Offshore companies owning UK residential property New UK tax considerations in 2018
Introduction There has been a long history of acquisition of UK residential property via offshore companies by non-uk resident investors. Since 2012 the UK tax advantages of offshore corporate ownership have been progressively eroded. This article considers these progressive erosions and what mitigating steps can be taken when de-enveloping is precluded because of unacceptable SDLT or CGT cost. Prospective and significant tax reforms to the capital gains tax liabilities of non-uk resident corporates, and other non-uk resident persons, are also considered. The penal measures applied to offshore corporate ownership or enveloping : The assault on offshore corporate ownership 1 of UK residential property has proceeded as follows: 1. A 15% rate of stamp duty land tax (SDLT) on acquisition of residential property by an offshore company (March 21 2012); 2. An annual tax, which is referred to as the annual tax on enveloped dwellings, or ATED, introduced on 1 April 2013; 3. An ATED-related capital gains tax (CGT), levied on the capital gains realised by an offshore company on the disposal of residential property, introduced on 5 April 2013; 4. Non-residents capital gains tax (NRCGT) introduced on 5 April 2015 and applicable to offshore companies that obtain statutory relief from ATED-related CGT. NRCGT is only applicable to gains realised from the disposal of UK residential property, and applies to non-resident individuals, companies (if closely held) and trusts. 5. From 6 April 2017, offshore company shares are no longer excluded property to the extent that their value is derived from UK residential property, directly or indirectly. ATED-related SDLT The ATED-related SDLT rate of 15% was introduced with effect from 21 March 2012, more than a year before the introduction of ATED and ATED-related CGT. The 15% rate of SDLT for enveloped acquisitions of UK residential property was a formidable penalty at the time, compared with the then prevailing rates of SDLT. 1 In fact, ATED s penal regime applies to all companies, wherever registered, and also to partnerships with corporate members, and collective investment schemes.
Today, the ATED-related 15% rate of SDLT does not appear so draconian, now that the highest rate of SDLT for individuals buying residential property is also 15% where the property is acquired for a consideration of more than 1,500,000. On the other hand, in 2016, ATED-related SDLT became applicable to enveloped UK residential property acquired for a consideration of more than 500,000. So the penal 15% ATED rate of SDLT now casts a much wider net to catch residential properties of comparatively modest value. ATED The amount of ATED an offshore company will pay is determined by the market value of the property that is enveloped. The market value of UK residential property need only exceed 500,000 to come within ATED. As ATED is determined by the market value of the property, the default rule is that the value of an enveloped property for ATED purposes is determined every 5 years (the first statutory 5 year cycle began on 1/4/2013 using a valuation date set on 1/4/2012). Corporate acquisition during a 5 year period will re-set the value of the property for ATED purposes and depending on the rate of property inflation may result in an increase in the ATED charge. The value of the property is the determinant of the level of ATED payable during the 5 year cycle, as ATED is a banded or tiered charge. The most recent statutory valuation date was 1/4/2017 which will determine the ATED charge for the 2018/19 year beginning on 1/4/2018, and the four subsequent ATED years. Whilst the ATED threshold has been progressively reduced, the rates of ATED have been increased since the inception of the regime. The table below illustrates this point. Property value Annual charge < 500,000-1,000,000 < 1,000,000-2,000,000 < 2,000,000-5,000,000 < 5,000,000-10,000,000 < 10,000,000-20,000,000 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 N/A N/A N/A 3,500 3,500 3,600 N/A N/A 7,000 7,000 7,050 7,250 15,000 15,400 23,350 23,350 23,350 24,250 35,000 35,900 54,450 54,450 54,950 56,550 70,000 71,850 109,050 109,050 110,100 113,400 < 20,000,000 140,000 143,750 218,200 218,200 220,350 226,950
ATED is operated under self-assessment, and the ATED return must be filed with payment of the tax on or before 30 April in the chargeable period to which it relates. Thus, filing and payment is on an up-front basis for the year. The ATED chargeable period runs from 1 April to the following 31 March. ATED returns for the 2018/19 period must be submitted by 30/4/2018, with the appropriate ATED duly paid, to avoid penalties. ATED taxpayer companies should consider now if they need to obtain a 1/4/2017 valuation of their enveloped properties. This may be advisable where property values are edging close to a higher rate of ATED, and there is no statutory relief from ATED. Acquisitions of property made by a corporate during a chargeable period require an ATED return to be filed within 30 days of the acquisition. ATED is then paid on a