From 6 April 2020, non-UK resident property companies will be charged corporation tax, rather than income tax. This change will align the treatment of resident and non-resident corporate landlords.
The current corporation tax rate is 19% so on the face of it that looks like a good thing because this is lower than the 20% basic income tax rate currently levied against non-resident corporations. However, this is only one facet of the new situation faced by non-residents because the calculation of taxable profits is different under the corporation tax rules.
Two possible issues to consider are the carried forward losses rules and, with potentially the biggest impact, restrictions on financing costs and the capping of interest as deductible for tax. We detailed these issues here when they were introduced two years ago. The carried forward losses rules and interest cap will mean that many non-resident landlords (NRLs) will now start paying tax for the first time. Previously, many offshore owners used interest on borrowings to wipe out profitability from rental income. Therefore, having had no tax exposure or CGT liabilities, they had little need to mitigate tax, for instance by claiming capital allowances.
Furthermore, NRLs are now required to pay UK tax when they make gains on the disposal of UK properties. From 1 April 2019 non-resident capital gains tax was extended to cover disposals of UK commercial property and shares in UK property-rich entities by non-resident companies. Gains made by non-UK companies are taxed at the corporation tax rate. Gains by non-resident individuals are taxed at either 10% or 20% depending on their income and Trusts are taxed at 20%. Gains arising from before April 2019 will not be subject to tax.
What needs to be done?
A greater focus on capital allowances will be needed to ensure that each property is as tax efficient as possible. A full review of property acquisitions and capital expenditure projects must be carried out to ensure potential reliefs are maximised and realised. A portfolio review is not necessarily limited to recent years and in many cases, properties acquired many years ago yield significant overage claims. Additionally, land and buildings that require clean-up from contamination such as asbestos, hydrocarbons and Japanese Knotweed are now in scope to claim Land Remediation Relief. This is only available to companies and provides tax relief at a generous 150% of qualifying expenditure.