Offshore Companies & Non-UK Resident Property Companies: Owning Commercial & Residential Property… The Forthcoming Changes April 2020.
Non-UK resident companies with UK property income are subject to income tax rather than corporation tax under the non-resident landlord scheme.
From April 2020, such companies will be charged to UK corporation tax rather than income tax, thereby bringing the tax treatment of resident and non-UK resident companies into alignment.
The changes will impact non-UK resident companies which carry on UK property businesses. They will also impact those which carry on property businesses indirectly through tax transparent collective investment vehicles such as Jersey Property Unit Trusts (“JPUTs”).
The new regime differs significantly to the existing one, with differences to most aspects of how tax is calculated, reported and paid over to HMRC. Given the widespread changes, it is important such non-resident investors prepare for the changes in advance…
Timing of the change
Non-resident landlord companies will be deemed to cease their (income tax) property businesses on 5 April 2020 and a new (corporation tax) business and tax period will commence on 6 April 2020.
Companies that do not prepare their accounts to 5 April, income and expenses will need to be time-apportion income and expenses for the accounting periods straddling 5 April 2020. While profits relating to the period to 5 April 2020 will be subject to income tax, the period from 6 April 2020 will be subject to corporation tax.
Post-5 April 2020, interest and finance costs will no longer be deductible as an expense in calculation property business profits. Instead, interest and related costs will fall within the loan relationship rules. For property investment companies, they will likely be treated as non-trade loan relationships.
The recently introduced corporate interest restriction limiting tax relief for finance costs to a percentage of taxable profits may also be relevant.
Income Tax & Property Losses
If the non-UK resident landlord company has pre-5 April 2020 property losses, these will still be available to carry forward into the corporation tax regime and designated ‘income tax property losses’. While they will be available to carry forward, they will only be relievable against post-6 April 2020 property business profits. If the company has income from other sources, the income tax property losses will only be available to set against the property profits.
These carry forward losses will be set against profits of future periods automatically and in priority to any post-6 April 2020 corporation tax losses. They will not be subject to the 50% corporation tax loss cap.
Carried forward Income tax property losses will not be available to set against capital gains realised by the company nor can they be group relieved.
Post-6 April 2020 losses will be relieved under the general corporation tax principles meaning that losses can be carried forward to set against future profits, subject to a limit of £5 million. Should profits exceed £5 million, the brought forward losses that can be relieved are limited to 50% of the profits over £5 million. Unlike income tax property losses carried forward, post-6 April 2020 corporation tax losses can be ground relieved.
The cessation of a property income business should give rise to a balancing adjustment for capital allowances purposes; however, the Government proposes to legislate so that the change from income tax to corporation tax on 5 April 2020 will not be treated as a balancing event. Instead, the 5 April 2020 income tax written down values will carry over to the 6 April 2020 corporation tax period.
Non-UK resident landlord companies will be able to claim a deduction for management expenses provided the costs are directly related to the UK property business.
Non-resident landlords will need to complete self-assessment returns to report the final income arising to 5 April 2020 while corporation tax returns will need to be completed for periods commencing 6 April 2020 and future accounting periods.
There is no automatic carry over of registration from the current income tax to corporation tax regime. Companies registered under the Non-Resident Landlord Scheme will still have to register for corporation tax with HMRC
Under the corporation tax regime, the payment deadlines for tax are different.
For companies with taxable profits of up to £1.5 million, the due date for payment if nine months and one day after the end of the accounting period. Companies with higher profits are required to pay corporation tax in quarterly instalments.
Further guidance is anticipated on the transitional provisions for payments of tax. Read more about Non Resident Landlord Forms – Read a Summary of the Non Resident Landlord Scheme – Read about Compliance Issues for Non Resident Landlord Companies…
The new regime will result in wide-ranging changes to the calculation, administration and payment of tax for non-resident landlords.
Given the significance of the change, landlords impacted should seek advice now. Contact us for more info, help and advice or check out more property related tax articles below…