From April 2020 non-resident landlords are to be brought under the UK corporation tax regime. This brings with it a significant shift in the way non-resident landlords will be required to conduct their tax affairs. One consequence is that the new interest expense restrictions will apply. Here we explore who is likely to be affected and what can be done about it.
The shift from paying income tax at 20% currently to moving across to the corporation tax regime where tax rates are currently at 19% and earmarked to fall further (to 17%) is a positive for non-resident landlords. It does however, bring with it the requirement to satisfy all the same obligations and restrictions which exist for current UK corporates which includes the recently introduced restriction on the amount of deductible interest-like expenses.
Although the new rules have been effective from April 2017 they only apply to the UK corporation tax regime. In simple terms the new rules disallows interest-like expenses to the value of approximately at least £2 million across a group.
£2 million may on the face of it seem a reasonable threshold but with the amount of debt on property investments it is likely that most non-resident landlords will be caught in this new regime. Therefore, despite the reduced corporation tax rate, they will suffer from increased tax liabilities reducing the net return on their investments.
Non-resident landlords who were previously able to mitigate the tax using the interest debt relief often did not need the tax relief offered by Capital Allowances and therefore it was not a consideration during the transaction process due to the negligible benefit it provided.
However, this is likely to change going forward with Capital Allowances offering the only means to mitigate the increased tax burdens. Coupled with the changes to the Capital Allowances legislation effective from 2014 on property acquisitions (s187a Capital Allowances Act 2001), one can expect an increase in the number Capital Allowances enquiries during the due diligence process on transactions.
It will be essential that investors receive the necessary specialist Capital Allowances advice, even if it is just to ensure that contract wording is drafted in a way to ensure that any ability to claim post completion is not lost due to an unnecessary oversight or omission, commonly due to a mistaken perception that Capital Allowances don’t apply or cannot be claimed by a Purchaser.