Up until 5th April 2020, non-UK resident entities, which owned UK property investments, were taxable on their UK rental income under the Non-Resident Landlord (NRL) scheme. Overnight, from 6th April 2020, there was a fundamental shift where such entities were moved into the UK Corporate Tax (UKCT) system.
Grant Thornton have compiled a list of the most commonly ask questions:
Will the tax payable under the UKCT be the same as under the NRL?
There will most likely be a difference in the tax payable. How much will depend on each entity’s circumstances and also whether it is part of a wider group of entities. The UKCT rate is lower (currently 19%) than the NRL tax rate (20%). This sounds like good news, but the UKCT system includes some extremely complex legislation, in particular towards deductions that can be claimed for interest and other financing costs, which can result in add backs being made, leading to a higher taxable profit.
Is there any impact in terms of borrowings that have been used to fund UK property investments?
Under NRL, interest paid to fund property investments would be deductible so long as the interest was reflective of an arm’s length, third party rate of interest.
There could be restrictions if borrowings were from a related party, or guaranteed by a related party, and it was determined that lending on those terms would not have been provided had the entity been standalone. That restriction, called Transfer Pricing, still applies under UKCT. In addition, under UKCT, there are other pieces of legislation that can apply so as to restrict deductions, that did not exist under NRL. Some of the most common ones that we can see include:
- The Corporate Interest Restriction (“CIR”), which can apply where interest and other finance costs payable by an entity (combined with certain related entities) exceeds £2m in a financial year. Where it applies, the CIR can restrict deductions to a fixed percentage that is based on profit levels.
- The Anti Hybrid Mismatch (“AHM”) legislation, which can apply to deny deductions of interest payments made to certain entities or bodies that are deemed ot have a degree of ‘hybridity’ e.g. some LLP structures.
- The ‘late paid’ interest rules, which can apply where interest payable to certain related parties is accrued, and remains unpaid more than 12 months post year end.
Each of these, in particular the CIR and AHM, are highly complex, even in undertaking the basic calculations. Added to this, the legislation contains a number of elections and alternative calculations that can be made, which can in some cases improve an entity/group’s position. As such, having a deep understanding of the legislation and elections is critical to managing the effective UK tax rate.
In addition, we need to be very conscious of the potential for UK Withholding Tax (“WHT”) to apply at 20% on certain interest payments made. This can sometimes be an issue where a non-UK entity pays interest to another non-UK entity, and where that UK interest is deemed to have a ‘UK source’. Case law in the UK has built up a bit of a picture as to when this may be an issue. Understanding this, together with considering ways in which this can be managed, is highly important.
What if there is a loss on the rental results?
There is considerable flexibility as to how losses can be used in the UKCT system. This can include carry forward against future income, carry back against prior year income, and in some cases, surrendering losses to other group companies that are within UKCT.
However, a further complication under the UKCT system is that each loss can be used in different ways:
Common losses include:
- Property business losses (on rental income)
- Non-trade financial loan relationship deficits (on interest and other financing costs)
- Capital losses (on property disposals)
Each one has different rules as to the extent the losses can be carried back, carried forward or group relieved. Especially for groups of companies, understanding the rule is vital to ensure that losses are relieved in the most efficient way.
Are different taxes paid when an investment is sold?
Any gains on investment sales are included on the annual UKCT return, and UKCT is paid as appropriate. Remember that residential property can benefit from a 6 April 2015 market value rebasing, and non-residential can benefit from a 6 April 2019 rebasing. Ensuring that all deductible costs and rebased market values are identified is vital to manage the taxable gain. If a loss arises, then there are separate rules as to how that loss can be relieved.
What are the UKCT filing obligations compared to the NRL scheme, and how do entities comply?
Gone are the days of sending a paper NRL return to HMRC! The UKCT filings are now made electronically and are due 12 months after the end of the accounting year. Specialist tax software is required to make the filings. Due to the nature of the UKCT system, the provider of any such software should be carefully selected to ensure that it can handle the inherent complexities. In addition, there is a requirement to submit accounts electronically for the entity, tagged in an iXBRL format. This requirement to file accounts with HMRC did not exist under the NRL scheme.
When is tax due to be paid under the UKCT system?
Normally, it is 9 months and 1 day after the year end. However, depending on the size of the expected profit, estimated quarterly instalments may be required, payable during the financial year in question.
Whether such instalments are needed is also driven in part by the number of any related companies. Understanding when UKCT payments are due is vital, as if they are missed, there will be interest applied, and potentially penalties may also be applied in more serious cases.
Do I need to register with HMRC for UKCT?
If the entity has already been registered for NRL then HMRC should have registered if for UKCT. However, it is prudent to double check that the registration is in place and also change the year end if necessary (HMRC default every year end to 5 April).
What does the future hold in terms of UKCT on property investment income?
There is an expectation that there will be a rise in the UKCT rate from its current level of 19%, however, to date, there have been no firm announcements from the UK Government. One thing that is for sure is that the legislation governing UKCT continues to be added to year on year, which only serves to add to the complexities in ensuring compliance. This means that working with advisors who remain informed of the changes is critically important.
For further information, contact the Grant Thornton team.
