Ownership of UK property by UK resident and non-resident overseas nationals
In its simplest form a non-UK taxpayer can significantly reduce the liability to UK taxation by establishing an appropriate structure:
Holding property in Trust
The idea of utilising a trust to protect assets is not new: asset protection via a trust dates back to the middle ages. Now with the increase in taxation rates in the UK and a desire for privacy, the intelligent investor is looking to protect their hard-won assets by the utilisation of offshore trusts. The idea of utilising a trust to protect assets is not new: asset protection via a trust dates back to the middle ages. Now with the increase in taxation rates in the UK and a desire for privacy, the intelligent investor is looking to protect their hard-won assets by the utilisation of offshore trusts.
In order to ascertain whether an offshore trust structure is appropriate you must first ascertain your domicile position. Domicile is quite a complex area but, broadly, if your country of origin is outside of the United Kingdom you may well be non-UK domiciled.
Unfortunately, if your country of origin is the UK, an offshore trust structure can provide little value. More bespoke planning may be appropriate for UK domiciles in some circumstances. But for non-UK domiciles purchasing UK property the offshore trust structure can provide significant tax savings.
An offshore trust is a legal entity evidenced by a Trust Deed into which the ownership of assets can be transferred by the Settlor. The trust is then managed by a trustee, who is the legal owner of the assets, while the beneficiaries are the equitable owners (note that the Settlor may be one of the beneficiaries). Any assets can be transferred into a trust such as property, cash, businesses and securities.
The trustee must be a neutral party who does not hold the assets for their own benefit, and acts only within the confines set out in the Trust Deed, administering the trust purely for the benefit of the beneficiaries. The trustee of an offshore trust would usually be a trust company, who as a professional trustee would have the expertise in trust and tax law to be able to ensure that the offshore structure is tax efficient but also within the realms of the law.
Offshore trusts are established in a lower tax jurisdiction such as Guernsey, Jersey, the British Virgin Islands or Gibraltar in order to reduce tax liabilities that would normally be payable under UK law.
Advantages of offshore Trusts
It is the duty of the trustee to act in the best interests of the beneficiaries.
Possible downsides of offshore Trusts
Both tax law and offshore trusts are incredibly specialist areas and professional advice should be sought to ensure legality, tax efficiency and to maximise effectiveness for the investor.
A company is created in a country of low or zero taxation which is used to purchase property in the UK.
Remark: That company can eventually be financed by loans made from third parties be they trusts or non-UK resident individuals. It is an important consideration that interest, charged at market value, is paid on such loans. The company acquires the UK property and the third party lender takes a legal charge over the property which is registered at the UK Land Registry.
Inheritance tax planning
Where the value of chargeable assets passing on death exceeds £285,000 the excess over that figure is taxed at 40%. This threshold will increase to £300,000 for the year 2007/8, £312,000 for 2008/9 and £325,000 for 2009/10. Where the investor had a foreign domicile, only UK property is taken into account in the calculation and it may be necessary to take into account the value of gifts of UK assets in the seven years preceding death.
If the property is purchased in the name of the individual there can be no doubt that its value will be assessed for inheritance tax purposes on his death. If however it is purchased in the name of an offshore company, the investor does not own an asset in the UK, but the shares in a foreign company, which, in his circumstances are not chargeable with inheritance tax. If the company is incorporated in a tax-free jurisdiction, such as the British Virgin Islands, the final result will be that the property passes tax free to the heirs.
Without careful planning however, offshore ownership of UK properties could have significant taxation implications. Mortgages for non UK resident borrowers are not always easy to obtain.
You would be considered to be resident in the UK if:
- You are in the UK for more than 183 days in a tax year.
- You come to the UK to work for more than 2 years.
- You come to the UK with the intention of remaining at least 3 years.
- You stay in the UK regularly for average stays of 91 days or more in a tax year and have a history of successive visits over four years, in which case you will be treated as resident from the start of the 5th year.
Residency and domicile
Simply stated, residency is where you live and domicile is where you consider being your permanent home. However, a long term residency may be considered to have become a domicile for tax purposes. For instance, if you are resident in the UK for, say, 17 of the past 20 years, then for Inheritance Tax purposes your domicile may also be considered to be the UK.
