Who is this relevant for?
This is relevant for any non-UK resident company that conducts a UK property rental business receiving income from renting out residential or commercial properties located in the UK. They are referred to below as non-resident landlords (NRL).
What is changing from 6 April 2020?
Currently NRL fall within the UK income tax (IT) rules. They therefore calculate taxable profits under these rules and pay tax based on the IT rate (currently 20%) and IT due dates.
From 6 April 2020, NRL will fall instead within the corporation tax (CT) regime calculating taxable profits, tax arising under these rules and paying on the relevant CT due dates.
Note: A final IT return is due for the period up to 6 April 2020. From then on, CT returns will be due going forward. Under CT, the tax period will align with the accounting period. The first CT return may be for a short period, e.g. 6 April 2020 to 31 December 2020, if that is when company’s year- end falls.
What could this change mean?
For smaller stand-alone NRL, apart from the initial administrative requirements, the change from IT to CT could have minimal impact. The only real change is the applicable tax rate reducing from 20% to 19% and the timing of tax payments.
However for larger NRL, particularly if they are part of a group, there are several key changes that come into effect with the move to CT that could have significant implications.
Two areas are noted below:
Finance costs restrictions
There are a number of CT rules which could limit the extent that finance costs can be offset for tax purposes against the property income. These include those flagged below:
- Corporate interest restriction – broadly applicable if the total finance costs in the UK exceed £2 million. Any interest over this amount would be restricted based on specific calculations – note the £2 million limit is a UK group limit.
- Hybrid mismatch rules – if applicable these could result in none of the interest being deductible in the UK
- Transfer pricing rules – if the finance costs are from a connected company and not on ‘arms length’ terms
Losses offset
The good news is that losses that have not been used on 6 April 2020 are not lost but will be carried forward under the CT regime. These will only be available to offset against future taxable profits arising from the UK property business and not any capital gains or other income.
Future losses arising after 6 April 2020 can be group-relieved to other UK group companies which again could be a positive change.
The bad news is that for losses arising after 6 April 2020, the CT loss restriction rules will apply and restrict 100% tax relief for the losses to the first £5 million profits. Any taxable profits after that can only be reduced by 50%. Once again, the £5 million is a UK group limit.
It will be necessary to ‘stream’ losses arising pre and post 6 April 2020.
What do you need to do?
Admin matters
There are certain administrative matters that need to be dealt with and all NRL will need to register with HMRC BY 6 JULY 2020. See how to register below:
Review the loss position
review whether it is likely that losses could be restricted and build
Review financing arrangements
review financing to determine if the above rules could result in tax relief being restricted, whether any changes can be made, or at least, build the increased tax liabilities into cash flow
Seek professional advice if the position under CT is not clear