The Government is considering bringing overseas property-owning companies within the charge to UK Corporation Tax
You may have seen the little, sort of tucked-away, announcement in the Autumn Statement last week that there will be a consultation on bringing Non-Resident Landlords into the UK Corporation Tax regime.
So what does this mean for overseas companies with UK property income?
Non-Resident Landlord companies (NRLs in tax-speak) are subject to Income Tax on rental income from UK property, at a rate of 20%. Unlike Corporation Tax, the rate is not scheduled to reduce in April 2017 nor at a later stage.
Importantly, NRLs are not subject to tax on capital gains on the disposal of UK commercial investment properties. The other important point (and not often highlighted) is that NRLs are not subject to the corporate debt rules as they only apply to Corporation Tax.
This also means that the BEPS restrictions on tax deductibility for interest (these are the OECD measures on Base Erosion and Profit Shifting) do not apply to NRLs. We were aware that this was likely to be addressed and at most we will have another year where NRLs are outside these restrictions.
HMRC indicated in discussions with British Property Federation (BPF) that they are considering whether to extend BEPS or amend the NRL regime.
Does this change the taxation of NRLs?
The simple answer is 'Yes', but it is not the blow or bombshell that some people have made it out to be. Clearly, life without BEPS Action 4 would be simpler and much more advantageous. This is because Action 4 is the OECD measure specifically aimed at tax deductibility of interest. But of course it is for this very reason that these rules were always going to change.
Firstly, the announcement was for the start of a consultation period next year. Our expectation is that NRLs will remain under the existing regime until April 2018.
Secondly, this does not necessarily mean that NRLs will be brought ‘onshore’ and subject to Corporation Tax on all income and gains.
There are three likely possibilities:
- remove the offshore distinction – NRLs become subject to Corporation Tax on all income and gains (not just property)
- retain offshore distinction but NRLs become subject to Corporation Tax on property income and gains
- bring NRLs into the Corporation Tax regime only in relation to property rental income; this would make them subject to Corporation Tax on property income and provision could be made to exempt them from corporation tax on gains.
We are involved in the discussions and await the consultation in the new year, which may give a better indication of the government’s intensions. The removal of the Capital Gains Tax exemption for commercial property would be a major change in UK tax, it has of course been eroded over the last few years anyway.