Offshore companies who invest in UK property could be brought into the corporation tax regime as outlined in a recently published consultation paper. This would bring together the ways both UK and offshore companies are taxed on their rental income and certain gains
Currently non-residential landlords have been subject to income tax on UK rental profits, whilst gains on residential property have generally been subject to capital gains tax. It has been proposed that these will be subject to corporation tax.
The income tax regime is much simpler than its corporation tax counterpart, with fewer anti-avoidance measures. One reason for the proposals is to ensure that new interest restrictions being introduced in April 2017, which will apply for corporation tax, will extend to non-resident companies investing in UK property.
Although it may be too late to align offshore and onshore landlords this year, we expect the proposed alignment to take place in April 2018.
Other key issues:
- brought forward income tax rental losses should be available to use against the future rental profits taxed under corporation tax;
- greater flexibility for rental losses to be offset against UK trading profits;
- disregard regulations will enable fair value movements in derivatives and hedges to be ignored. However elections may need to be made;
- enabling deductions for previously disallowed management expenses in respect of UK investment property business; and
- lower tax rates - corporation tax is due to fall to 19 per cent from April 2017 and then to 17 per cent from April 2020. There has been no proposal to reduce the basic rate of income tax from 20 per cent.
The new rules are not intended to extend the tax charge to gains realised on commercial property, which subject to existing anti-avoidance, should remain tax free.
The corporation tax regime is complex and subject to a wide range of anti-avoidance measures. A lower rate and additional deductions for management expenses should be welcomed. Although there is concern that most non-resident landlords will find they have higher tax liabilities and greater compliance burdens.
How RSM can help
Offshore landlords may need to improve their account systems so they are able to meet the complex reporting requirements required under corporation tax. Given additional restrictions on interest deductions, modelling cash flow requirements may also be needed. It is important to consider how the transition may impact on property businesses and if a review of the accounting policies is required beforehand.
RSM will be responding to the consultation process which is due to close on 9 June 2017. Please feel free to contact us with your comments.