UK: UK Property Tax Changes: "De-Enveloping" Or A Use Of A Trust?

Last Updated: 26 February 2013
Article by Henry Mander and Colin Riegels

It has long been popular for high net-worth people who are not domiciled in the United Kingdom ("non-doms") to form an offshore company, often in the British Virgin Islands ("BVI"), for the purposes of holding property in the United Kingdom. Using an offshore vehicle has two principal advantages: (a) it preserves the confidentiality of the non-dom (an issue of great importance particularly for Middle Eastern and Eastern European non-doms) and (b) it insulates the property from potential UK inheritance tax ("IHT"). Additionally, using an offshore company could also sometimes mitigate against potential charges to UK stamp duty land tax ("SDLT") on a subsequent transfer.

The new problem

However, the United Kingdom government has published new draft legislation which is intended to be included in the 2013 Finance Bill. This new legislation would bring in an annual charge called the "Annual Residential Property Tax" on certain foreign non-natural persons1 (including an offshore company) which owns a residential property in UK worth more than £2 million. This annual charge will be up to £140,000 depending on the value of the property. Furthermore, from 6 April 2013 UK capital gains tax ("CGT") will be imposed on any sale of such a property by a foreign non-natural person, such as an offshore company, on the increase in value of the property between 6 April 2013 and the date of sale. Lastly, any purchase of a residential property valued over £2 million by an offshore company from 21 March 2012 is now charged to SDLT at a punitive rate of 15% (rather than the conventional rate of 7%). 

This clearly creates a serious issue for non-doms who have UK property holdings in offshore companies. Most are likely to take one of two courses of action.


The first is referred to as "de-enveloping". This is a grand term for removing the property from the ownership of the company and moving it into personal ownership.

As a result of this new legislation, many people holding such property through BVI companies are thinking about "de-enveloping". In most cases, the de-enveloping process will be carried out by (i) placing the BVI (or other offshore) company into voluntary liquidation and then (ii) distributing in specie the affected property holdings. This avoids the new punitive tax regime, but it clearly exposes the ultimate beneficial owner (if a non-dom) to UK IHT and results in the loss of confidentiality which they previously enjoyed. CGT may also be a determining factor in whether this is a viable option. There might also be other issues if the non-dom is resident in the UK.

...or use of an offshore trust structure?

Accordingly for many non-doms a preferable approach may be to convert their offshore company holding structure to an offshore trust holding structure. Corporate trustees are exempt from the foregoing taxes2 and for most people transferring property already owned by an offshore company to an offshore trust may be the most cost effective way forward. 

Where an offshore trust structure is already in place, with trustees holding a BVI company which in turn holds UK property, it might be advantageous to de-envelope the UK property (by liquidating the BVI company) so that the property is then held directly by the trustees.

Alternatively, if the BVI company is held directly by a non-dom, he or she may consider transferring the shares into an offshore trust now shortly before the BVI company is liquidated, with the same end result of the property then being held directly by trustees.

If the trustees are individuals, they should retire in favour of corporate trustees so that the tax exemptions can be enjoyed. In this regard, another BVI trust structuring option would be the use of a Private Trust Company (often abbreviated to "PTC"). PTCs are very popular with clients who do not wish to use a third party trust corporation and, provided certain conditions are satisfied, most importantly that company conducts solely unpaid trust business or "related business" (meaning all the beneficiaries of the trust are related to the settlor – i.e. family trusts), and no other business, PTCs can act as trustees without requiring a BVI trust licence.  Individuals and other family members can act as directors of PTCs, so that there is no requirement to involve outside entities.

Trustees who hold UK property will be subject to a 10-year anniversary charge to IHT, which may be as much as 6% of the value of the property, although the charge is only assessed on the value of the property less any debt secured by the property. Accordingly, it seems likely that most properties will be heavily leveraged with debt to minimise the exposure to this IHT charge, although SDLT may be payable on the transfer of the debt.

For non-doms purchasing new properties, it seems likely that offshore trusts (and in particular use of PTCs) might be considered the most attractive structure of choice.  First and foremost the trust structure would maintain the confidentiality of the ultimate beneficial owner, in addition to the potential tax benefits.

The interaction of the various UK taxes involved is very complicated (especially because the new CGT legislation is yet to be published) and will vary according to each situation. Obtaining expert UK advice is the key to formulating the offshore structure (potentially involving a BVI trust or PTC) which is most effective in terms of tax mitigation, whilst hopefully allowing individuals to maintain confidentiality.

Time is short

Non-doms who have BVI or other offshore companies holding affected UK property should start (i) reviewing their position, (ii) take appropriate UK tax advice (Harneys can recommend suitable UK tax experts), and (iii) if necessary, take the necessary steps to either de-envelope the property or instigate the establishment of an offshore trust structure (potentially involving a PTC) before April 2013. Each of these processes involves a certain amount of lead time, so people who are potentially affected should consider their position sooner rather than later.


1 A non-natural person is a company (except when acting as a trustee of a trust or as bare trustee), a partnership where one of more of the members is a company or a collective investment scheme.

2 Certain transfers of UK property will be subject to SDLT at 7%.  Specialist SDLT advice should be taken in this respect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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