Coming within the scope of corporation tax
From 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income will be chargeable to corporation tax. This will transform the way Non-Resident Landlords (NRLs) handle their UK tax affairs. These changes have been brought in by Finance Act 2019.
What does this mean for NRLs?
1. Tax rate
NRLs will be subject to corporation tax on income at 17% for the year starting 6 April 2020 and income tax will no longer apply
from this date. Corporation tax will apply to capital gains from 6 April 2019.
Changes to tax relief for interest payments
Under the income tax rules interest payable on a loan used to finance a property will likely have been treated as a tax deductible business expense for NRLs. Under corporation tax, interest and finance charges will instead be treated as non-trade deficits which will be offset against financial income, with the excess available to offset rental profits. The loan relationship and derivative contract regimes will now apply and these are very detailed. Issues may arise especially in respect of connected party lending.
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. Amounts on derivative contracts that relate to the period before 6 April 2020 and were not relievable under the income tax rules will not be deductible for corporation tax. This may apply to amounts that are capital in nature.
2. Management expenses may become trapped
NRLs will be required to analyse their expenses and split them between rental, management and non-trade expenses. These are expected to be treated as follows:
- Expenses directly related to the renting out of the property, e.g. agents fees, will be streamed to offset rental income only. /li>
- Expenses which relate to the management of a NRL company will become ‘management expenses’ and will only be deductible against the UK property profit (which is broadly net rental income) in the year. Excess management expenses will be carried forward to be offset in future years. If the NRL carries on other activities (e.g. owns non-UK properties or subsidiaries) relief for management expenses will only be available to the extent they relate to the UK property business.
- Any non-trade expenses will not be relievable.
3. New UK tax relief restrictions will be applicable
A number of new corporation tax rules have recently been implemented and these will also apply to NRLs from 6 April 2020:
Loss restriction – The NRL will be subject to an annual overall loss utilisation threshold of £5 million, plus 50% of any profits remaining over and above £5m. The income tax property losses bought forward at 6 April 2020 will only be available to offset against future UK property income only (so cannot offset capital gains or other UK profits) and will not be subject to above restriction. Pre 2020 and post 2020 losses will have to be streamed which will increase administrative burdens. The Autumn Budget also brought capital losses into this restriction and we are awaiting the outcome of the consultation which closed on 25 January 2019.
Interest restriction - Where the NRL’s net interest expenses are in excess of £2 million the expenses can be restricted to up to 30% of the NRLs’ 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 – Certain 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.
4. New filing requirements
NRLs will 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 which NRLs need to take now
- Be aware of the timing of any future sales on your tax position: the tax treatment of capital gains and losses will depend on whether capital gains tax or corporation tax applies to the disposal, and whether the use of losses is likely to be restricted.
- Ascertain whether annual net interest payments in 2020 or 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 being taxed in each jurisdiction – if there is any mismatch the Hybrid rules may apply to restrict tax deductions going forwards.
- 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 being forecast, analysis should be undertaken to determine when these losses are likely to arise and if their use is likely to be restricted post 5 April 2020.
- Review the filing and administration requirements to ensure the correct systems are in place. HMRC have stated their intention to issue new UTRs to all NRLs prior to the April 2020 deadline, however we would advise registering in February 2020 if a UTR has not yet been received. HMRC have not yet confirmed whether a corporation tax UTR will be needed to notify property disposals in 2019/20. Any existing agent authorisations will not extend to corporation tax, so new agent authorisations should be requested.
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. 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 publication.