New Legislation On Taxation Of Offshore Companies Which Own UK Property
28 November 2013
Posted by: Author: Howard Bilton
Author: Howard Bilton (Mondaq)
In May last year the consultation document entitled
"Ensuring fair taxation of residential property
transactions" was published. 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 2012
outlining the new taxes and charges which will have to be paid by
offshore companies which own property in the UK worth over 2 Million. There were some significant changes from the
consultation paper. Next, the actual legislation was included in
the Finance Bill 2013 and again showed changes from the draft not
least in the name of the new annual charge.
The main features of the legislation will only affect properties
which either are, or will become, valued at more than 2
million and which are owned by "non-natural persons" -
this being a reference to companies, partnerships, funds and the
like, not to persons with strange personal habits.
Previously many buyers of UK property chose 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. If a company owns the property 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 pay IHT on the shares. 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
allowed the purchaser to avoid SDLT and/or allowed the seller to
charge more, or a bit of both.
Offshore companies which own property worth over 2
million will now be faced with an annual charge of a minimum of 15,000 and a maximum of 140,000 depending on value.
The new tax was to be called the Annual Residential Property Tax
(ARPT). In the legislation it was called the Annual Tax on
Enveloped Dwellings (AETD). I wonder which committee came up with
that one? The companies will also pay 28% Capital Gains Tax (CGT)
Corporate trustees are not subject to these new taxes. 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. Those who have purchased property purely
as a buy to let investment may well be able to rely on this and
ignore the new legislation. Those who do, or may, live in their
property will be effected.
The best structure going forward will depend on a variety of
factors including the tax residency and domicile of the owners and
any intended beneficiaries of the trust or even occupiers of the
property but let us consider the example of Mr Guiseppe Sixpack
(GS) an Italian resident and domiciled individual who intends to
move to the UK during the current tax year (i.e. between 6 April
2013 and 5 April 2014). GS, through an offshore company, holds the
freehold of a residential property in London which he will live in.
The property was acquired in November 2001 for 1,400,000 and
is currently valued at 4,000,000. It is not currently rented
out and there is no mortgage.
As the property was beneficially owned by a company on 1 April
2013, the company will be subject to ATED.1 The
property's value as at 1 April 2012 will determine the
liability to ATED.2 The Company is currently liable to
pay a charge of 15,000. The first chargeable period runs
from 1 April 2013 to 31 March 2014. The Company must file a return
for the first chargeable period by 1 October 2013 and pay the
charge by 31 October 20133. This is a transitional
measure and the return for the second chargeable period, commencing
1 April 2014, must be filed by 30 April 2014. The tax for the
second chargeable period must be also paid by that date. The
property will need to be re-valued on 1 April 2017 to cover the
ATED returns for the five years starting on 1 April 2018. However
until 30 April 2018 the charge should be limited to 15,000
payable by the 30 April each year. To correctly calculate the
charge the property must be independently valued by a professional
such as a chartered surveyor.
It is possible for a company to obtain relief where it does not
hold the property throughout the whole chargeable period. This is
known as interim relief and must be claimed.4 Broadly,
the charge is reduced to reflect the number of days in the
chargeable during which the property was not held in the
company.5 For example if the property were to be sold to
a third party individual on 30 September 2013, the seller Company
could reclaim 50% of the original charge.6 The precise
procedure for claiming the relief and the contents of the ATED
Return will be fleshed out by HMRC in supplementary Regulations to
be published in the summer.Capital Gains Tax (CGT)
The legislation provides that a company which holds a property
on 1 April 2013 that is within the scope of the ATED charge is
deemed to have acquired the property for its market value on 5
The property was acquired in November 2001 for 1,400,000
and it is assumed that it had a value of 4m on 5 April
2013.Shadow Directorship issues
If GS were to occupy the property in the future rent free there
is a danger that he would be subject to an annual benefit in kind
tax charge as he would be treated as a shadow director. The case of
Dimsey v Alan established that the benefit in kind
provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient
to consider moving the property out of the Company. Mr GS has a
number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as
there is no mortgage. There should be no charge lifetime
IHT8 as the asset would still form part of the
beneficial owner's estate. However there would be CGT to pay-
if the property at the time of value was worth more than the
�4,000,000 April 2013 value. Here there is a nasty trap. If
GS was resident when the company sells the property the whole of
the gain since acquisition could be attributed to him under
s 13 TCGA 1992
Advantages of individual
- There would be no ATED charge from 6 April 2014 onwards
provided the transfer was made to the individual
before that date.
- There would be no UK CGT on a future
disposal provided GS used the property as his main
residence throughout the entire period of his
- There would be no shadow director issues which can arise with
- The property would be subject to UK IHT of 40% on GS's
- The ability to mitigate the charge with debt or even bank
finance has been severely restricted.10
Option 2: Share Sale to a new Dry
This plan would involve GS's family member establishing a
new dry trust (i.e. a single asset holding trust) with a nominal
cash sum. GS would sell the Company shares to that trust. The
consideration would be a loan note equal to the market value of the
property on the date of the share transfer. The Company would be
liquidated by the trust. The liquidation would not cause a SDLT
issue as there is no mortgage.
- The property would be outside the charge to UK IHT.
- There would be no CGT on a future sale by the
- There would be no ATED from 1 April 2014.
- There is a ten yearly charge of up to 6% on the net asset value
of the trust's UK assets. However the charge should be
mitigated by the value of the loan the trust owes to GS on the
- The trust would need to avoid selling the property, thereby
realising a potential gain, when GS is UK resident. Otherwise GS
would be subject to UK CGT to the extent that the value of his rent
free occupation could be matched with the gain made by the trust on
the sale. The liability would be significant but can be avoided
provided GS is not UK resident in the tax year of the disposal and
is not caught by the 5 year rule noted above.
Non UK domiciled purchasers should henceforth use a similar
trust structure to the above. Domiciled purchasers should consider
purchasing via a QNUPS structure.
From the above it will be apparent that is a highly technical
area and expert advice is, as always, strongly advised.
1. Refer to Part 3 of the Finance Bill 2013
2. FB 2013, Section 99(2)(b)
3. Refer to the FB 2013, Schedule 33, Part 2, para
4. FB, s97
5. FB s158(4) sets out the procedure for making the
interim relief claim
6. This must be paid by 31 October 2013.
7. The FB has inserted a new CGT code into TCGA 1992 to
account for ATED related gains. The calculation of the base cost is
found in the new Schedule 4ZZA in TCGA. Refer to paragraph
8. Under IHTA 1984, s 94
9. Under TCGA 1992, S10A
10. It has inserted a new s175A IHTA 1984 which severely
restricts the deductibility of debt on death
11. This position needs to be carefully watched. It is
possible that the debt may not be deductible under s.162A which is
to be inserted into IHTA by the Finance Act. As yet it appears
section 162A would not deny a deduction but it may be subject to
further amendments before it hits the statute books.
This article first appeared in mondaq.com.