A person who is resident and domiciled in the UK is liable for income tax and capital gains tax upon their worldwide income and capital gains, including all that has been earned or gained from outside the UK. Their estate will be subject to UK Inheritance Tax on all assets worldwide, including shares in an offshore company owning land in the UK (the exception to this would be where assets pass to a spouse).
A person who is resident in the UK but domiciled in another country, has a liability to income tax and capital gains tax on income and capital gains which arise in, or are remitted to, the UK. There will be liability for Inheritance Tax on assets in the UK, this includes property held in the person’s name or a Trust in which the person has an interest for life. If the ownership of the property is vested in an Offshore Company of which the person is a director or deemed director, and the property is the residence of that person, then there may be Income Tax liability on “benefits in kind” of that residency.
Non-resident landlords may receive gross rental payments. If the property is to be rented out, and is to be bought with a loan, or a loan will be required for improvement of the property and is wholly and exclusively for benefit of the rental business, then the interest on the loans should be wholly deductible against UK income tax on rental income. If the source of the loan is from a UK resident lender, the interest on the loan may be subject to withholding tax. One possible structure could be for the UK resident source of funds to loan funds to another offshore company, which in turn lends funds to the offshore company that will purchase the property, so that the loan agreement for the purchase of the property is between two offshore entities. However, this is something upon which the purchaser should take professional advice.
Ownership of property by an offshore company may also offer much reduced “costs” when a property is sold, as the sale of the property may be effected by the simple transfer of shares (the ownership) of the company itself, and would not normally be subject to UK Capital Gains Tax. The owner of the company may further protect their assets by settling the company shares into a trust thereby ensuring that in the event of their demise, the benefits of the assets devolve seamlessly to the beneficiaries of the trust. Ownership of property and the tax consequences will be different with every individual. We recommend that a client considering the purchase of property in the UK for their own residency or for letting, should take appropriate legal and tax advice on the matter.
Taking the United Kingdom as an example, use of an appropriate offshore vehicle can offer relief from capital gains tax and inheritance tax. It should be remembered, in particular, that when a non-resident company disposes of a property investment, no capital gains tax is charged and holding through an offshore company removes the application of inheritance tax which would apply if a non-domiciled investor held a UK property in his personal name.
Buying in a corporate name
Ownership through an offshore company will also ensure that, on death, the property will pass to the intended heirs. It will overcome the forced inheritance provisions found in the civil law and in Sharia law.
Purchasing through a company does increase the cost. The purchase may attract a higher rate of stamp duty, the company will need to be professionally managed and it may be required to file a tax return. These costs are however generally modest in relation to the potential tax saving.
Others, such as the UK have hit on the wheeze of taxing their residents on a notional benefit, where the property is owned by a company rather than by the taxpayer personally, and no occupational rent is paid. Foreign investors in UK property are not discriminated against however. The answer, as always, is to take advice before acting.
UK capital gain taxation rules on the sale of investment properties depend on the residence and domicile status of the vendor and also on the physical location of the investment property being sold. There are some pretty simple hard and fast rules to understand and bear in mind when it comes to selling investment property and UK capital gains and this article details them for you.
If the owner of the investment property for sale is resident in the UK, ordinary resident in the UK and of UK domicile then the UK tax man actually requires capital gains tax be paid on profits arising from worldwide assets held – less the usual annual CGT allowances and exemptions. This means that if you own an investment property overseas but are UK resident and UK domiciled you will be liable to pay UK capital gains tax on any profits you generate from the sale of your overseas investment property. There are of course many double taxation agreements in place between the UK and other countries which mean that you will not be taxed twice on gains made.
If the property owner is UK domiciled but neither resident nor ordinary resident in the UK then they are not usually liable to pay UK CGT. There are a number of exceptions to this rule however and if you are selling a UK based investment property and have only just expatriated to take up temporary residence elsewhere you should seek taxation advice from an accountant in the UK or from the Inland Revenue directly as to your potential liability.
If you emigrate for a brief period before returning to the UK you may have to back pay tax on any capital gains that arose from the sale or disposal of assets you held in the UK prior to your departure but which you sold on during your period of absence. This applies if you were resident in the UK for at least four out of the last seven tax years before you expatriated and if your period of expatriation was for less than five complete tax years.
