that are capital in nature.
3. Management expenses
Expenses that relate to the management of the NRL’s UK property business are deductible against the UK rental profits. Any excess allowable management expenses can be carried forward. Expenses that relate to the running of non-UK businesses, such as the management of overseas property businesses or subsidiaries, are not deductible for UK corporation tax purposes. This will require an allocation of the NRL’s expenses between the running of the UK and non-UK businesses.
4. New UK tax relief restrictions will be applicable
Several new corporation tax rules have recently been implemented and these have also applied to NRLs since 6 April 2020:
Loss restriction – NRLs are subject to an annual overall loss utilisation threshold of £5 million plus 50% of any profits exceeding £5m. The income tax property losses bought forward at 6 April 2020 are only available to offset against future UK property income (they cannot be offset against chargeable gains or other UK profits) and will not be subject to the £5m restriction. Pre 2020 and post 2020 losses must be streamed, which increases NRL’s administrative burdens.
Interest restriction - Where an NRL’s net interest expenses exceed £2 million, the expenses can be restricted to up to 30% of its taxable profits. There are specific exceptions to these rules, e.g. public infrastructure projects. Advice should be taken for highly leveraged NRLs and those with shareholder debt.
Hybrid restrictions – Particular payments involving hybrid entities may be disallowed under the Hybrid Mismatch Rules. This covers entities or financial instruments that are treated differently for tax purposes in different jurisdictions. All NRL structures should be reviewed.
5. New filing requirements
NRLs still need to complete a NRL self-assessment tax return (Form SA700) for the tax year ended 5 April 2020. They will then need to file a corporation tax return (Form CT600) for their first accounting period starting 6 April 2020. Corporation tax returns must be filed online and should be accompanied by Inline Extensible Business Reporting Language (iXBRL) tagged accounts.
Steps that NRLs need to take now
- Review the filing and administration requirements to ensure the correct systems are in place. New corporation tax UTRs should have been issued by HMRC by 30 June 2020. If a new UTR has not been received, the NRL should contact HMRC to notify chargeability to corporation tax. HMRC must also be notified in writing if the NRL’s accounting period end is not 5 April.
- Ascertain whether annual net interest payments in 2020 and beyond are likely to exceed £2m. If so, there may be an interest disallowance to consider.
- Work out how entities and financial instruments in the NRL structure are taxed in each jurisdiction. If there is any mismatch, the Hybrid rules may restrict tax deductions.
- NRLs that have entered into swaps to hedge their financing arrangements will need to consider the derivative contract rules and the impact of fair value accounting under GAAP.
- If losses are forecast, NRLs should determine when these losses are likely to arise and if their use is likely to be restricted post 5 April 2020.
S&W can support your property business through this complex transition with our corporation and property tax specialists. For more assistance contact Claire Perrett on 01483 407134 or Zoe Thomas on 020 7131 8871.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.