Key benefits of using an offshore company to buy and sell property in the UK:
- Confidentiality, hide the ownership of the property
- Tax, although some of these have diminished due to some tax changes.
- Potential tax advantages when selling
In the last few years following recent property crashes London residential property has done well when compared to other parts of the country. One of the main factors for this has been overseas buyers who have seen London as an excellent long-term investment.
Buying through an offshore company should be considered especially for overseas investors.
However, you do have to consider the administrative cost of running an offshore company to see if the savings are viable to opt for an offshore company.
It is generally not a good idea for an offshore buyer of the high-value property to buy in their name. Purchases in the name of a trust or a trust company are becoming an increasingly attractive option.
It is not surprising considering the tax advantage for companies owning residential properties worth more than £2M. It is wise to get the tax structure right from the get-go, rather than transfer property from an individual later to an offshore company which is expensive.
Using an offshore company to buy and sell property in the UK
From 1 April 2013 a company (whether offshore or not), HMRC rules are: Anyone owning a UK residential property worth more than £2M is required to pay an annual fee which is based on a sliding scale according to the market value of the property. It is worth noting you can no longer claim any deduction for mortgage payments either.
What are the disadvantages of using an offshore company?
- They are setting up costs, annual fees, and transactional fees for an offshore company. The level of costs varies due to the jurisdiction of the offshore company. Costs depend on the level of service required.
2. Elaborate company structure may include an offshore trust behind the company. This adds to the cost, which may be justified if the value of the property is high, and you save money on tax.
3. Loss of Control – This one is what puts most people off, most people like control at least of their finances. You must have administrators, and they must be trustworthy.
They need to follow your instructions, especially where the director(s) of the company are nominees or similar and not under your control. You need to ensure you carry out your due diligence on the company agent you are going to use.
4. The liability to capital gains tax on the sale of the property as opposed to the sale of the shares in the offshore company. This is subject to the same exemptions as the annual charge.
What are the tax advantages of an offshore company?
- A property can be sold by selling the company shares with no UK CGT.
2. However, CGT is payable (subject to certain exemptions) on any gain from the sale of the property itself where the sale price is more than £2M. This is regardless of the country of incorporation of the company or the tax status of the shareholders/beneficial owners, a buyer acquiring property by purchasing the shares in a company.
It is worth noting; one could acquire a tax liability to pay CGT on the latent gain. This is what the company built up during the seller’s ownership, and which will be triggered when selling the property.
3. If the property is in the name of an individual, upon their death inheritance tax is potentially payable on the net value of the property. Example, IHT is currently at 40% on the net value less an exempt amount currently £325,000.
There are some exceptional circumstances by which IHT can be mitigated, but the risk is avoided simply by using an offshore company. Use of a trust may be useful. However, you should seek legal advice before you consider an offshore company for this purpose.
4. Regardless of who owns the property, any rental income will remain taxable in the UK if the property is owned by an offshore company, only the basic rate of UK income tax of 20%. This will apply regardless of the level of income.
This can result in a huge saving when you compare it with personal ownership under which the banded UK income tax rate is up to 50% that applies. In all cases, the default position is that the basic rate tax should be deducted at source by an agent or the tenant.
It may be possible for the owner to apply to HMRC for a clearance which allows them to receive the income gross.
5. No stamp duty land tax is payable by a buyer of the shares in the company.
It should be noted that the above assumes that the beneficial owners of the company are not UK resident or domiciled for tax purposes. There may be capital or other taxes payable in the jurisdiction of the incorporation of the company concerned or in the country in which the beneficial owners are tax resident.
6. The acquisition of a UK property, particularly a high value one, should be considered as part of an overall tax strategy with appropriate advice.
Tax implications when selling property
If the offshore company’s purpose is to own just one property, i.e. its only business and reason for existence is the ownership of a single property. There are benefits if the property can be sold by way of a sale of shares in the company rather than the sale of the property itself.
There is one financial advantage for the buyer as there is no stamp duty land tax on a sale of the shares of an offshore company.
There is an advantage for both parties in that the transaction does not appear on any public register in the UK as the ownership of the property does not change.
From the seller’s point of view, it is the shareholder who will be a party to the contract and although the contract is not a public document some sellers may not want their name to appear on any legal document for legitimate reasons of confidentiality.
If the shares are held in the name of a nominee, then this issue does not arise.
When considering selling UK property which is in the name of an offshore company, it is recommended that you take legal advice before marketing on the advantages and disadvantages of selling the company against selling the property and the likely cost of both.
It is also helpful if the correct structure for the ownership of the property is set up when the property is first bought as this can make the sale of the company easier.
Confidentiality when it comes to an offshore company
Most wealthy property owners do not want their names available to the public. This is usually due to security and confidentiality reasons.
When you search the HM land registry records for a property, you will see the name of the offshore company.
It is virtually impossible for anyone to find out who the owner of a particular property is.
The tax implications of holding investment property in an offshore company?
The UK currently encourages inward investment into UK property by providing a tax exemption for investment gains realised by an overseas investor on the sale of UK commercial property.
However, this exemption is expected to be withdrawn for gains arising from April 2019 from when a 19% rate is likely to apply (falling to 17% in April 2020). Properties currently exempt from tax are expected to be rebased to their market value in April 2019 to calculate future taxable gains.
Most gains on residential property are taxed at a rate of either 20% or 28%. The 28% rate will generally apply for property valued at over £500,000 and which is not let as part of a property rental business.
Where the 28% rate applies, an annual tax on enveloped dwellings (ATED) will also apply. The ATED annual charge ranges from £3,500 for properties worth between £500,000 and £1m to £220,350 for those worth £20m or more.
Net rental income (after finance costs and other deductions) is currently subject to tax in the hands of a non-UK resident company at 20%, but this is expected to be 17% from April 2020.
Does an overseas structure get tax relief for finance costs?
Finance costs incurred on a property investment or trading business should generally be tax deductible provided that the finance has been raised on commercial arm’ s-length terms. The tax treatment will generally follow the accounting treatment although,
where annual finance costs exceed £2m, a restriction to the interest deduction applies from April 2020.
What is the tax impact if the ultimate owners are in the UK?
Generally, a UK tax resident can be taxed on both income and gains which arise to offshore entities under various anti-avoidance rules. You should seek legal advice in such situations as the rules for non-UK domiciliary changed radically from 6 April 2017 and, therefore, such arrangements may no longer be tax efficient.
SDLT when purchasing a home or land?
However, it is worth noting that using a company to purchase a residential property. If the directors of that company live in that property, then this may in certain circumstances trigger much higher income tax charges which may outweigh any SDLT savings.
HMRC is much more pro-active now and will challenge SDLT avoidance cases. HMRC has tightened the number of anti-avoidance rules contained in the legislation to catch many tax saving schemes.
It is maybe to reduce exposure to SDLT using the reliefs and exemptions within the current legislation. This can be achieved by purchasing shares in a property holding company rather than the property direct.
However, it is difficult to avoid SDLT on a purchase of property without taking on a significant, an unreasonable amount of risk.
Non-resident companies letting UK property are likely to be required to register for corporation tax from April 2020.
You should seek legal advice before you take any action, this blog is not legal advice nor is it intended to give legal advice.
Source: British Landlords Association
Author: Sarah Featherstone
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25th of January 2023