The government is considering bringing non-resident companies receiving UK rental income into the corporation tax regime rather than the existing income tax regime. The government will begin consulting in March 2017. The idea is to ensure that such companies will be taxed in the same way as a UK company.
Although there is currently little detail available, the proposal could impact non-resident landlords in a number of ways.
- Tax rate reduction – non-resident companies are subject to income tax at a rate of 20 per cent; corporation tax is due to fall in April 2020 to 17 per cent.
- Interest deductions – finance costs are generally limited to borrowing up to the cost of a property. Corporate debt rules provide greater flexibility.
- Loss offset – restriction which may occur where trading losses are not available for set off against rental income. Where both are within the corporation tax regime there may be greater flexibility.
- Interest restrictions – for corporation tax purposes, the government has proposed restricting finance costs to 30 per cent of profits. This measure would automatically apply to non-resident landlords.
- Loss relief – for corporation tax purposes, the government has proposed restricting the use of brought forward losses. These rules would then apply to non-resident landlords.
- Transitional rules – existing brought forward losses and capital allowances will need to be dealt with and it is hoped that companies do not find that reliefs are lost.
- Complexity – corporation tax rules are more complex than income tax rules.
The proposal is directed at the taxation of rental income rather than gains. Offshore commercial investors and certain companies holding UK residential property are not generally subject to UK tax on capital gains. There is a concern that by bringing these companies into the scope of corporation tax in order to have equal treatment with UK companies, capital gains will, in the medium term, become subject to UK tax.
Traditionally HMRC has been less aggressive on its approach to non-resident landlords than it has to other corporation tax payers. Bringing non-resident companies into UK corporation tax may result in these companies facing greater scrutiny.