Non-resident companies owning property to pay income tax and CGT

The government is consulting on the capital gains tax and income tax liability of non-resident companies owning UK property with a view to bringing their taxable income and/or gains from the disposal of certain UK residential property interests, within the UK tax regime for the first time

As this proposal is still at the early stages, the Treasury has not released any details about how much tax this measure is likely to raise nor the scale of the impact in terms of affected companies.

The proposals will bring foreign owned property into the income tax and CGT regime, but will not change withholding tax. The documents states that the withholding regime for the deduction of tax at source within income tax will not be changed as a result of the new measures.

In addition, this change will not affect other source trading income, as it is focused exclusively on property ownership.

This is a result of various changes to corporation tax such as interest restriction and loss reform as well as the planned reductions in the corporation tax rate, which affect UK-based companies.

By paying corporation tax, these companies would fall under the interest restriction rules, although these do provide for a de-minimis exemption of £2m net interest expense to be shared by the worldwide group. If the non-resident company does not have any group associates, the worldwide group would only consist of that company and it would then be entitled to access the £2m exemption in its entirety. There may also be exemptions for third party rental.

The government is now reviewing whether it would be practical to bring non-resident companies into the loss relief and interest restriction rules, bearing in mind that even officials recognise that this could be complicated to roll out.

Whatever the outcome of the consultation, the government will move income from UK real estate property into the corporation tax regime.

This would be a fundamental change to the taxation of the majority of non-resident companies who currently file self assessment returns. However, from the government perspective, it states that ‘this change would ensure that the taxation of income from UK real property is consistent’. For some time, the Treasury has felt that the current systems gives non-resident owners an unfair tax advantage.

The same issues could also apply to income arising from a trade carried on in the UK other than through a permanent establishment which, technically, remains within the charge to UK income tax – though in practice this applies to only a very small number of companies.

As part of this policy proposal, the government is gauging views on whether non-resident companies could be brought into the loss relief regime.

Its preferred options is to bring non-resident CGT gains within the scope of corporation tax. The government intends that the existing computational rules for non-resident CGT would remain broadly the same with some adaptation for group companies.

There will also be a requirement to agree appropriate starting dates for the transition of property rental income into corporation tax, which need to take into account the relevant accounting periods.

For corporation tax purposes, the first accounting period would start on the first day on which they come into charge to corporation tax which would be 6 April of the relevant financial year.

There would be a deemed cessation of the UK property business at 5 April for the purposes of the charge to income tax.

Consideration is being given to the treatment of assets which qualify for capital allowances; the government’s current thinking is to avoid the creation of balancing allowances or charges which require a market valuation.

Bringing the profits of a UK property business of a non-resident company within the scope of corporation tax would affect the vast majority of non-resident companies who file self assessment tax returns for income tax.

Treatment of profits and losses

The government wants to gauge views on whether there is an alternative approach to the computational treatment of profits and losses by a non-resident company. Using the current UK system would mean that the net profit on this source of income will be nominally higher under corporation tax. It is also considering the impact of new interest deductibility rules coming into force this April as well as loss relief reform, which taken as a package, would substantially increase tax liability for non-resident companies.

The biggest hit would be from compliance with the loss relief rules. This would mean that only 50% of the profits recognised by a company in any period of account could be sheltered by corporation tax losses carried forward from previous accounting periods (subject to an annual allowance per group of £5m profits which can be relieved in full).

There will also be constraints on the use of management expenses to run the business, with companies forced to split their costs against UK only property versus their wider global property portfolios.

The consultation document states that it is considering ‘limiting the deductibility of management expenses of a non-resident company to those amounts which have been wholly expended for the purpose of managing the part(s) of the investment property business which have a UK source and are within the charge to corporation tax’.

Transition period

There will be a transitional period before the rules are implemented to allow companies to review profits from loan relationships and derivative contracts to ensure that amounts are not taxed or relieved twice. Any losses may be able to be carried forward as ‘income tax property losses’ at the effective date when the new regime starts.

The government’s plan is for affected companies to be able to ‘carry the loss forward to the next accounting period and for the loss to be set against that future income without restriction’. This is part of the consultation process so this may well be subject to review.

Consultation document and closing date

The consultation closes for comment on 9 June 2017.

The consultation, Non-resident companies chargeable to income tax and non-resident capital gains tax, is available here 

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