TBA & Associates

Ownership of UK property

By UK resident and non-resident overseas nationals

On the 15th of March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 achieved Royal Assent, officially coming into effect on the 1st of August 2022. This act mandates that overseas entities currently possessing property in the United Kingdom must register with Companies House by the 31st of January 2023.

In addition to amendments related to sanctions and Unexplained Wealth Orders, the Act introduces a novel legal requirement for overseas entities owning property in the UK. This requirement entails registering with Companies House and providing information about their beneficial owners. It’s essential that this data is verified by an agent who operates under the Money Laundering Regulations. Non-compliance or the provision of erroneous information could result in criminal offenses.

This register will be publicly accessible, and HMRC will have access to additional information at Companies House.

Land law in Scotland has unique characteristics, and the Scottish government has also established a similar Register of Persons Holding a Controlled Interest (RCI) in land as of the 1st of April 2022.

Reasons for Implementation

According to Land Registry data, properties in England and Wales are presently owned through overseas entities. Many individuals opt to hold UK property through overseas companies to safeguard their privacy. However, this comes at a cost: such companies must pay a 15% Stamp Duty Land Tax (SDLT) when acquiring residential property.

Owning UK property through an offshore company for legitimate commercial or personal protection reasons is entirely acceptable and not impeded by these new rules. The government’s primary aim is to enhance transparency in ownership. The lack of previous transparency allowed those with intentions to conceal their identities, sometimes for illicit purposes, to invest in UK property. Part of the new registration process involves declaring the beneficial owners of the company to Companies House.

What does it mean an ‘Overseas Entity’?

These rules are applicable to entities governed by laws outside the UK. Offshore companies, partnerships, and foundations are expected to comply. However, offshore trusts directly owning UK land are not obligated to register with Companies House since they must already be registered via the Trust Registration Service. In cases where an overseas structure encompasses both a trust and an overseas company or other entity, the officers of that entity must ensure its registration.

The requirement to register at Companies House applies to entities holding freehold property and land, as well as leasehold properties granted for over seven years. Offshore entities must register before acquiring such property.

In cases where registrable land is held through a chain of companies, the general rule is that the overseas entity must look through the structure and ascertain its ultimate beneficial owners.

Using Trusts for Property Ownership

The concept of employing a trust to safeguard assets has a long history dating back to the middle ages. With increasing taxation rates in the UK and a growing desire for privacy, astute investors are exploring the use of offshore trusts to protect their hard-earned assets.

To determine whether an offshore trust structure is suitable, one must first establish their domicile position. Domicile is a complex matter, but broadly speaking, if your country of origin is outside the United Kingdom, you may be considered non-UK domiciled.

Regrettably, for those whose origin is the UK, an offshore trust structure might offer limited advantages. In certain situations, more tailored planning may be necessary for UK domiciles. However, for non-UK domiciles investing in UK property, an offshore trust structure can deliver substantial tax benefits.

If you acquire UK investment property in your own name, you are likely to face capital gains tax upon the property’s sale and inheritance tax upon your demise. By holding the property through an offshore structure, both of these tax liabilities can be effectively and legally mitigated.

An offshore trust is a legal entity established through a Trust Deed, allowing assets to be transferred into the trust by the Settlor. The trustee, who is the legal owner of the assets, manages the trust, while the beneficiaries hold equitable ownership. It’s worth noting that the Settlor can often be one of the beneficiaries. Various types of assets, including property, cash, businesses, and securities, can be transferred into a trust.

The trustee must be an impartial party who manages the assets solely for the benefit of the beneficiaries, following the guidelines set out in the Trust Deed. Typically, the trustee of an offshore trust is a trust company, a professional trustee with expertise in trust and tax law. They ensure that the offshore structure is both tax-efficient and compliant with the law.

The transfer of legal ownership to the trustee is what facilitates tax mitigation and asset protection. It’s common for the Settlor to provide the trustee with a letter of wishes, which serves as a private document, guiding the trustee on how to manage the assets on a day-to-day basis and after the Settlor’s passing. This letter of wishes offers a flexible form of a living Will.

Offshore trusts are typically established in low-tax jurisdictions such as Guernsey, Jersey, the British Virgin Islands, or Gibraltar to reduce tax liabilities that would otherwise be applicable under UK law.

Advantages of Offshore Trusts

  • Reducing or deferring tax on income.
  • Avoiding inheritance tax.
  • Lowering corporation tax.
  • Assisting in forced heirship planning for residents of countries like France, Saudi Arabia, and Japan.
  • Potentially safeguarding assets from bankruptcy or litigation.
  • Protecting assets from political uncertainties.
  • Maintaining the confidentiality and privacy of the Settlor and beneficiaries, as the Trust Deed remains a private document.
  • Enforcing the trustee’s duty to act in the best interests of the beneficiaries.