fractional basis. Corporates that sell residential property during the chargeable period can obtain refunds of the ATED they have already paid up front. Therefore, the refund will amount to the ATED already paid for the post-sale element of the chargeable period. ATED is not chargeable in the event of relievable days. A relievable day is a day in the chargeable period when a statutory relief is in point. If a statutory relief covers an entire chargeable period, then no ATED will be payable, and this also means that ATED-related CGT cannot apply either to any capital appreciation in that period. ATED-related CGT ATED-related CGT will be applicable if the proceeds of the disposal exceed 500,000, and the corporate was within the charge to ATED for at least one chargeable day. If all the days of the relevant ownership period are chargeable, the entire gain will be chargeable. If all the days of corporate ownership are relievable, then no part of the gain will be chargeable to ATED-related CGT. Where some but not all the days in the relevant ownership period are chargeable to ATED, the ATED-related gain is a pro rata fraction of the total gain. The rate of tax is 28%. There is no annual exempt amount, and no indexation relief.
HMRC Consultation Document: reform to the taxation of non-uk residents on their UK property gains It is clear from a Consultation Document published in late 2017 that from April 2019 the UK s capital gains tax regime will be reformed and consolidated. Offshore companies are likely to be affected in the following ways as a result of the prospective reforms: From 1/4/2019 it is intended that offshore companies will be charged to UK corporation tax on capital gains from the proposal of UK residential and UK commercial property. ATED-related CGT will cease to apply from 1/4/2019 to subsequent accruals of capital gains From 6/4/2019 it is intended that NRCGT will be charged on UK residential and UK commercial property disposed of by non-corporate non-uk residents, such as individuals or trusts From 1/4/2019 (for non-uk resident companies) and 6/4/2019 (for other non-uk resident persons) disposals of shares or other interests in property rich companies will be liable to corporation tax or NRCGT respectively. The non-uk resident seller of such interests will be liable where that person holds or has held in a defined period, 25% or more of the shares or other intersts in the property rich entity. A property rich entity is one that derives 75% or more of its gross asset value from UK residential or commercial property The exemption from CGT for diversely held non-uk resident companies owning UK residential property will cease when non-uk companies fall into the UK corporation tax regime in April 2019 Rebasing to the April 2019 market value will be available for any property brought into the scope of CGT for the first time as a result of the reforms ATED will continue to apply as before i.e. the annual tax on enveloped dwellings, and the ATEDrelated SDLT charge. However, ATED-related CGT will probably only be relevant for calculating pre 1/4/2019 gains.
Beneficial ownership requirement For an offshore company to become liable to the tax penalties of ATED, it must be the beneficial owner of the UK residential property or properties. Therefore, offshore companies that hold UK residential properties as nominees or bare trustees are outside the scope of ATED. The same point also applies to offshore companies that function as trustees of any kind, the most common example of this in practice being offshore discretionary trustees, who are generally corporate in form. These categories of corporate owner are not in fact required to file ATED returns, as they are exempt from ATED and therefore not required to claim relief from ATED. However some advisors recommend notifying Her Majesty s Revenue & Customs (HMRC) to avoid enquiries 2. Statutory reliefs from ATED It has already been mentioned that the annual financial periods of ATED (successively beginning on 1 April and ending on the following 31 March) consist of either relievable or chargeable days. If all the days are relievable for a given ATED year under a statutory relief, it follows that none of the ATED penalties can apply. A new corporate envelope acquiring UK residential property with an intention to operate a property business that comes within one of the ATED statutory reliefs is also relieved from ATEDrelated SDLT. It then follows that it will also be relieved from ATED and ATED-related CGT. The statutory reliefs apply to the following businesses conducted by the corporate: property rental business; property trading business; and property development business. In practice, the most common relief is the property rental business relief. For this relief to apply, the company must let the property on commercial terms to an individual who is unconnected with the offshore company, and its beneficial ownership (see case study 1). 2 It is essential that documentary evidence of a company s nominee status is prepared. A written declaration of bare trust between the UK company and the beneficial owner of the property is recommended.
