CAPITAL letters - Issue 31

As the title suggests, it’s a confusing mess and makes about as much sense as the government’s ever-changing social distancing rules. 

CGT summary

As a quick reminder there are now three significant dates for non resident company landlords. The first is the non-resident CGT (‘NRCGT’) start date of 5 April 2015 for UK residential property. At the inception of this new tax the rate was set at 28% and you get a re-base at that date. The second date is 5 April 2019, when NRCGT was extended to all UK property, including commercial property. Commercial properties got a re-base as at 5th April 2019. At the same time, ATED related CGT was abolished, meaning the earlier relevant date of 5th April 2013 is no longer relevant. 

For corporate landlords the tax rate for commercial property from April 2019 was 19%, due to the fact that gains were charged to Corporation Tax (CT), although companies were not subjected to the full CT regime. However, following the introduction of CT for non resident companies from 6 April 2020, which is our third significant date, whilst gains continue to be charged at the CT rate (19%), those companies are subjected to the full CT regime, for which more below. I do hope you are keeping up with this….

This also means that the NRCGT forms, which needed to be filed within 30 days of any gain being realised, are no longer required (except for trustees and individuals) from April 2019 onwards. Instead, non-resident companies will file in accordance with the unlovely CT rules (see below). This is where the fun really starts. 

Extension of CT to non resident companies

From 6 April 2020 all non resident companies will become liable to CT on both their UK income and gains from UK property. This change will have major implications for offshore companies and the people that run them. Up until 2020 non resident companies were charged to UK Income Tax on UK rental profits, but now they will be charged to CT. The good news is that the rate of tax reduces to 19%, whereas the income tax rate was 20%. 

The bad news is that the calculation of profits will now be made in accordance with CT rules, which are much more complex than the Income Tax rules and also contain some nasty surprises, such the Corporate Interest Restriction (CIR) and loss carry forward rules.

The Corporate Interest Restriction (CIR)

The CIR is an unpleasant beast as it restricts your deduction for CT purposes on financing costs to 30% of the turnover. Whilst this will only apply to companies or groups of companies where the financing costs exceed £2 million per annum, there are a number of other provisions which may affect corporate landlords with lower borrowing costs. For instance, the ‘unallowable purpose rules’ will affect loan relationships which are created for tax avoidance purposes. This is particularly relevant to offshore property holding structures, which are often entirely constructed to mitigate tax. 

Loss relief

The loss relief rules for CT differ from those applicable to Income Tax and will be an issue for non-resident companies with large carried forward losses (that is over £5m). Where caught you will be restricted to carrying forward only 50% of your losses. 

Compliance

Non UK resident companies receiving income from UK property are currently required to submit form SA700 to HMRC, which can only be submitted by post and will be in relation to the Income Tax year ending on 6 April every year. By comparison non resident companies subject to CT will need to file the more complex Corporation Tax returns in accordance with the company's accounting periods. Significantly, this cannot be done by post but must be done online in accordance with the iXBRL formatting requirements. I should imagine that most offshore company administrators do not presently have the software to enable them to do this.

HMRC will automatically register all non resident landlords for Corporation Tax and issue a CT Unique Taxpayer Reference (UTR) by 30 June 2020. As such, you should already have this in your in tray. Lucky you. 

Interaction with Non Resident Landlord Scheme (NRLS)

The NRLS process is fairly well understood and, by HMRC's standards, quite straightforward. However, NRLS was the means by which non-resident companies could declare and pay their Income Tax liabilities and those companies are now liable to CT, rendering the NRLS scheme potentially redundant. 

For most corporate landlords, the NRLS regime will come to an end and they will need to file CT returns. However, for companies who have their tax deducted at source under NRLS by the rental agent/tenant then, provided that the tax deducted at source actually satisfies the company's liabilities under CT, then there is no requirement to file under the CT regime. This will lead to some confusion, given that the NRLS regime is not designed to accommodate the CT computational rules. 

Finally, you need to note that this exception is only applicable if there are no chargeable gains realised by the company in the year of assessment. 

The interaction between these two regimes will inevitably lead to challenges, not least because the reporting period will be different. The Income Tax year end is 5 April, whereas for CT this will depend upon the accounting period of the company. It might therefore be an idea for companies affected to adopt a year end of 5th April. Many property owning non-resident companies do this already. 

Finally, a reminder that all gains from April 2019 must be reported under the CT system, which means a rate of 19%, with the tax payable within 9 months of the end of the company’s accounting period, as opposed to 30 days after the gain is realised, under the NRCGT regime.

Conclusion

The government cannot resist tinkering with the taxation of UK property and these latest changes will undoubtedly make life more much difficult for non resident company landlords. The majority of corporate landlords will now have the grapple with the complexities of CT, which contain unfamiliar rules and require investment into specialist software in order to submit returns. 

In many cases, the complex rules of CT which affect the ability to deduct finance costs will require careful scrutiny, particularly where there are loans from related parties. 

The only good news is that, apart from those landlords who will fall foul of the various interest restrictions and/or loss carry forward restrictions, the tax burden will reduce slightly, due to the lower rate of CT. However, it is clear that the administrative burden and consequential compliance costs will probably increase. 

I know it’s predictable to say this, but if you are a corporate landlord you really ought to get some advice on the effect of this new regime on your taxation profile.