Where a non-UK resident sells property in the UK for profit, UK tax must be paid on the profit. That doesn’t sound surprising, but what’s more surprising is how long it took the UK to introduce this charge. The gain on residential properties was generally only subject to UK non-resident tax from April 2013 or April 2015 (depending on the circumstances of the property) while the gain on properties business was not subject to UK tax for non-residents until April 2019. Prior to these dates, the UK generally allowed non-residents to make gains by investing in UK property in tax free.
Until April 2019, non-resident companies were generally subject to capital gains tax (CGT) on their gains from UK residential properties. Now the charge is corporate tax. Similarly, non-resident company earnings from UK business properties are subject to corporation tax from April 2019. Although the introduction of the tax charge may come as no surprise, some of the effects of this change are more so.
For example, the introduction of corporation tax for residential properties will result in lower tax paid by non-resident corporations. Until April 2019, non-resident companies owning residential property generally paid CGT in the UK at the rate of 20% or 28% (depending on the circumstances of the property). From April the corporate tax rate will apply – it is currently 19% but is expected to drop to 17% from April 2020.
In addition, the increase in value of a residential property from April 2013 to April 2015 is generally removed from tax for non-UK resident companies by the April 2019 amendments. Only increases in value apartment buildings after April 2015 are generally subject to the new corporate tax charge.
The liability of non-resident corporations to corporation tax has also had a surprising effect on when any tax must be paid. Companies normally pay corporation tax nine months and one day after the end of their accounting period. However, large companies generally have to pay the tax quarterly starting six months and 13 days from the start of the relevant accounting period. And very large companies must start their quarterly payments two months and 13 days after the start of the relevant accounting period.
This is where the main surprise begins. A large company is generally a company which makes more than £10 million in profit in the relevant accounting period, while very large companies are those which make more than £20 million in profit. A non-resident company is deemed to begin an accounting period for tax purposes when it sells property in the UK and is deemed to end the accounting period on the same day – i.e. it has a period deemed accountant for a day.
Where a business has an accounting period of one day, the above limits should be divided by 365. Therefore, a large business is one that has made a profit of more than £27,397 in that accounting period and a very big business is one that has profits. over £54,794!
This means that virtually all non-UK resident companies selling UK properties will be very large companies which will have to pay advance corporation tax. But even that is not the main surprise. A very large company with a one-day accounting period must pay all of its corporation tax on the same day – three months before it is required to register for corporation tax. It’s a surprise !
To deal with the situation, HMRC said it would, by concession, allow corporation tax to be paid three months and 14 days after the end of the one-day accounting period. So a non-UK resident company will be able to register for corporation tax before having to pay it, which seems to be the right solution.
It is not clear whether new legislation will be introduced to make this concession legal but, in any case, the problem should ease from April 2020. From this date, non-resident companies in the Kingdom UK will have to pay corporation tax on their UK rental income. (At the moment they pay income tax on this income.) This means that when they sell a UK property after this date they will already be subject to UK corporation tax. United and will not have a one-day deemed accounting period.
Depending on when the sale takes place during their accounting period, whether or not they own other properties in the UK and the profits they make, they may not be a big or very big business at tax purposes and therefore may have much more time to pay their tax bill.
One last thought. The way these rules work makes it likely that non-UK resident companies will have to pay corporation tax before a UK resident company has to. On the face of it, this seems against EU law when the company is an EU company. It may not matter in the future, but for now, it still does.