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HMRC internal manual

Property Income Manual

From
HM Revenue & Customs
Updated
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Rent from property outside the UK: CT

General

The rules for the taxation of income of companies from overseas let property assessable under Schedule D Case V have, with the exception of the treatment of losses (see below) been aligned with the new Schedule A CT rules relating to the taxation of income from UK property. The changes came into effect as from 1 April 1998.

Overseas property business

Income from ‘an overseas property business’ has the same meaning for companies as it has for individuals within the charge to IT.

Trading

Companies whose activities in relation to overseas property amount to the carrying on of a trade within Case V Schedule D (that is, a trade carried on wholly outside the UK) are subjected to the rules of Case I Schedule D by ICTA88/S70 (2) and are unaffected by these changes.

Where the company is in receipt of income from more than one overseas property all those properties jointly constitute a single overseas property business of that company. This is the same approach which applies to the overseas property income of individuals within the charge to IT. However, see below where there is a claim to tax credit relief where the overseas income has suffered foreign tax.

Losses

As part of the changes made by FA95, the taxable profits and losses of overseas let property were ring fenced for IT purposes. The effect was that:

  • losses of an overseas property business cannot, for IT purposes, be set against profits of a UK property business carried on by the same individual,
  • similarly, losses of UK property business cannot for IT purposes be set against profits of an overseas property business carried on by the same individual.

The ring fencing of overseas property losses has been carried through to the new rules for companies but the ring fencing of overseas property profits has not. The effect is as follows:

  • Losses of an overseas property business can only be set against future profits from that overseas property business and cannot be set against profits of a UK property business or any other profits of the company whatsoever - ICTA88/S392B (1)(a) and (b) as amended.

but

  • Losses of a UK property business (which broadly fall to be relieved in the same way as management expenses under ICTA88/S75) can be set against profits of an overseas property business - ICTA88/S392A (1) as amended.

Two other features of the loss provisions should be noted:

  • Previously, there was no statutory authority for allowing losses on overseas property to be carried forward. Loss relief was given by ESC/B25. Any relief for losses due under ESC/B25 which is unused at 1 April 1998 may be carried forward and set against profits of the overseas property business.
     
  • CT Schedule A losses of an overseas property business may only be carried forward where a company carries on a Schedule A business,
    • on a commercial basis,

      or
       

    • in the exercise of statutory functions as defined at ICTA88/S392A (7).

    See ICTA88/S392A (5) as applied by ICTA88/S392B (2).

    Credit for foreign tax

    If the overseas income has suffered foreign tax and a claim to tax credit relief is made, it will be necessary, for the purposes of the source by source rule (see INTM161210) to identify the amount of UK tax attributable to income from each particular property. Where, therefore, tax credit relief is claimed separate computations of profits and losses for each property will be required. For the purposes of calculating tax credit relief, losses should be deducted in the order most favourable to the company’s claim. Normally this will mean that losses should be allocated first against the source which has suffered at the lowest rate of foreign tax.

    A company’s flexibility in deciding how to allocate the deduction set out in ICTA88/S797(3), subject to the limitations in respect of deficits on non-trading loan relationships set out at ICTA88/S797 (3)(A) and (B), is unaffected by any of the changes.