Differences in tax treatment at a glance

The table below provides a high level outline of the main differences which should be considered for non-resident landlord investors from April 2020.

Topic Income Tax (pre-April 2020) Corporation Tax (post-April 2020) Impact for non-residents
Tax rates 20% 19% This should be perceived as good news as the lower tax rates should result in lower tax liabilities for many companies.
Filing dates
31 January after end of tax year.
12 months after end of the period of account.
Following the transition, companies should have more time to prepare and submit a tax return. 
How to file
By paper.
Online with iXBRL tagging.
Non-residents will now also file tax returns online (a significant saving in costs of postage from overseas should be experienced going forwards) .
Tax payments
50% due on 31 January during tax year and 50% due on 31 July after tax year.
Depending on size, tax payments may be brought forward and payable on a quarterly basis or may be due 9 months and 1 days after the end of the accounting period.
The cash flow position will need to be carefully considered on the transition to Corporation Tax as there is a possibility that there may be overlapping payments throughout 2020/21 in respect of settling final Income Tax liabilities and the first instalments due under Corporation Tax. 
Transfer Pricing
All transactions should be in accordance with the arms-length principle, or face being subject to adjustment in the company’s Income Tax return.
All transactions should be in accordance with the arms-length principle, or face being subject to adjustment in the Corporation Tax return.  There Transfer Pricing rules under both regimes are very similar. There is not expected to be a practical impact for how companies structure connected party transactions with the exception of those companies that may qualify for the small and medium-sized “SME” exemption that exists under Corporation Tax.
The SME exemption does no apply to entities resident in certain jurisdictions.
Deductibility of interest
Subject to any adjustment under Transfer Pricing rules, interest is deductible in full on an accruals basis.
May be restricted under Transfer Pricing rules but now need to consider Corporate Interest Restriction (“CIR”), anti-hybrid and other anti-avoidance measures included in corporation tax regime that may seek to reduce tax relief for interest expenses.
The Corporation Tax regime is far more complex in this area and is widely considered to be more restrictive in enabling tax relief for interest and other finance costs. 
Financing structures currently in place should be reviewed to avoid unexpected surprises on transition to the new regime. 
Financial instruments
The tax treatment of movements in fair value may be taxable / deductible, but could also be treated as capital, depending on nature of the instrument.
A separate regime exists to treat the movements in fair value. Principally the difference is that fair value movements may now be brought into charged, where previously excluded. Elections to disregard such gains / losses could be made depending on the circumstances.
Complex legislation exists within the Corporation Tax legislation that prescribes the treatment of fair value movements recognised on financial instruments and other derivatives. Capital items are also now potentially within the charge to tax, where previously excluded. This results in increased volatility and potential increased exposure to cash tax.
Withholding taxes on rental income
Required to obtain advance clearance from HMRC in order to receive rental payments gross.
Non-resident companies will remain subject to the Non-resident landlord scheme and will continue be subject to withholding tax unless advanced clearance is received from HMRC.
In practice, there should be no change to the way tenants and agents collect and pay tax withheld on rental payments to HMRC.
Applications should continue to be made to HMRC for rent to be paid gross under the Non-resident landlord scheme.
Withholding taxes on interest payments
If interest has a UK source, in principle there is a requirement to withhold tax at the basic rate, currently 20%.
If interest has a UK source, in principle there is a requirement to withhold tax at the basic rate, currently 20%.
The position is the same under both regimes. There are similar processes for both regimes for mitigating against withholding taxes, where possible, under double tax treaties with the UK and currently under the EU Interest and Royalties Directive.
Bank interest receivable
Typically, not subject to UK tax under non-resident landlord regime.
Not subject to UK tax unless the interest is directly attributable to the operation of the UK property business.
In certain instances, bank interest may be subject to Corporation Tax. The basis for whether UK tax is due however does not change between the two regimes. 
Property business losses may only be utilised against property rental business profits only – not capital gains.
Property business losses may be utilised against total business profits subject to corporation tax, including capital gains, and may also be eligible for group relief.
Pre-April 2020 Income Tax losses will continue to only be available for relief against property rental business profits only. The increased flexibility only applies to losses generated under the Corporation Tax regime.
Under Corporation Tax, there are anti-avoidance rules regarding the use of losses following a change in ownership, that did not previously require consideration.
There may also be a financial reporting requirement to consider deferred tax on losses.
Limited in scope for non-resident landlords.
Complex raft of measures exist that must be considered in advance of transition to Corporation Tax.

Under Corporation Tax, additional anti-avoidance is in force. The below is expected to be most relevant to non-resident real estate investors:

  • Corporate Interest Restriction (CIR);
  • Anti-hybrid rules;
  • Controlled Foreign Company’s (CFCs) regime; 
  • Diverted Profits Tax (DPT);
  • The Unallowable Purpose rules; and
  • General Anti-Abuse Rule

For further information please contact Adrian Benosiglio