Non-resident company landlords are now subject to corporation tax
Non-Resident Landlord Corporation Tax
Until 5 April 2020, non-resident (company) landlords (NRLs) receiving UK rental income were required to file returns under the income tax regime and pay tax at a rate of 20%.
However, from 6 April 2020 this has changed as non-resident landlords are instead subject to the UK’s corporation tax regime, where the rate is currently at 19%.
For ease, we have highlighted below the main points that you need to be aware of.
NRLs currently within the self-assessment scheme will be automatically registered for corporation tax and will be sent a Company Unique Taxpayer Reference (UTR). They should contact the UK tax authorities (HMRC) if they have not received their UTR or request their agent to prompt HMRC. Please note that the new UTR will not be automatically sent to the company’s existing tax agent.
New NRLs set up after 6 April 2020 will have to register and notify HMRC of chargeability to UK corporation tax within three months of becoming chargeable.
Tax returns for 2019/20 tax year
The NRLs will need to complete a final Non-Resident Company Income Tax Return to report the proportion of income arising up to 5 April 2020.
The NRLs will need to make advance income tax payments on account for the 2020/2021 tax years unless they expect to receive only UK rental income after 6 April 2020. Any excess credit balance remaining on the HMRC income tax account after the 19/20 tax liabilities have been settled should be claimed as a repayment via the 19/20 income tax return as it will not be able to be transferred over to the corporate tax account.
Tax returns for 2020/21 tax year
Under the corporation tax rules, the NRL’s profits from a UK property business will be calculated by reference to accounting periods, which are aligned to the period for which the companies prepare their annual accounts.
As such, the first accounting period for corporation tax will start on 6 April 2020 and end on 5 April 2021. The filing deadline is 12 months after the accounting year end. Thus, the corporation tax return for the year ended 5 April 2021 will be due to be filed by 5 April 2022.
The tax payment dates for corporation tax also differ from those with which NRLs will be familiar. The due date for the first corporation tax liability will fall nine months and one day after the end of the accounting period (i.e. before the filing deadline). For subsequent periods the payment dates will depend on various factors (i.e. taxable profits, number of 51% group companies and length of period). Generally, entities with higher profits will need to pay their tax in quarterly instalments.
UK tax relief restrictions
There are several differences as to how taxable rental profits are calculated under the income tax vs corporation tax regime. For a summary of the most common changes please note the comments below:
- Management expenses – These will be deductible against net UK rental income in the year and any excess will be carried forward to be offset in future years.
- Loss restriction – Existing unutilised income tax losses will be carried forward to the corporation tax regime. However, these will not be able to be offset against other types of income or gains or be surrendered as group relief. Losses generated whilst in the corporation tax regime will be subject to special rules.
- Relief for finance expenses – Mortgage interest and other finance costs are calculated separately under the loan relationship rules; hence they are not included in the calculation of net taxable profits or losses from UK property.
- Interest restriction – When calculating how much UK corporation tax is due, there is a limit to the amount that a company or group can deduct for interest and other financing costs. This is known as a Corporate Interest Restriction (CIR). These are complex rules but in summary where the NRL’s net interest expense is in excess of £2 million, the expenses will be restricted to up to 30% of the NRL’s tax adjusted profits before interest and capital allowances. CIR can be complex; hence advice should be sought for highly leveraged entities.