Many high value UK residential properties are owned via offshore companies, but even their owners are often unclear why. With new inheritance tax (IHT) provisions about to change the way these structures are taxed from 6 April 2017, now is a good time to think about how these arrangements work, and what to do with them. This article considers UK residential properties occupied by the ultimate owners. The position of rental properties may be very different.
Why use offshore companies?
Buying an offshore company owning a property, rather than buying the property itself, eliminates the need to pay stamp duty land tax (SDLT) on the purchase. More importantly for many non-UK domiciled individuals, holding a property via an offshore company means the value of the property has historically not been included in the UK death estate of the ultimate owner, saving IHT at 40 per cent.
Over the last few years, the government has introduced a number of tax provisions significantly increasing the tax payable by these structures. From 6 April 2017, the following tax charges will apply.
- Annual tax on enveloped dwellings (ATED) charge each year for ‘enveloped’ properties worth more than £500,000.
- ATED related capital gains tax (CGT) charge at 28 per cent on disposal, where such enveloped property value has increased since 6 April 2013.
- SDLT at 15 per cent on the future purchase by companies of most properties intended to be occupied by the ultimate owner .
- IHT charges on the value of the property on the death of the ultimate owner.
With so many recent changes affecting the taxation of residential property held by a company, are such arrangements still a good idea? In many cases, the simple answer to this is now likely to be no.
The loss of protection from IHT means that there are no tax advantages to living in a property owned by a company. On the other hand, annual ATED charges, company running costs, and CGT charges on disposal all combine to make corporate ownership an expensive proposition. However, once a property is owned by a company, there may be no easy way out.
In 2012, the government coined the ugly term ‘de-enveloping’ to describe taking property out of a company, and declared that encouraging de-enveloping was one of the main purposes of introducing new ATED tax charges. In December 2016, the Treasury confirmed that no relief or assistance will be provided to taxpayers wishing to de-envelope, because doing so would have a significant cost to the Exchequer . This leaves taxpayers with an unappealing choice to make as:
- de-enveloping is likely to trigger CGT charges on any properties that have increased in value since purchase by the company, and can also create SDLT charges of up to 15 per cent, in particular where companies have outstanding borrowings ; and
- doing nothing will give rise to substantial annual ATED charges and additional tax on the eventual sale of the property.
In some circumstances, especially where shareholders or beneficiaries are not UK resident, a palatable solution is possible. In others, it will be a case of deciding how to minimise the pain. In either case, this is not a problem that will go away unless it is faced head on.
For more information please get in touch with Andrew Robins, or your usual RSM contact.