Offshore companies whose residential properties are occupied by the controlling parties of the offshore company or their relatives cannot obtain any of the statutory reliefs and they are the real target of ATED. Existing offshore companies already paying ATED can exit the ATED regime by commencing a relevant property business. However, if the property has already been occupied by a non-qualifying individual, e.g. the beneficial owner or his children, then until a commercial tenant is in occupation of the property, ATED charges will continue (s135 FA 2013). Mitigating ATED for new acquisitions: Case Study 1: Property rental business relief Non-UK resident and non-uk domiciled UBO (Mr S) 100% BVI Co (assume non-uk resident) BVI Co commences property rental business 2 January 2018 UK residential property Market value - 8m Mortgage - 2.5m
Comment Assume BVI Co is the beneficial owner of the property UBO wishes to commence a property rental business from the outset of incorporation, i.e. on 2/1/2018. This day, and subsequent days will be relievable days for as long as the conditions of property rental business are met. The most important condition is that neither the UBO of the BVI company, nor persons connected to him, occupy the property BVI Co should document the commencement of the business (board resolution or minutes) Engagement of the services of a letting agent will be clear evidence of the commencement of the business, but other reasonable preliminary steps taken to commence a property rental business should be sufficient Relief from ATED commences from 2 January 2018 even if the property is vacant, as long as steps are being taken to find appropriate tenants It is very important that no persons connected with the beneficial ownership of the BVI Co occupy the property at any time. This includes spouses of connected persons. The definition of connected person is set out in s1122 CTA 2010 Rental income will be liable to basic rate income tax of 20% with deduction for mortgage interest, for now. (From 1/4/2020, rental income will probably become subject to UK corporation tax) Rental income may be paid gross to BVI co under self-assessment (i.e. without withholding tax) subject to administrative conditions Disposal of the property by the BVI Co (at least prior to 1/4/2019) will give rise to NRCGT at 20% on any gain element accruing on and after 2 January 2018 provided that ATED-related CGT is precluded by the statutory relief. This is always preferable because the NRCGT is a more benign tax regime than the ATED CGT regime. As already noted above, ATED-related CGT is likely to cease to apply on gains accruing on or after 1/4/19, to be relaced by UK corporation tax From 1 April 2017, the BVI Co shares are UK IHT assets because their value is derived from UK residential property (any mortgage taken out to acquire the property reduces the IHT equity in the property, and consideration can also be given to issuing or transferring shares to family members to maximise nil rate band rate relief, and discounting of minority interests)
Mitigating ATED - related CGT and NRCGT and SDLT Case Study 2: Share sale The ATED regime was apparently instigated in 2013 to discourage SDLT avoidance through share sales, but at the time share sales were comparatively rare. However today, the risk/reward analysis of share sales for a buyer are more compelling than they were in the past, due to the high rates of SDLT. There may also be a limited window of opportunity prior to April 2019 for non-uk resident beneficial owners of enveloped UK residential property to sell the shares of the corporate envelope itself in order to mitigate UK capital gains tax charges, but it is essential that independent advice is taken to ensure such transactions are not caught by anti-forestalling measures now in operation. Mr S Mr S sells shares to Mr ALP Mr Arm s Length Purchaser (ALP) 100% BVI Co UK residential property Market value - 8m
