Non-resident Taxation of Income from UK Property

Finance Act 2019 has introduced two changes to the taxation of non-resident income from UK property:

  1. From 6 April 2019, disposals of direct or indirect interests in UK land are brought into the Territorial scope of charge; and
  2. From 6 April 2020, income from a UK property business is moved out of the charge to income tax and brought into the charge to corporation tax.

Background: the position until 5 April 2020

Non-UK resident companies have been subject to income tax in respect of property income arising in the UK. Tax has been chargeable at the basic rate of 20%. These companies are required to complete a Non-resident Company Income Tax Return (SA700).

Finance Act 2019

Coming into effect from 6 April 2020, income from a non-resident UK property business will now be subject to corporation tax rather than income tax. The corporation tax rate is currently charged at 19%: 1% point lower than the equivalent income tax rate. The details of profits to be charged with corporation tax will be included on a company tax return form CT600, as opposed to the SA700.

From an administrative point of view, the annual company tax return will include details of both UK property business income and any property disposals for the accounting period as a whole, on which corporation tax will be due. The filing deadline is 12 months after the end of the accounting period, though in practice, this will be filed 9 months after the end of the accounting period: the point at which any corporation tax is due.

Property losses and allowable deductions

Profits and losses will accordingly be drawn up under corporation tax principles according to the rules of CTA 2009 Part 4.

Loan relationships or derivative contracts that the non-resident company is party to for the purposes of its UK property business are also brought into the charge to corporation tax.

For companies that have net deductible interest and financing costs of over £2 million per annum, there will be a limit to the amount that the company can deduct: the Corporate Interest Restriction.

Transitional rules

UK property business income tax losses carried forward at the point of transition, 6 April 2020, will be grandfathered and therefore deductible under corporation tax rules against future income of the property business.

Capital allowance balances will transfer between the two regimes in such a way as to produce no balancing allowances or charges.

Notably, if a company’s only source of UK income after 6 April 2020 is expected to be income from the UK property business, no Income Tax payments on account for 2020/2021 and future tax years will be required. Similarly, if a credit balance remains in the company’s Income Tax account after all Income Tax liabilities for 2019/2020 and earlier years have been settled, the credit balance will be repaid to the company.

Annual Tax on Enveloped Dwellings (ATED)

ATED on residential properties owned through a corporate structure with a value of more than £500,000 continues to be unchanged following the Finance Act 2019. As ever, ATED can be relieved in full for residential property that is let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner. Other reliefs can be claimed as per sections 30 to 41 of the ATED technical guidance.

Capital Gains Tax (CGT) on UK property

Non-residents, both individuals and companies, are taxed on almost all gains made on disposals of UK residential properties. Since 6 April 2019, non-UK residents who make an indirect disposal of an interest in UK land will also be brought into the Territorial scope of charge, with the new s1A of TCGA 1992 Part 1. Indirect disposals can for example be disposals of shares in a non-UK entity that derives at least 75% of its value from UK land, provided that the person making the disposal has an investment of at least 25% in that company. The scope of taxation for non-residents has been extended from targeting UK residential property specifically, to now including commercial property and disposals of shares in so-called ‘property rich’ entities. Disposals will be reported in the annual company tax return.

Mouktaris & Co have experience in helping clients navigate the regulatory, accounting and tax matters of property businesses. Our team can review your corporate structure and advise on whether it may be beneficial to de-envelope or restructure in other ways, to take heed of an almost even UK vs non-UK playing field. This will include reviewing potential capital gains tax, stamp duty and inheritance tax liabilities as well as commercial considerations of raising finance and banking relationships in the UK and offshore.

Contact Mouktaris & Co Chartered Accountants to find out how we can help your property rental business.

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