The consultation document entitled “Ensuring fair taxation of residential property transactions” was published in May 2013. As always whenever the UK Treasury or HMRC refer to “fair taxation” what they really mean is “considerably increased taxation”. The resulting draft legislation was published on 11th December outlining the new taxes and charges which will have to be paid by offshore companies which own property in the UK.
There have been some significant changes from the consultation paper. There is still a small chance that there will be alterations before the enactment of the actual legislation in April next year but no further surprises are expected and it would be unusual if there were any more changes. Property owners should plan accordingly.
The main features of the proposed legislation will affect properties which either are, or will become, valued at more than £2 million and which are owned by “non-natural persons”. This is a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Previously many buyers of UK property have chosen to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property , after allowances, upon the death of the owner. As a company never dies the asset becomes the shares of the company which is a non UK asset and therefore not subject to UK IHT as long as the owner is not UK domiciled. Owners who are UK domiciled are subject to IHT on their worldwide assets so the tax catches the whole estate. Many UK expatriates will remain UK domiciled despite living abroad for many years. Offshore company ownership also facilitated the avoidance of stamp duty (SDLT) as any subsequent sale of the property could be effected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This would mean the incoming purchaser avoided SDLT and allowed the seller to charge more or made it easier to sell as it was cheaper for the buyer, or a bit of both.
Offshore companies which own property worth over £2 million will now be faced with:
1. An annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax is called Annual Residential Property Tax (ARPT).
2. Capital Gains Tax (CGT), which was previously not paid by non UK resident sellers whether they were individuals or companies, will be charged on resale at a rate of 28%.
New offshore company purchasers will pay stamp duty at 15% whereas natural persons will pay stamp duty at the bargain rate of only 7%.
A transfer of property to an individual or individuals (presumably the beneficial owner or owners of the company) who own the company will avoid these charges but expose those individuals to UK inheritance tax at 40% so this is an option which will appeal only to the very young and very healthy who are quite certain of their own longevity. For those less certain of their own mortality this will not be a sensible option. It is possible to cover the liability by life insurance but actuaries have of solvent life insurance companies have got it right. You will pay more than you receive so this is an expensive option which normally appeals most to life insurance salesmen.
The good news is that there are exemptions from the above taxes. The main one of these is that corporate trustees are not subject to these new taxes. For most, transferring property already owned by an offshore company to an offshore trust will be the most cost effective way forward. For new purchasers making the purchase via an offshore trust will be best. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. The problem here is that even a single day of occupation by anyone connected with the company at any time when that company owned the property would cause the exemption to be lost so this is somewhat inflexible and inherently risky.
Luckily, there has been one change to the original proposals. CGT will be based upon the difference between the sale price and the presumed value at April 2013. Originally the CGT was to be based upon the original acquisition value and resale price. This is obviously an improvement for those who purchased a long time ago and have seen the value of their investment rise considerably. Even those who have bought unwisely will have made a big paper profit so this is welcome news but would not seem to make much difference to the correct structure going forward.
Trustees who hold UK assets are subject to the ten year anniversary charge which could be as much as 6% of the value of the property but this charge is only made on the equity on the property. The equity on the property is the difference between the property value and any loans against the property. It is therefore recommended that the properties be laden with debt whether that be loans from a bank or from loans injected by the Settlor or other persons associated with the trust.
Between now and April 2013, properties can still be transferred to a new structure without CGT applying. After April any changes in ownership are likely to result in tax consequences and the annual charge will start biting. In summary, there is a brief window when action can be taken at minimal cost to avoid future CGT and ARPT so urgent action is required. Prevarication or inaction is likely to result in significant additional costs.
Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
