18th May 2023
This article summarises the UK Corporation Tax treatment of property income generated from land/property (referred to as a property business) by a company. This article does not cover capital gains realised by companies selling land/property, which will be dealt with separately in a future article.
What is Property Income
Property income is defined as generating income from land by exploiting an estate, interest or right in or over land as a source of rents or other receipts. The most common form of property income is rent but it also includes other receipts such as payments by a tenant for work to maintain or repair the property and lease premiums.
There are specific tax rules that treat part of the lease premium on the grant of a lease for a term of less than 50 years as property income that is subject to corporation tax for companies. The amount that is treated as property income is calculated on a sliding scale where broadly 2% of the lease premium for each complete year (plus an additional year) that the lease is less than 50 years treated as rental income. For example, 52% of the lease premium for a lease granted for 25 years is treated as property income. The remaining part of the lease premium is subject to the capital gains rules.
There are also special rules that can treat inducements for entering into a lease and payments made for the surrender of a lease, which might usually be considered capital transactions, wholly or partly as property income. These rules are fact dependant and tax advice on the specific scenario should be sought.
We would recommend obtaining advice from your tax advisor on the taxation treatment whenever you are granting, acquiring or surrendering leases.
Calculating the profits of a property business
UK resident companies are subject to corporation tax on the profits arising from UK property businesses and overseas property businesses, which are treated as distinct property businesses for computational purpose.
A UK company with overseas property may be subject to tax in the local jurisdiction as well as in the UK. The double charge is relieved by deducting the overseas tax paid on the property income from the UK tax due on the same income. This is done either under the terms of a Double Taxation Treaty with the overseas country or, where no treaty exists, under separate UK rules, depending on the circumstances.
The profits of the property business must be computed in accordance with Generally Accepted Accountancy Practice (GAAP) and will generally follow the accounting treatment in the accounts subject to any capital expenditure and expenditure not incurred wholly and exclusively for the purposes of the property business not being deductible as a property business expense.
The deductible expenses for corporation tax purposes are generally similar to those discussed under UK Taxation of Property Income Held Personally. It can be possible to obtain tax relief as management expenses for some expenses that are not deductible as property business expenses.
Interest and other financing costs are however not treated as property expenses for Corporation Tax purposes and are dealt with under the rules for non-trade loan relationships.
The tax treatment of corporate interest is a complex area with a number of different rules such as transfer pricing, the corporate interest restriction and hybrid rules impacting the relief available for interest. This will be discussed in the next article as it is a vast topic on its own.
A UK company may also be able to obtain tax relief for fixtures in a building and plant and machinery used in property business by claiming, although capital allowances are generally not available for residential properties. It may also be able to obtain structure and building allowances (‘SBAs’) on the construction or refurbishment of non-residential buildings.
Since 6 April 2020 non-UK resident companies have been chargeable to UK Corporation Tax on profits of a UK property business, together with any loan relationships and derivatives relating to generating the UK property income. These Non-Resident Landlords (NRLs) were subject to the income tax regime on UK property income prior to 6 April 2020.
The default position for non-UK resident landlords is that the tenant or letting agent is required to withhold 20% tax at source before paying the net rent which could be disadvantageous especially where the landlord is paying for expenses directly. It can be possible for such entities to register for the non-resident landlord scheme to receive the gross rent and we would recommend registering for this, which we can assist with.
NRLs will also need to consider the interaction between the UK tax regime and the tax regime in their country of residence. The most common interaction is withholding tax (‘WHT’) on interest, which will be covered in the corporate interest article, but if the NRL is situated in a country that also taxes property income then the tax rules in the country of residence, including any double tax treaty with the UK, will need to be checked to ensure that relief is given for any double taxation.
NRLs who prepare signed accounts that meet UK GAAP or IFRS accounting standards will need the statutory accounts to be ‘tagged’ in iXBRL format and submitted to HMRC together with the corporation tax return and computation. NRLs who are not required to prepare statutory accounts in their local jurisdiction will need a tagged profit and loss statement within the tax computation at the very least to submit a valid UK tax return.
The losses arising from a UK property business can first be set off against the company’s total taxable profits for that accounting period and then surrendered as group relief to other companies in the same group. Any remaining property losses can be carried forward for offset against total profits of the following accounting period or, for losses accruing on or after 1 April 2017, surrendered as group relief where the company cannot offset them against its own profits and the same property business is carried on in the succeeding accounting period.
Overseas property business losses can be used only against future profits of that overseas property business.
The above is not exhaustive but hopefully provides a broad overview of the UK Corporation Tax regime for property businesses. Please do contact Reshma Patel at email@example.com or Mark Baycroft firstname.lastname@example.org if you have any questions.