This week we consider the position of UK and non-UK resident companies holding UK real estate as an investment property and earning rental income.
This is the twenty fifth in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation was included in Finance (No.2) Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. This week’s article considers the position of UK and non-UK resident companies holding UK real estate as an investment property and earning rental income (property investment companies). While most property investment companies buy developed properties, some will develop and then lease the property. Such UK property investment companies need to consider the various CIR provisions dealing with capitalised interest. In addition, and in line with an ongoing consultation, non-resident property investment companies, which are currently subject to UK income tax, should be assessing the potential implications if they are brought within the scope of corporation tax.
UK property investment company
A UK tax resident company holding UK property for investment purposes is subject to UK corporation tax on its rental income and is within the CIR rules with effect from 1 April 2017.
As we saw in last week’s article, in some cases, it may be possible for such a company to elect into the special CIR regime for public infrastructure. For the purposes of this article, we assume that the company does not meet the conditions to qualify for that regime or chooses not to elect into it.
Property investment companies will commonly capitalise interest costs into the value of the property. Under the loan relationship rules, any such interest expenses capitalised into the value of an investment property are required to be brought into account for tax purposes in the accounting period when they are capitalised (as opposed to the period when they are written off in the accounts). On that basis, any interest capitalised into the value of investment properties prior to the 1 April 2017 start date, should be outside the scope of the CIR rules.
Key points to note and practical implications
Non-UK property Investment company
A non-UK tax resident company holding UK property for investment purposes is currently subject to UK income tax on its rental income and is therefore not within the CIR rules yet. A consultation is ongoing to bring NRLs within the scope of corporation tax for some sources of income. If this proposal is enacted, the CIR rules will become applicable to such entities as well.
The previous articles in this series can be found here.
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