Expat Landlord Tax Changes: Non-resident UK Companies to Become Liable for Corporation Tax
From April 2020, certain expat landlords will find themselves liable for Corporation tax for the first time, according to new guidance issued by HMRC.
From accountants in London who offer a wealth of experience in helping expats get their tax affairs in order, here’s a closer look at what the new rules mean, who they apply to, and how to get further help in managing the change …
The new rule at a glance
Historically, many owners of UK property who are based abroad have found it advantageous to go down the route of limited company formation as a vehicle for property ownership.
From 6 April 2020, non-UK resident companies will pay Corporation Tax instead of Income Tax on profits from UK property.
Who it applies to
The company tax return change applies to non-UK resident companies, including those who invest in UK property through collective investment vehicles.
For any accounting period, you will not be required to register for Corporation Tax and file a Company Tax Return if your liability for Corporation Tax is fully offset by tax deducted under the Non-resident Landlord Scheme and if the company has no chargeable gains for that period. You can find out more about the Non-resident Landlord Scheme here.
Do I need to register for Corporation Tax?
It seems that HMRC has been attempting to identify all affected non-UK resident companies to automatically register them. As such, the guidance states that the companies in scope will be automatically registered and sent a Company Unique Taxpayer Reference (UTR). If you have not received your UTR by 30 June 2020, the guidance states you should contact HMRC.
Do you currently rely on tax return services from a small business accounting specialist. Be aware that their existing authorisation to deal directly with HMRC on your behalf will no longer be valid once the switch happens. It means you will need to submit a new authorisation form to HMRC (your tax advisor should be able to sort this out for you).
Transitional provisions (applying to Pre-6 April 2020 Income Tax losses and Capital Allowances)
If your non-resident company’s UK property business is reporting a cumulative loss for Income Tax for the current tax year, this will be carried forward to your Corporation Tax (so long as the property business is still continuing at 5 April 2020).
This loss can be offset against future profits from the same UK property business or any non-trade loan relationship profits connected to that UK property business.
The Income Tax loss cannot be relieved against Capital Gains where the company may be chargeable to Corporation Tax.
The loss must be used in priority to any other losses made on or after 6 April 2020 under Corporation Tax. The restriction to relief for Corporation Tax losses that arise on or after 1 April 2017 does not apply.
If your company has claimed Capital Allowances under Income Tax, the value pools as at 5 April 2020 will transfer to Corporation Tax without giving rise to a balancing allowance or balancing charge.
On moving to Corporation Tax this April, you will need to apportion Capital Allowances between Income Tax and Corporation Tax.
What will this mean for your property business?
From the tax year starting 6 April 2020, your company’s profits will be subject to Corporation Tax (currently 17%) instead of Income Tax. All capital gains from 6 April 2019 will also be subject to Corporation Tax.
The switch to Corporation Tax also means that several key business expenses are accounted for differently:
Interest payments. Instead of being treated as a straightforward tax deductible business expense eligible for relief, the Corporation Tax regime requires you to treat mortgage interest and other finance charges as non-trade deficits. You will need to apply a separate set of rules (loan relationship rules) to properly bring these costs into account.
Tax relief restrictions. These recently-introduced restrictions will most likely be relevant to companies that include significant property portfolios. For post-2020 losses, the restriction threshold means that you can offset losses up to £5 million, plus 50% of any remaining losses over and above £5 million. There’s also a specific threshold governing interest (the Corporate Interest Restriction (CIR). The basic rule is that where your company’s annual interest expenses exceed £2 million, those expenses can be set off against up to a maximum of 30% of the company’s taxable profits.
Distinguishing between different categories of expense for your Corporation Tax return. Rental expenses (e.g. agents’ fees) can be offset against rental income only. Expenses that relate to the management of the company are only deductible against ‘property profit’ (i.e. net rental income as opposed to profit arising from a property sale). Non-trade expenses (notably, interest payments) are not directly relievable.
What next for your company?
It’s clear that there is much more to this rule change than a slightly different return form to fill in. For one thing, especially if your portfolio contains mortgaged properties, you will need to get to grips with the loan relationship rules, as well as being aware of the further restrictions that will apply where interest payments exceed £2m.
The upcoming switch from one tax to another should also be a factor to consider if you are planning on disposing of a property in the next few months. In particular, the timing will determine whether Capital Gains Tax or Corporation Tax will apply, so make sure you are aware of how the two types of liability affect your overall tax position.
Completing a Corporation Tax return for the first time? Need assistance in apportioning capital allowances for the transition period, or for ensuring interest payments are properly accounted for? Combining expertise in the fields of business expenses, tax planning and services for non-UK residents, MJH Accountancy is ideally placed to help you manage the change. For more info, speak to MJH today.