Comment Assume Mr S and Mr ALP are unconnected and the sale of the BVI shares is therefore conducted at market value. Assume also that Mr S and Mr ALP are non-uk resident The capital gains realised by Mr S from the sale of the BVI shares should not be liable to any UK capital gains tax, because the assets sold are not UK residential property, but non-uk assets in the form of BVI Co shares Mr ALP will pay no UK SDLT on purchase of the BVI Co shares. This is a considerable saving as Mr ALP would pay SDLT at 15% of the purchase price, with a possible 3% surcharge if he was to acquire the UK property personally Mr ALP will also pay no BVI stamp duty on the purchase of the BVI Co shares Mr ALP does incur risk in acquiring the BVI company and should obtain BVI legal advice before proceeding (and water-tight warranties and indemnities from the seller) Mr ALP inherits BVI Co s historic base cost for NRCGT or ATED-related CGT purposes. This is a disadvantage, but there may be a discount on the sale price of the property, if the seller wishes to proceed via a share sale. Mr ALP needs to take UK tax advice before proceeding, particularly if the property has been enveloped for many years prior to ATED being enacted and Mr ALP considers it likely that one day he may become UK resident If Mr S removes the sale proceeds from the BVI share sale outside the UK, or the sale price is received outside the UK, then such proceeds will cease to be UK IHT assets after 2 years from sale, assuming Mr S is non-uk domiciled 10
Conclusion Where de-enveloping a UK residential property is unrealistic (perhaps because the beneficial owner of the company is UK resident and the company has accumulated significant latent gains from the ownership of the property), ensuring that the offshore company runs a property rental business is an effective way to obtain relief from the ATED regime, and ATED-related CGT. Offshore companies currently trapped in the ATED regime can be extricated with appropriate careful planning to stop further accrual of ATED charges. Offshore companies that conduct property rental, trading (dealing) or development businesses can achieve full protection from ATED with appropriate planning. In the short term, there may be a short window of opportunity to sell property-rich company shares, to achieve CGT mitigation for certain mainly non-uk resident beneficial owners. However this window is likely to close on 1 April 2019, and in any event, independent tax advice should be taken before implementation of such transactions, in particular to ensure the anti-forestalling measures announced by HMRC do not apply. By Martin Palmer BA (Hons) Law, ADIT Consultant Jordans Limited martin_palmer@jordans.co.uk T: +44 (0)117 918 1321 Martin joined Jordans in 1984 and was appointed to the Jordans main board in 1995. He holds the Advanced Diploma in International Taxation from the Chartered Institute of Taxation and graduated in Law with Honours from Nottingham University. He has been a speaker at the ICAEW Annual Tax Conference, the INTAX Forum and The International Tax Planning Association. He is an author of The Journal of International Tax Trust and Corporate Planning: UK Companies and Partnerships. This is now in its 4th edition and published by Lexis Nexis. Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.
About Jordans Jordans are part of Vistra, one of the largest corporate and trust service providers in the world. As such, we can provide a comprehensive range of services and advice relating to corporate envelopes of UK property. In particular, we can provide: Legal services to support BVI and other offshore companies that own UK property and that wish to enter into commercial transactions, in respect of their properties e.g. to buy, or sell such property. We employ our own BVI lawyers and can provide a wide range of BVI legal opinions and document drafting services We can provide ATED, NRCGT and income tax computations, and filing services for offshore companies owning UK residential property We can provide BVI and other offshore company formation services for clients who wish to buy UK residential or UK commercial property via offshore companies, as well as ongoing management and administration services. For non-uk resident clients who wish to trade in UK property, we usually recommend formation of UK companies to conduct the trade, with the UK shares held by an offshore holding company Many existing offshore companies are unable to de-envelope their UK residential properties due to anticipated SDLT and/or CGT costs (particularly s13 CGT charges apportioned to UK resident beneficial owners of offshore companies for pre-ated gains prior to 5 April 2013). For these companies we can assist in obtaining statutory reliefs, or advising on possible ways of mitigating the tax costs of de-enveloping Find out how we can help you. For further information about any of our services, or to discuss your requirements in confidence: Jordans Limited First Floor, Templeback, 10 Temple Back, Bristol, BS1 6FL, UK Call: +44 (0)117 923 0600 Email: info@jordans.co.uk Twitter: @JordansLimited www.jordans.co.uk