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New election for agents of corporate non-resident landlords

20 February 2020: corporate non-resident landlords move from the income tax regime to the corporation tax regime on 6 April 2020 and become subject to the corporate interest restriction rule. ICAEW’s Tax Faculty gives an overview of a new election available for letting agents of corporate non-resident landlords.

For those landlords with paying agents deducting tax at source, the corporate interest restriction adds a complication to the withholding calculation performed by the agent. Therefore, an irrevocable election can be made by agents to calculate deductible finance costs on a formulaic basis.

Non-resident landlords may apply to receive their rental income gross if:

  • their UK tax affairs are up to date;
  • they have not had any UK tax obligations before they applied;
  • they do not expect to be liable to UK tax for the year in which they apply; or
  • they are not liable to pay UK tax because they have Sovereign Immunity from UK taxation.

The application is made on form NRL2.

If the non-resident landlord does not apply for gross payment status, letting agents and, in some cases, tenants, must deduct tax at source on the rent payable to the non-resident landlord and pay the tax to HMRC on a quarterly basis.

The calculation of tax to be deducted is more complicated for letting agents as they also take account of expenses they have paid on behalf of the landlord and expenses paid at the agent’s direction. An agent may make a deduction for expenses where they are reasonably satisfied the expenses are tax deductible.

From April 2020, this means that agents need to take account of the corporate interest restriction when deciding whether the finance costs that the agent pays (or directs others to pay) are deductible.

The Taxation of Income from Land (Non-residents) (Amendment) Regulations 2020, SI 151/2020, instead allows the letting agent to make an irrevocable election to use a finance cost allowance.

The allowance is 30% of the UK rental income net of deductible expenses other than financing costs. Any unused allowance may be carried forward from one quarter to the next, and any unused financing costs above the allowance may also be carried forward.

The election must be notified to HMRC with the annual return that the agent sends to HMRC for the annual period which relates to the first quarter to which the election applies.

The election will not apply to tenants as they do not deduct expenses.

This election applies only for the purpose of the tax deduction calculation performed by the letting agent. The election does not apply to the non-resident landlord who would still need to calculate their corporation tax liability by applying the corporate interest restriction rule.

A guidance note and policy paper are available on GOV.UK