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Tax Regulations and Offshore Entities

Monday, 29 April 2013

Prospective buyers thinking of using offshore entities to make a property purchase should be aware of tax changes coming into force. Previously, both residents and non-domiciled buyers of property in the UK have been customarily be advised to register a Non-Natural Person (NNP) for tax purposes such as a company, a trust or an investment scheme, to make an acquisition.

Tax Benefits of Offshore NNPs

In the past, an offshore NNP could avoid tax measures such as the UK Inheritance Tax, currently at 40% and Stamp Duty Land Tax (SDLT). However, SDLT was recently increased to 15% for properties over £2 million owned by Non-Natural Persons and further changes effective from 6 April 2013 will make such vehicles less attractive than they once were.

New Tax Measures

The new tax measures will only affect owners who place property in an offshore company. The two most significant changes are:

  1. The Annual Residential Property Tax: an annual charge will apply to property over a certain value as follows:
  • £2m - £5m £15,000
  • £5m - £10m £35,000
  • £10m - £20m £70,000
  • £20m+ £140,000

This sum is calculated based on the valuation of property on April 2012. The valuation will be revised on a 5 year cycle.

2. Capital Gains Tax: Any property sold by an NNP for a profit will be subject to Capital Gains Tax, which currently stands at 28%. Valuations for property owned prior to 6 April 2013 will be rebased at that date.

There is no ‘one size fits all’ solution regarding the best strategy for dealing with these changes. A number of options are available. Therefore measures should only be taken in light of your current personal and financial situation.

Dealing with the Tax Changes

As noted, there are a number of broad options available to parties holding property in offshore NNPs, including alternative avenues for maintaining tax efficiency.

Firstly, individuals could become a personal owner of the property, otherwise known as ‘de-enveloping’. This would eliminate anonymity but would avoid the newly introduced annual charge and Capital Gains Tax. However, it could mean that the owner exposes the property to UK Inheritance Tax on their estate.

Secondly, the company could transfer property to a corporate trustee which would hold the property on behalf of the beneficial owner. Consequently, the company could gift the property to the beneficiaries and avoid paying the Capital Gains Tax and the Annual Residential Property Tax. However, any such restructuring of trusts may become subject to further legislation in future. It should be noted that properties with mortgages may be subject to different rules.

Future decisions focused on tax efficiency should only be made in consultation with expert advice. Each situation is unique and requires a bespoke solution. