Non-resident landlords moving to corporation tax

6 April 2020 brought significant changes for non-resident landlords (NRLs) on UK property taxation with the transition from the income tax regime to he corporation tax (CT) regime.

While this brings a reduction in the current applicable tax rate from 20% to 19%, there are a number of provisions which seek to restrict the deductibility of expenses that would otherwise be deductible for income tax (IT) purposes. Therefore, it is likely that the tax liability of a NRL will be higher under CT than it is currently.

Non-resident landlords continuing a UK property business will have automatically been registered for corporation tax on 6 April 2020 and should have been issued with a corporation unique tax payer reference (UTR) by 30 June 2020. Follow up with HMRC if you didn’t receive a UTR by 30 June 2020.

Compliance

A significant change between IT and CT is that under the latter, tax returns must be filed electronically no later than 12 months after the end of the accounting period, along with tax computations and accounts in iXBRL format using specialist software.

Financing

NRLs will now be subject to the loan relationships regime, which determines whether UK tax deductions are available for interest payments and other financing costs. In general, this should not materially affect the ability of landlords to claim a deduction for interest payments.

More significantly, the corporate interest restriction regime (CIR) now applies. This (broadly) limits interest deductions to 30% of EBITDA, subject to an annual allowance of £2 million (on a group basis). As a result, landlords may find themselves paying more UK tax than was previously the case.

Losses

Specific provisions have been made to allow unrelieved IT losses to be grandfathered, and will continue to be available for set off against future profits from the UK property business.

Capital allowances

Existing capital allowances pools at 5 April 2020 are transferred into the corporation tax regime, with no balancing allowance or charge arising.

What NRLs need to consider

While your company’s first corporation tax return may not be due for some time, it is important to consider the impact of the changes now. Plan a new timetable for the preparation and completion of accounts, corporation tax returns and arrange for accounts to be prepared in iXBRL format.

Penalties and interest can apply for non-compliance and inaccurate return submissions so it is important to seek advice at an early stage.