Proposed corporation tax on non-resident companies' UK income
Changes to how non-UK resident companies are taxed on UK source income could have a significant impact on foreign investors into UK property.
In its Autumn Statement on 23 November, the UK Government announced a proposal to review how non-UK resident companies are taxed on UK source income. The proposals would have a potentially significant impact on non-UK companies that hold UK rental properties.
Currently, a non-UK company which owns a UK rental property pays basic rate income tax on the annual net rental profits (the rate of tax payable is 20%). In calculating the net rental profit, a tax deduction is allowed for interest paid by the company on loans to purchase the property (assuming the interest is on arm’s length terms). Also, brought forward tax losses of the UK rental business can be offset against current year rental profits without restriction.
What is likely to change?
The proposal announced in the Autumn Statement was to potentially bring the net rental profits of non-UK resident companies within the charge to UK corporation tax. No details have been announced as yet and the Government has stated that it will consult at Budget 2017. The consultation will consider how to apply corporation tax rules, in particular rules which restrict the deductibility of interest expense and restrictions on the use of losses.
The UK Budget 2016 announced proposals to restrict the deductibility of interest and fundamental changes to the rules in relation to offsetting brought forward tax losses. These rules, if enacted, could potentially be applied to non-UK companies in receipt of UK rental income.
What could the changes mean in practice?
On the face of it, bringing non-UK resident companies within scope of UK corporation tax is a positive proposal from the perspective of the taxpayer as the rate of corporation tax is set to fall from April 2017 (eventually down to 17% by April 2020). As noted above, such companies currently pay 20% basic rate income tax. However, the benefit of the falling tax rate may, depending on the circumstances of a particular company, be more than offset by restrictions on interest deductibility and relief for tax losses.
Interested parties should monitor this situation closely. Directors of companies holding UK property which are highly geared or have brought forward tax losses should consider how these proposals will impact on the company as further action may be required, for example to restructure how a company is financed.
For more information, contact:
Abacus Trust Company Limited, Isle of Man
T: +44 (0)1624 689608