From 6 April 2020, non-UK tax resident corporate landlords (NRLs) are subject to corporation tax rather than income tax on their UK rental profits. Prior to this change, NRLs were subject to income tax (through withholding tax or direct assessment) on UK property rental income, unless they were operating out of a UK permanent establishment.
The most significant consequences of this change are that NRLs are now subject to the corporate interest restriction rules (CIR) and carry forward loss restrictions. CIR limits the amount of interest that can be deducted for tax purposes to, broadly, 30 percent of EBITDA, and the amount of carry forward losses that can be set against profits is capped at 50 percent of profits in any year.
NRLs are now also subject to corporation tax on any gains made on a disposal of UK real estate, whether direct or indirect, and regardless of whether the property is commercial or residential.
The changes will impact all non-resident companies that either carry on UK property business directly or by using a tax transparent collective investment vehicle such as a Jersey property unit trust.
In particular, the typical corporate holding structure where tax on income is reduced by tax deductible, transfer-priced finance costs (such as, interest on shareholder loans), will no longer operate tax efficiently to the same extent for higher-value property holding groups or entities.
Companies will need to calculate their profits in accordance with corporation tax principles, which may represent a significant change from the current method of calculation.