Inland Revenue 12
17 March 1998
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TAXATION OF INCOME FROM PROPERTY
Changes will be made to simplify the corporation tax rules
which apply to the taxation of income from property. These
will be brought broadly into line with those for income tax,
yet effectively preserve the flexibility of current reliefs
for corporate interest and management expenses.
Proposals for these changes were set out in an Inland Revenue
Consultative Document published on 18 December 1997 and have
in general been welcomed as a real simplification. The
changes will take effect from 1 April 1998.
DETAILS
Proposed regime for corporation tax
1. The main proposals are
All UK rental activities to be a single source on Case I
computational lines
Corporate interest rules in FA 1996 to continue to apply
Management expenses regime to continue to apply
Capital allowances to be taken into account in computing
Schedule A profits or losses with no special rules to
apply.
Rental business losses to be relieved in the same way as
management expenses:
first set off against non-Schedule A income and gains of
the company for the current period; and any excess
be carried forward for set off against future income (of
all descriptions); or
available for surrender as group relief (to the extent
that management expenses are relievable at present).
2. It is also proposed that the treatment of income from
overseas property will be aligned as closely as possible with
that eventually adopted for income from UK property.
Starting date/transition
3. These main proposals, which were set out in the
consultative document, will take effect from 1 April 1998.
There will be rules to ensure that the transition to the new
regime does not cause income or expenditure to fall out of
account or to be taxed or relieved more than once.
Consultation
4. While the main proposals have generally been welcomed,
representations have been received on some of the points of
detail. These have been carefully considered, and some
concessions have been introduced in the package. They
concern the withdrawal of :
a statutory provision on land managed as one estate
introduced as a transitional measure in 1963 to preserve
a pre 1963 advantage for estate owners which provided
that personal expenditure on unlet property by an estate
owner - chiefly the owner's home - on the estate exceeds
a notional rental figure for that property, the excess
can be set against rental income of the estate
Extra Statutory Concession (ESC) B4 which allows a
deduction for repairs/improvements of property which is
not available to traders
ESC B5 which, again as a transitional measure in 1963,
preserves a pre 1963 advantage by giving relief against
general income for losses from non commercial farms.
5. The representations have argued for these measures to be
retained. The Government recognises the force of these
comments. Although it has been decided that neither the
statutory provision nor the extra-statutory provisions in
paragraph 4 above should be kept, as they do not fit within
the overall policy of fairness and harmonising with the rules
for trading income, the Government has decided nevertheless
to delay their withdrawal for three years so as to minimise
the impact on those who currently benefit from them.
Withdrawal will therefore take effect from 1 April 2001 for
corporation tax and 6 April 2001 for income tax. In the
meantime the Inland Revenue will issue guidance material on
the type of repairs expenditure which will continue to be
allowable once ESC B4 is withdrawn.
6. The consultation exercise also prompted representations
on Schedule A matters outside the scope of the proposals in
the consultative document. These are not covered in this
press release.
7. Summaries of the representations made in response to the
consultative document are available on request, in line with
the Inland Revenue Code of Practice on Consultation.
NOTES FOR EDITORS
1. Before the Finance Act (FA) 1995, rents and other income
from property were treated in the same way for income tax and
corporation tax purposes. Income from UK land and
non-furnished property was charged under Schedule A. Income
from UK furnished lettings and furnished holiday lettings was
charged under Case VI of Schedule D (the Schedule D `sweep up'
Case). And income from overseas property was charged under
Case V of Schedule D. Schedule A, Case V and Case VI had
different rules.
2. In outline, under FA 1995:
for income tax, Case VI property income was brought into
Schedule A, so that income from all UK unfurnished and
furnished lettings was treated as a single source.
Changes were also made to the computational rules that
applied to income from property within the expanded `new'
Schedule A.
for income tax, the treatment of Case V property income
was aligned with that under the `new' Schedule A.
but the rules governing Schedule A, Case V and Case VI
property income for corporation tax were broadly left as they
were in order to maintain the degree of flexibility which
companies have always enjoyed in the way that their interest
payments and management expenses have been relieved.
3. Since then there have been representations to make similar
simplifications for corporation tax but without removing some
of the special flexibilities which companies enjoy. A
Consultative Document `Schedule A and Companies Chargeable to
Corporation tax' was published on 18 December 1997 with
proposals for meeting those representations.
4. A number of individuals, tax professionals and
representative bodies made a total of 32 responses to the
document.
5. Because the proposals put an end to the possibility of
exploiting a mismatch between the rules for deducting rents
as incurred under Case I of Schedule D and bringing rents
received into account for Schedule A, the proposals will have
an estimated one-off timing yield of about 50 million
poundsin the tax year 1999-2000.
6. An Extra-Statutory Concession is a relaxation which gives
taxpayers a reduction in liability to which they are not
entitled under the strict letter of the law. Inland
Revenue concessions are published in a free booklet IR1,
available from any Tax Enquiry Centre or Tax Office. They
are also available from Inland Revenue Information Centre,
South West Wing, Bush House, Strand, London WC2B 4RD.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours 0860 359544)
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(Office hours only)