From 6 April 2020, all non-UK resident companies carrying on a UK property business will be charged Corporation Tax, rather than the previous Income Tax treatment. These changes have been introduced to deliver an equalised tax treatment for UK and non-UK companies in receipt of property income and follows the UK Government’s attempt to ‘level the playing field’ in line with previous revisions to the Capital Gains Tax and Inheritance Tax regimes.
It is estimated that the latest changes will affect some 22,000 Non-Resident Corporate Landlords (“NRCL”). HMRC should already have notified each NRCL to advise them of the changes and issue their Unique Taxpayer Reference (“UTR”) for Corporation Tax purposes. The generation of these UTRs is based on information held by HMRC in connection with the 2017/18 Income Tax filings, therefore if these returns have not been completed, or the NRCL was not required to file a return for that year, a notification may not have been issued.
The final self-assessment income tax return (SA700) for NRCLs will be for the 2019/20 tax year and must be submitted to HMRC by 31 January 2021 in hard copy. For NRCLs within the payment on account regime for income tax, no advance payments will be required for the 2020/21 tax year due to the transition to Corporation Tax and a claim to reduce these should be made.
Unlike the SA700 forms, Corporation Tax returns (form CT600) can only be filed electronically and it has been confirmed that HMRC’s free software will not be suitable for these purposes. Those NRCLs that currently complete SA700 themselves will either have to acquire filing software from third-party providers or appoint an agent to complete the return on their behalf, leading to additional compliance costs for the company.
For NRCLs that have received notification, HMRC has automatically setup the Corporation Tax record with a default accounting period ending on 5 April 2021 (in line with the tax year treatment for Income Tax). NRLCs must notify HMRC if their accounting year-end does not align with the fiscal year, however this will not be applicable in most cases. The first Corporation Tax return will require to be filed by 5 April 2022, with any corporation tax payable by 6 January 2022.
NRCLs cannot go straight into the Quarterly Instalment Payment (“QIP”) regime for their first Corporation Tax period, but they should consider this for subsequent periods.
Provisions have been included to allow for ‘grandfathering’ of existing Income Tax losses that allows them to be carried forward into the Corporation Tax regime. These losses can be offset against future UK property business profits chargeable to Corporation Tax, but they cannot be utilised against other types of income received by the company, e.g. non-trade loan relationships.
Additionally, if the NRCL has a capital allowances pool for Income Tax purposes, the change to Corporation Tax will not trigger any balancing event as the UK property business has not ceased. Capital allowances will continue to be claimed on this brought forward pool.
Capital Gains Tax & Inheritance Tax Considerations
From April 2015, any gain made by a NRCL on the disposal of UK residential property was chargeable to UK Capital Gains Tax. This charge was repealed in April 2019, taxing NRCLs to Corporation Tax on these gains, as well as extending the charge to commercial property.
For non-UK domiciled individuals, UK Inheritance Tax only applies to UK situated assets. By owning shares in an overseas company, which held the UK property, non-domiciled individuals were able to remove the property from UK situs and exempt any UK Inheritance Tax exposure.
However, from April 2017, a ‘look through’ provision was adopted for overseas companies owning UK residential property to include the value of the company shares within an individual’s charge to UK Inheritance Tax. Minor interests (less than 5%) are disregarded and remain outside the scope of UK Inheritance Tax.
There are many tax issues to be considered when owning property in the UK, and the complexities are increased when there are overseas corporate or individual property owners involved. This article has highlighted some of the corporate tax, income tax, capital gains tax and inheritance tax considerations, but there is also ATED (annual tax on enveloped dwellings) and VAT to be understood too. It is important to obtain professional advice early in the property acquisition process in order to avoid any unexpected tax liabilities.
The UK government has dramatically altered the landscape for overseas owners of UK property over the past decade and the latest changes will impact NRCLs fundamental UK tax compliance.
Although the changes do not make a NRCL UK tax resident and any non-UK activities will remain exempt from UK income (provided no Permanent Establishment has been created and the company is centrally managed and controlled outside of the UK), the transition to UK Corporation Tax should be carefully considered by NRCLs as to the impact it may have on their UK property business.
If you think your business is likely to be impacted by these changes, are yet to receive the relevant notification from HMRC, or would like advice on the international aspects of owning UK property please contact Helen Brown, Lynn Gracie or your usual AAB contact.