From April, individuals who own UK property through offshore companies are liable for new taxes. Howard Bilton explains how to minimise the burden.
On December 11, the Government published draft legislation outlining new taxes and charges which will have to be paid by offshore companies which own property in the UK. Although a consultation document on the topic was issued in May, there have been some significant changes since then – and property owners should start to plan accordingly before the laws come into force.
The main features of the proposed legislation will affect properties which are valued at more than £2 million and which are owned by “non-natural persons”. (This is a reference to foreign companies, partnerships, funds and the like, not to persons with strange personal habits.)
Previously many foreign buyers of UK property have chosen to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT), which would otherwise be charged at 40 per cent on the whole value of the property, after allowances, upon the death of the owner. Offshore company ownership also facilitated the avoidance of stamp duty (SDLT), as any subsequent sale of the property could be affected by a transfer of the shares in the company, leaving the title to the property in the UK unaltered.
But all that is about to change. Offshore companies which own property worth over £2 million will now be faced with:
1. An annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax is called Annual Residential Property Tax (ARPT).
2. Capital Gains Tax (CGT), which was previously not paid by non-UK resident sellers, be they individuals or companies, will be charged on resale at a rate of 28 per cent.
New offshore company purchasers will also pay stamp duty at 15 per cent, whereas natural persons will pay stamp duty at the bargain rate of only 7 per cent.
So what should people do? A transfer of property to an individual or indivduals who own the company will avoid these charges but expose those individuals to UK inheritance tax at 40 per cent, so this is an option which will appeal only to the very young and very healthy who are quite certain of their own longevity.
For those less certain of their own mortality this will not be a sensible option. It is possible to cover the liability by life insurance but you will pay more than you receive so this is an expensive option which normally appeals most to life insurance salesmen.
The good news is that there are exemptions from the above taxes. The main one of these is that corporate trustees are not subject to them. For most people, transferring property already owned by an offshore company to an offshore trust will be the most cost effective way forward. For new purchasers, making the purchase via an offshore trust will be best.
There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. The problem here is that even a single day of occupation by anyone connected with the company at any time when that company owned the property would cause the exemption to be lost, so this is somewhat inflexible and inherently risky.
Luckily, there has been one important change to the original proposals. CGT will be based upon the difference between the sale price and the presumed value at April 2013. Originally the CGT was to be based upon the original acquisition value and resale price. This is obviously an improvement for those who purchased a long time ago and have seen the value of their investment rise considerably. Even those who have bought unwisely will have made a big paper profit.
Trustees who hold UK assets are subject to a 10-year anniversary charge which could be as much as six per cent of the value of the property, but this charge is only made on the equity on the property. The equity on the property is the difference between the property value and any loans against the property. It is therefore recommended that the properties be laden with debt, whether that be loans from a bank or from loans injected by the settlor or other persons associated with the trust.
Between now and April 2013, properties can still be transferred to a new structure without CGT applying. After April, any changes in ownership are likely to result in tax consequences and the annual charge will start biting. In summary, there is a brief window when action can be taken at minimal cost to avoid future CGT and ARPT – so urgent action is required.
Howard Bilton is a UK and Gibraltar barrister, professor of law at Thomas Jefferson School of Law, San Diego and chairman of The Sovereign Group.
ORIGINAL SOURCE: How to escape the offshore property tax trap
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