UK Budget 2021: Issues and impact on non-resident landlords

The Chancellor made several announcements in his Budget on 3 March that affect the taxes of UK real estate. Additionally, substantial developments in the taxation of non-residents investing in UK real estate have occurred in recent years. The amendments announced today may affect Channel Island structures investing in UK real estate, and we have summarised the important developments below:

1. Taxation of income
2. Extended loss carry back
3. Hybrid and other mismatches
4. Taxation of non-UK residents on capital gains
5. UK withholding tax on interest payments
6. Non-resident SDLT surcharge

Taxation of income

For non-UK resident companies that invest in UK property, the taxation of UK property business income will transfer from income tax to corporation tax from 6 April 2020. The rate of corporation tax will be increased up to 25% on 1 April 2023.

Along with changing tax rates, the move to corporation tax entails a change in the method of taxable profits. Additional restrictions may apply to the deductibility of interest, deductions for hybrid mismatches, and the amount of losses or even the availability of brought forward losses from previous years that can be offset.

On 3 March, it was stated that the company tax rate would increase to 25% on income over £250,000 beginning in April 2023. Small businesses with profits under £50,000 will continue to pay 19 percent, while businesses with profits under £250,000 will pay less than the main rate. These upper and lower limits will be adjusted proportionately in the case of short accounting periods and associated companies. Where a company’s accounting period does not end on 31 March 2023, taxable profits shall be apportioned to apply the increased rate.

Non-corporate investors continue to be taxed on their income from UK property businesses. The basic rate of income tax is 20%, and no modifications to the rates are proposed. Income tax is payable in two instalments on 31 January and 31 July of each year, with final payment due on 31 January after the end of the tax year.

Extended loss carry back

Property investors can’t carry back property-business losses and offset them against taxable income in prior accounting periods. In certain circumstances, companies may carry back surplus non-trade deficits (e.g. interest deductions), although this is unlikely to apply to a non-UK tax resident company.

In scenarios where activities are taxed as a trade (e.g., dealing in or developing land), the trading loss carry-back rule was temporarily extended from one year to three years on 3 March. This will be available to companies (including non-UK tax-resident companies subject to UK corporation tax on their trading profits) and other taxable individuals (unincorporated firms) in the following manner:

1. In 2020-21 and 2021-22, unincorporated businesses and companies that are not members of a corporate group will be eligible to claim relief for losses of up to £2 million.
2. Companies that are members of a corporate group will be eligible for relief for losses of up to £200,000 in each of the financial years 2020-21 and 2021-22.
3. Companies that are members of a corporate group will be eligible for relief for losses of up to £2 million in each of 2020-21 and 2021-22, subject to a group-wide cap of £2 million.

Hybrid and other mismatches

The hybrid mismatch rules, which apply to UK tax residents and non-UK companies subject to corporation tax (e.g., those engaged in the property business in the UK or in the trade of dealing in or developing UK land), are intended to counteract arrangements that take advantage of jurisdictional tax treatment differences. These laws may have an effect on real estate funds in particular. Following industry lobbying bodies and consultation, amendments to the rules have been made to ensure that they operate proportionately and as intended.These amendments should greatly simplify compliance with and management of UK hybrid rules for partnership fund structures.

Three major provisions should simplify the analysis of tax-deductible payments (mostly interest) to transparent fund vehicles (e.g. partnerships, contractual funds, and unit trusts):

1. New provisions will be introduced to eliminate counteractions where they arise concerning participants who have less than 10% of their investments in those funds (note: the wording has changed slightly since November, such that it appears to be a reduction in the counteraction and no change to "acting together"). This could indicate that funds with more than 10% of investors but less than the 25%/50% limits for each chapter may now be included in the rules. However, while the policy statement said in November that new restrictions would apply only to partnerships, todays announcement appeared to expand the relief to all transparent tax funds.)
2. If the beneficiary is a Qualifying Institutional Investor under the SSE rules, no counteraction will be applied to hybrid entity mismatches that are not taxed at the fund level.
3. Imported mismatches - Payments made through an equivalent regime (including ATAD2 countries) will disable these rules.

Taxation of non-UK residents on capital gains on direct and certain indirect disposals of UK property

Non-UK residents have also been subject to UK capital gains tax on direct and some indirect disposals of UK property as of 6 April 2019. Non-resident companies (including certain collective investment vehicles ("CIVs") that are treated as companies) are taxed in the United Kingdom. Capital gains tax is also applicable to non-UK resident investors.

Apart from a sale, gift, or transfer, disposal (including part disposal) can be triggered in a variety of other ways. These include the grant of a lease, the grant of an option over land, and receiving a capital sum (e.g., compensation for "rights of light" and payments paid in connection with lease variation or early surrender).

The indirect disposal rules apply when a person disposes of an entity in which it owns at least a 25% interest (or any interest in the case of disposal with a suitable connection to a CIV), and that entity derives at least 75% of its gross asset value from UK land.

UK withholding tax on interest payments

The UK withholding tax may be applicable to annual interest payments made by a UK tax resident company or a non-UK tax resident company engaged in a UK property business if the interest is deemed to be a "UK source."On 3 March, it was announced that the provisions of the EU interest and royalties regulation would be abolished.

Payments made on or after 1 June 2021 will be exempt from the repeal unless the payments are made under "disqualifying conditions." Under broad terms, a payment is made in "disqualifying circumstances" if it is done with the primary objective, or a primary objective, of securing the provisions repealed by this clause (that is, to enable a payment to be made without withholding tax on the payment). In such circumstances, the repeal will apply to payments made on or after 31 March 2021.

These provisions will be abolished, ensuring that companies based in EU member states would no longer benefit from the UK withholding tax exemptions. The UK will no longer be obligated to give relief. As a result, EU-based businesses will no longer enjoy preferential status over non-EU-based businesses. The UKs ability to levy a withholding tax on cross-border payments of annual interest and royalties will be governed exclusively by reciprocal duties under double taxation agreements.

Non-resident SDLT surcharge

As previously established, non-UK residents purchasing residential property in England and Northern Ireland will be subject to a 2% SDLT surcharge from 1 April 2021.

The additional 2% SDLT rate will apply to non-resident individuals as well as non-natural persons (e.g. companies, trusts, and partnerships), in addition to the existing SDLT rate of up to 15%.

For the purpose of the charge, a new residence test has been developed, which will apply in addition to the existing residential SDLT rates of up to 15%, potentially resulting in a top SDLT rate of up to 17% for non-residents.It will apply to residential properties like apartments or single-family homes (but not to student accommodation), but not non-residential or mixed-use land. It will consequently not apply where a purchaser acquires six or more dwellings and elects to treat the transaction as non-residential, in which case the 5% SDLT rate will apply.

When multiple joint purchasers are involved, the surcharge will apply if just one of them is a non-UK resident (with an exception for married couples or civil partners).

Individuals are considered UK residents if they spend at least 183 days in the UK during the period beginning 364 days prior to the date of the transaction and ending 365 days after the transaction date (except in certain circumstances where the residence of the individual purchaser in the 12 months preceding the transaction determines their residence).

In case you have any queries or want specialist advice on "Impact of UK budget 2021 on Non-resident landlords", kindly call dns on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Disclaimer :- "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.