Historically, UK resident non-domiciled individuals have been able to achieve certain tax advantages through holding interests in UK residential property through offshore companies. In recent years, the UK government has introduced a series of tax changes that have stripped away most, if not all, of the tax advantages previously enjoyed by corporates holding UK residential property. Examples include the introduction of the Annual Tax on Enveloped Dwellings (ATED), the extension of capital gains tax to non-UK residents making disposals of UK residential property and the 15% flat rate of stamp duty land tax (SDLT) for corporate purchasers. A further adverse change to inheritance tax for non-domiciled individuals using offshore corporate structures to own UK residential property will also soon be in force. As of 6 April 2017, the UK government will legislate to ensure that such arrangements will be ineffective for non-domiciled individuals in avoiding UK inheritance tax on the UK residential property, thus removing the last tax advantage of holding UK property through an offshore company.
In addition, from a non-tax perspective, the UK will likely introduce in the near future the need to disclose the beneficial owners of offshore companies which buy UK residential property where such ownership is not publically available. If introduced, this will mean that the benefit of anonymity will end which will effectively remove one of the last practical benefits of holding UK residential property via an offshore company.
Following the recent and proposed changes there will generally be little advantage (and substantial potential cost) to holding UK residential property through a corporate structure, whether it be onshore or offshore. The table below briefly summarises the application of certain taxes to holding UK property directly in an individual capacity or indirectly through a corporate structure.
Dechert can assist in the reorganisation or restructuring of arrangements where ownership of UK residential property is currently held through a corporate vehicle to mitigate the effects of the recent and incoming tax changes (especially ATED and SDLT).
|Holding UK Residential Property via a Corporate Vehicle||Holding UK Residential Property in an Individual Capacity|
|Summary of Recent Tax Changes|
|SDLT||Introduced in 2012, a
15% SDLT flat rate applies on acquisitions by companies (wherever
incorporated) of UK residential property worth over
However, there is no SDLT on a transfer of shares. In addition, if an offshore company is used it will be outside the scope of UK stamp duty.
|Residential SDLT rates
are progressive and vary from 0% to 12% depending on the value of
Individuals can also pay a 3% SDLT supplement. For large value properties (over £2 million), and where an individual already owns a residential property, the 3% supplement charge will apply leading to a 15% rate above a certain threshold. This may make the SDLT difference between a corporate purchaser and an individual quite minimal.
|Annual Tax on Enveloped Dwellings (ATED)||Introduced in 2013, ATED is an annual tax payable by companies that own UK residential property valued at more than £500,000. The highest annual ATED charge is currently at £218,200. Certain exemptions can apply, for example, operating a property letting business or a property development business.||No ATED charge.|
|Capital Gains Tax||ATED related CGT at 28%
is charged on any gains arising on the disposal of UK residential
property held by an onshore or offshore company after April 2013.
Even where ATED does not apply a charge can arise to CGT at 28%
under the non-resident CGT charge.
There is no possibility of claiming an exemption if the property is the principal private residence.
Dealings in the shares would be free of CGT if the shares are of a non-UK company and the gain is not remitted to the UK.
|CGT was extended to
disposals of UK residential property by non-UK resident individuals
on or after 6 April 2015. The gain will be calculated as accruing
from April 2015 at 28%.
Unlike a company, an individual could get the benefit of the principal private residence CGT relief.
|Tax changes coming into effect 6 April 2017|
|Inheritance Tax||Currently, if a non-domiciled individual holds UK residential property through an overseas company, the shareholding would not be subject to UK inheritance tax. However, with effect from 6 April 2017 the UK government will legislate to ensure that such arrangements will be ineffective in avoiding UK inheritance tax on the UK residential property.||A person owning UK real estate directly will be subject to inheritance tax.|
|Prospective future changes|
|Anonymity||Anonymity on the face of the Land Registry title has to many been a key attraction in holding a UK residential property through an offshore company. However, the previous UK government considered proposals to implement a public register disclosing and detailing all beneficial owners of foreign companies that own properties in the UK (which the current government may implement).||No anonymity if property is bought in a personal capacity.|
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.