Companies are chargeable to corporation tax on property income. Profits from land and buildings in the UK and overseas are taxed separately and treated as arising from either a UK property business or an overseas property business. Profits and losses are calculated in broadly the same way as trading profits and losses. Financing costs are, however, dealt with under the rules for non-trading loan relationships. Non-UK resident companies are chargeable to corporation tax only on profits from their UK property business.
What is property income?
A company’s property income, for corporation tax purposes, is made up of its profits from its ‘UK property business’ and/or its ‘overseas property business’. A UK property business consists of every business which the company carries on to generating income (rents and other receipts such as lease premiums) from UK land and buildings. It also includes any other transaction entered into for the same purpose. An overseas property business is defined in the same way by reference to land outside the UK. The profits of the UK and overseas property business are calculated separately.
Is the company carrying on a property business or a trade?
A business of renting property does not normally amount to a trade except for situations such as guest houses and hotels, etc. Income from farming, market gardening and mining, quarrying and similar activities is not considered to be property income as it is specifically treated as trading income. In some cases there may be a fine line between property business income and an additional trade of providing connected services to the tenants. Where the company provides substantial services, including porter facilities, a reception, general maintenance, etc, that additional service might be regarded as a separate trade.
How are profits of a property business calculated?
The taxable profits of a UK or overseas property business are calculated broadly by applying the same principles as apply to the profits of a trade. These include the fundamental rules that profits must be computed in accordance with generally accepted accountancy practice (GAAP), that capital expenditure must be excluded and that other expenditure is not deductible unless incurred wholly and exclusively for the purposes of the business. Interest payable and other amounts falling within the loan relationships provisions are excluded from the computation and dealt with under the rules for non-trading loan relationships. Capital allowances are not generally available for plant and machinery used in residential property, although a deduction may be allowed for the replacement of domestic items. Structures and buildings allowance is also not available for residential property.
How are lease premiums treated?
When a property investor grants a lease on the basis that the tenant pays a premium for the initial grant in addition to also paying rent over the term of the lease, there is specific legislation to treat some or all of the premium as a receipt of the property business. This applies only where the term of the lease is less than 50 years and in effect treats 2% of the premium as a receipt of the business for each complete year by which the term of the lease falls short of 50. The remaining part of the premium is capital and the capital gains rules apply to it. Similar rules apply to deemed premiums arising in respect of work required to be carried out on the premises by the tenant and to payments made for the surrender of a lease.
How are non-UK resident companies taxed on their UK property income?
From 6 April 2020, non-UK resident companies are chargeable to corporation tax on profits of a UK property business and other UK property income. They must also bring into account non-trading debits and credits from loan relationships and derivatives which enable the company to generate the property income. Previously, property income of non-resident companies was chargeable to income tax. Profits of non-resident companies from properties outside the UK are outside the scope of UK taxes.
Non-resident companies may be subject to the non-resident landlords scheme under which either the tenant or letting agent, as appropriate, must deduct income tax before paying rent unless the landlord obtains permission from HMRC to receive the rental income gross.
What are the special rules for furnished holiday lets?
To the extent that a UK property business consists of the commercial letting of furnished holiday accommodation, the profits or losses must be separately calculated. The same applies, separately, to all such letting outside the UK but in the European Economic Area. Capital allowances are available on plant or machinery for use in the accommodation, losses and the letting activity is treated as a trade for certain loss reliefs and capital gains purposes. There are stringent conditions which must be met for furnished holiday letting treatment to apply.
What is a real estate investment trust (REIT)?
Companies, and groups of companies, which meet the necessary conditions can elect to apply a special corporation tax regime as a real estate investment trust (REIT). REITs enjoy exemption from corporation tax on their property rental business, and also on any gains from disposals of properties that form part of that property business. At least 75% of the company or group’s activities, by reference to income and asset values, must relate to the tax-exempt property business. Distributions by the REIT are treated as UK property business income of the shareholders (including corporate shareholders) to the extent that they are paid out of tax-exempt profits.
What reliefs are available for losses?
UK property business losses are deducted from total profits (if any) in the period in which the loss is incurred. Any loss which is not relieved in this way and has not been surrendered as group relief may be relieved against total profits in a later accounting period on the making of a claim for all or part of the loss. The claim must be made within two years of the end of that later accounting period. Overseas property business losses can only be set against future profits of the same business.