If the investment property owner is not of UK domicile but has UK residence and the property for sale is physically located overseas they will only become liable for UK CGT on any gain made from the sale based on how much of that gain is remitted to the UK. If the investment property for sale is physically located in the UK they will be liable for UK CGT on the entire gain less all the usual allowances and personal annual capital gain exceptions.
If the investment property being sold is located in the UK and was formerly the vendor’s primary residence the vendor may be able to reduce his overall capital gain liability depending on how long ago and for how long the property was his primary residence.
If the investment property being sold was a dedicated holiday home that was let out on a short term basis fully furnished, any capital gain is subject to special taxation treatment including taper relief. But it is quite tricky to fulfil all the criteria set for any relief obtainable and it is necessary to seek taxation advice in this instance.
In the United Kingdom, holding property through an offshore company converts the UK asset – the property – to a non UK asset – the shares in the company – and so eliminates UK inheritance tax to which the non-domiciled investor would be subject if UK property was held in his personal name.
A, a wealthy individual resident in the Far East, has surplus funds of approximately £1m that he wishes to invest in UK property, having heard that returns, significantly larger than those which might otherwise be obtained merely by leaving money on bank deposit, may be enjoyed.
A has identified a portfolio of properties which will cost £1.6m and which will provide a gross rental return of 7.5% and an estimated capital growth of 2.7% per annum. A obtained the advice as to the manner by which the ownership of that property portfolio might be structured in order to minimise or avoid, legally, any income or capital gains tax.
A may consider establishing in, say, Belize a discretionary Trust (*) for the benefit of himself and his family. A’s £1m is settled in the Trust. The trustees then establish a Limited Liability Company in an appropriate low tax (or tax exempted) jurisdiction, say, USA, State of Delaware or any other jurisdiction, depending on your citizenship and residing country, and, through that company, subject to obtaining finance to cover the £600,000 shortfall, acquire the portfolio. The directors of the purchasing company also register their company with the Inland Revenue as a non-resident company, thereby enabling all rental income received from tenants of the property to be paid gross to the non-UK resident landlord companies.
The company submits annual accounts and tax returns to the UK Inland Revenue, which show a deduction from the profits received equivalent to the interest paid to the bank together with other expenses. After a period of, for example, five years the portfolio is sold for £1.9m and no capital gains tax is payable on the uplift in price. Issues of stamp duty (the UK tax payable on the transfer of property) may also be reduced or avoided in certain cases.
Tax matters specific to non-resident entities
All below information provided by “HM Revenue & Customs” – to learn more about it, click HERE.
Non-resident landlord scheme
This section explains how non-resident individuals, companies and trustees can apply to receive their rental income with no tax deducted.
The non-resident landlords scheme is a scheme for taxing the UK rental income of non-resident landlords. The scheme requires UK letting agents to deduct Basic Rate tax from any rent they collect for non-resident landlords. If non-resident landlords don’t have UK letting agents acting for them, and the rent is more than £100 a week, their tenants must deduct the tax.
When working out the amount to tax, the letting agent/tenant can take off deductible expenses. Letting agents and/or tenants don’t have to deduct tax if HM Revenue & Customs (HMRC) tells them not to HMRC will tell an agent/tenant not to deduct tax if non-resident landlords have successfully applied for approval to receive rents with no tax deducted. But even though the rent may be paid with no tax deducted, it remains liable to UK tax. So non-resident landlords must include it in any tax return HMRC sends them.
Applications by non-resident landlords for approval to receive rent with no tax deducted
Non-resident landlords who are eligible can apply at any time for approval to receive their UK rental income with no tax deducted. This includes applying before they have left the UK or before the letting has started.
Contacting HMRC residency
For help and advice about the non-resident landlords scheme you can telephone the HMRC Residency helpline.
Non-resident landlords, other than HM Forces personnel and other Crown Servants, who are applying for approval to have rents paid without deduction of tax, should also send their applications to this address. Which tax district deals with non-resident landlords? All non-resident landlords who receive rents with no tax deducted will have a tax district. These are:
Non-UK resident landlords
Call HMRC for help and advice and for more information about the NRL scheme.
Opening times: 8:30 am to 5:00 pm, Monday to Friday (closed on weekends).
Write to HMRC for help and advice and to register for the NRL scheme.
HM Revenue and Customs
Charities, Savings and International Operations S0708
PO Box 203
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