Possible Disadvantages of Offshore Trusts

  • Transferring some assets to the trust might incur taxation.
  • Care must be taken when transferring income to beneficiaries to avoid attracting tax.
  • Trust assets are under the control of the trustee, who usually respects the wishes of the Settlor and beneficiaries, but ultimate decision-making rests with the trustee.

Many investors find that employing offshore trust structures is crucial for wealth management and planning. However, it’s vital to choose the right trust company to administer the trust, as both tax law and offshore trusts are highly specialized fields. Seeking professional advice is essential to ensure legality, tax efficiency, and maximize benefits for the investor.

Structural Considerations

There are various structural considerations when using offshore trust structures, such as creating a company in a low or zero-tax jurisdiction to purchase property in the UK. It’s important to finance the company through loans from third parties, which should be charged at market value. This company acquires the UK property, and the third-party lender secures a legal charge over the property registered with the UK Land Registry.

The company should approach the Inland Revenue as a non-resident landlord, which allows tenants to pay rent gross to the non-resident landlord. This may necessitate filing accounts and annual returns with the non-resident landlord unit at the Inland Revenue.

Annual accounts of the company should include rental income, allowable deductions like interest, and standard business expenses. Properly structured, the company should make minimal or no taxable profit, thus minimizing UK corporation tax.

A significant advantage is that the UK doesn’t typically impose capital gains tax on income from the sale of UK-based property for non-UK tax residents. However, stamp duty is a consideration in UK property transactions when the registered proprietor’s name is altered at the UK Land Registry. The stamp duty rates differ based on the property’s value.

In summary, utilizing offshore trusts is a strategy that investors employ to protect their assets, particularly in response to increasing tax rates and privacy concerns. Careful planning, professional advice, and a thorough understanding of the legal and tax implications are essential for successful wealth management and asset protection through offshore trusts.

Overseas Entities Owning UK Property

New Rules

The transparency requirement for corporates to declare individuals with significant influence and control over them at Companies House, is not set in place. These rules are designed to enable anyone to identify the ultimate beneficial owner of overseas entities owning UK land interests and deter those contemplating the purchase of UK property with illicit funds.

To comply with the Act, the officers of overseas entities must take the following reasonable steps;

  • Identify any registerable beneficial owners of the entity.
  • Obtain and provide this information to Companies House.
  • Complete an annual return to keep the register updated. d. Request removal from the register when appropriate.

Overseas entities must issue ‘information notices’ to all persons believed to be beneficial owners, who must respond within one month. As with the existing rules concerning “persons with significant control” of UK companies, someone with share ownership or voting rights of more than 25% of the overseas entity will be categorized as a “beneficial owner,” along with all directors. The Act outlines details of exemptions and procedures. Even if the ultimate beneficial owner in an overseas structure is a trustee, details of the trust must be disclosed, along with information about beneficiaries, the settlor, and other individuals or entities with control over the trust (e.g., a protector).

The implementation of regulations also stipulate that this information must be verified by a UK-based agent supervised under the Money Laundering Regulations 2017 (e.g., an accountant or lawyer) before submission in the registration process. As a result, while companies may undertake the registration process themselves, this new verification requirement suggests that it may be simpler to engage a regulated agent to complete the process once they have gathered all the relevant registration data.

Failure to register is considered a criminal offense, and the officers of the entity may face fines and imprisonment, up to two years (or five years in extreme cases) for non-compliance. Similarly, failure by beneficial owners to provide information can also be a criminal offense under UK law.

Tax Investigations after Registration

HMRC, the police, and other enforcement agencies believe that foreign company ownership of UK property can be used to conceal crimes like tax fraud and money laundering. As a result, they will closely scrutinize the companies that register. HMRC will integrate this information into its Connect system to cross-reference other government data, including data from offshore banks under the Common Reporting Standard, and open-source data to identify cases for further investigation.

For example, HMRC is likely to investigate the tax residency of individuals living in the property. If they are UK tax residents, they may be liable for UK tax on their global income. HMRC can assess whether there were taxable ‘remittances’ (usually money transfers) to the UK by non-UK domiciled individuals. Questions about the source of funds used to purchase property may also arise. Overseas landlords will be subject to tax on UK rental income.

Required Actions

The officers of offshore entities affected by these new rules must carefully consider their new responsibilities and take steps to ensure compliance. If there is any doubt regarding past non-compliance with UK tax reporting obligations, making a voluntary disclosure to HMRC, including all relevant circumstances, is the best approach to resolve these matters. Seeking expert tax advice on how to do this most appropriately is recommended, as there may be penalties involved. Nevertheless, making a disclosure typically helps in reducing these penalties.

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