The UK Government's recent consultation on tax reforms in respect of non-domiciled individuals, whether resident or not, has resulted in a shake-up of company law. The UK has announced that from April 6, 2017, residential property in the UK held by non-UK companies will be subject to UK inheritance tax, or IHT.
As a result, British Virgin Islands companies holding UK residential property owned by non-domiciled individuals should note the following:
- The value of the shares in the BVI company will be subject to IHT where all or part of that value derives from UK residential property.
- Both individual shareholders and trustee shareholders will be affected.
- Directors of affected companies will be personally liable for reporting chargeable events to HMRC (Her Majesty's Revenue and Customs) and for paying any outstanding inheritance tax.
- Debts relating exclusively to the property, e.g. outstanding mortgages, will be allowable when determining the value chargeable to IHT. However, loans between connected parties will be disregarded when determining the value of the property which will be chargeable to IHT.
Obtain UK advice
Many owners of UK residential property presently "enveloped," i.e., held in either an offshore or onshore company, are taking steps to "de-envelope" or transfer their residential property out of the corporate structure through liquidation. For some persons, de-enveloping their BVI company might be a worthwhile option. For others, maintaining or modifying the current structure might be a better option. It is best to seek UK advice to ascertain exactly what works best for your specific situation.
Liquidating a BVI company
As a result of the new rule, affected BVI companies are considering whether to liquidate their holdings and transfer the property or properties during liquidation to their owners.
The procedure to liquidate a BVI company is fairly straightforward but the timeframe remaining is quite short since at least one month is required to complete the entire process. The process generally involves the passing of resolutions by directors and shareholders and the approval of a plan of liquidation followed by the appropriate notices and filings. O'Neal Webster can assist in advising on the liquidation process and work with liquidators and other parties involved in the process, including issuing legal opinions where necessary.
Maintain or modify existing structure
For those who have been advised to retain or modify their current structure, there would still be benefits to holding property through a BVI company. Those benefits include:
- Information on directors and shareholders is held privately, and is not publicly filed or available for inspection.
- The opportunities for succession planning through joint ownership of shares, special class rights, transmission of shares, and other options still exist.
- The company law principle of limited liability continues to exist. For example, where the property held is subject to a mortgage, the liabilities under the mortgage will be those of the company and not the shareholder.
- Continued flexibility, such as the ease of restructuring property holding and distributing assets based on straightforward solvency tests.
- Familiarity to lenders, meaning that the ease of taking and registering security and obtaining priority over subsequent creditors ensures the process of financing a BVI company is also cost effective and predictable.
- No corporate, capital gains, withholding, or estate taxes are charged in the BVI.
- BVI companies have low annual maintenance costs.
In any scenario, whether you wish to de-envelope or continue with your existing or modified structure, we can assist. But key to obtaining the best outcome is to take immediate action and secure appropriate UK advice.
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.