General Publications April 3, 2020

“Leveling Tax Playing Field for Non-UK Resident Landlords,” Law360, April 3, 2020.

Extracted from Law360

The tax regime applicable to non-U.K. resident landlords of U.K. real estate is changing in a demonstration of a further leveling of the playing field to the tax regime already applicable to U.K. resident landlords.

On and from April 6, non-U.K. resident company landlords will be subject to U.K. corporation tax on their property income, rather than income tax (as is currently the case). While the headline corporation tax rate is slightly lower than the income tax rate, it is important to note that there will be a reduction in the availability of tax relief for interest and finance costs deductibility under the corporate interest restriction rules (which apply to the calculation of U.K. corporation tax).

This shouldn't be news for the well-informed and the well-advised sponsors (and lenders) but nevertheless landlords and lenders alike should, if they are not already, be taking stock of how the tax changes impact transaction cashflows and the extent to which this may impact covenant compliance.

These latest tax rule changes follow an initial set of rule changes introduced in April 2019 whereby non-U.K. resident landlords became subject to U.K. tax on capital gains arising from the disposal of U.K. property (whether directly or indirectly through "property rich" holding vehicles), subject to the terms of any applicable double taxation treaties (notably the U.K.-Luxembourg treaty) and certain other exemptions.

Corporation Tax on Property Income

The objective of the new rules is to improve the fairness of the U.K. tax system by ensuring that, with respect to income derived from U.K. property, non-U.K. residents are subject to broadly the same treatment as U.K. residents.

Under the new rules, non-U.K. resident companies will be charged corporation tax on their U.K. property income at the rate of 19% (this remains static from previous proposals to reduce the rate to 17%), which is slightly lower than the 20% basic rate of income tax that is currently applicable to such non-U.K. resident landlords.

However, of particular importance, whilst under the existing regime non-U.K. resident landlords are entitled to tax relief in full for finance costs (such as interest on shareholder loans) in calculating their income tax profits (subject to certain transfer pricing limitations and anti-avoidance measures), under the new regime this will be very different and a lot more complicated and is likely to result in increased tax liabilities and a reduction in returns to investors.

The tax relief available for interest and financing costs of a non-U.K. resident company will become subject to the corporate interest restriction rules and so will, in general, be capped at 30% of U.K. aggregate earnings before interest, taxes, depreciation and amortization for the applicable accounting period, subject to: there being no such cap applicable for any interest and financing costs below £2 million; a group ratio election (for multinational groups who might be able to make an election to apply a higher percentage if the group's interest and financing costs as a percentage of that group's EBITDA is greater than 30%); and a public benefit infrastructure exception.

Non-U.K. resident landlords should consider what other tax allowances may be available to them to help reduce any potential tax liability increases, such as those relating to the expenditure on plant and machinery and the new structure and building allowance.

The rule changes will therefore have a potentially significant impact on those non-U.K. resident companies with significant shareholder debt and/or high leverage who may well find that a large portion of their finance costs are no longer deductible. They will also now find themselves subject to additional administrative requirements in the preparation and filing of annual corporation tax returns.

We expect lenders to non-U.K. resident landlords will have already spent a great deal of time with their borrowers requesting them to provide analysis (potentially supported with reliance on accountant reports/advice) as to how their tax liability will change once the rule changes kick in. Where borrowers need to make elections in order to benefit from a preferential tax allowance or relief that are available to them, it would seem an obvious step for borrowers to make such elections and lenders will no doubt, where the terms of the financing allow, oblige their borrowers to make such elections.

The consequences these tax changes will have on the use of senior/mezzanine financings are naturally yet to be known, but given that the mezzanine financing is traditionally lent into a parent entity and then downstreamed through shareholder loans, may mean that sponsors move away from such structures or, at least, such financings may not be so structurally subordinated in the future.


For some sponsors, the introduction of these tax rules changes may mean that the cost and expense of utilizing off-shore structures are no longer offset by the tax savings on their investments and this might then result in some sponsors on-shoring their holding structures in an effort to reduce their cost base.

A Note on Capital Gains

Before April of last year, non-U.K. resident landlords were not subject to U.K. tax on any capital gains arising from the disposal of U.K. property (with a very limited exception relating to residential properties). That ceased to be the case on April 6, 2019.

Unless an exemption applies, a non-U.K. resident will be subject to tax on the capital gains made on the disposal of its interest in U.K. property or from the disposal of its interest in any entity deriving at least 75% of its value from U.K. property (a property-rich entity) where the non-U.K. resident has a 25% or more interest in that property-rich entity (although the 25% rule doesn't apply if the property-rich entity is a collective investment scheme, an alternative investment fund or equivalent to a U.K. real estate investment trust).

To reduce the potential charge to capital gains tax for non-U.K. residents holding U.K. property (directly or via property-rich entities) there is a re-basing for tax purposes as of April 5, 2019, such that any capital gains tax is based on the gain against the value on such date.

The applicable percentage rate of the tax on capital gains differs based on the nature of the non-U.K. resident. For companies, the tax is at the corporation tax rate of 19%; for individuals, the tax is at the capital gains tax rate of 10% or 20% depending on their marginal rate in the case of nonresidential property or 18% or 28% depending on their marginal rate in the case of residential property; and for trusts, the tax is at the capital gains tax rate of 20% for nonresidential property or 28% for residential property.

There are exemptions for certain types of investors, such as sovereign investors and overseas pensions schemes that meet certain criteria, as well as for qualifying institutional investors satisfying the requirements of the substantial shareholdings exemption. There is also a specific exemption for the disposal of property-rich entities where the relevant property is used for trading purposes both before and after the disposal.

The rules on taxing non-U.K. residents for capital gains on U.K. property are subject to the right of the U.K. to tax non-U.K. residents under double taxation treaties. For the most part, the network of double taxation treaties that the U.K. is party to do not restrict the U.K. in taxing nonresidents in this way, however the most notable exception to this is the U.K.-Luxembourg treaty and so, for now at least, Luxembourg entities will not be subject to U.K. tax on any capital gains made from their disposal of U.K. property or property-rich entities.

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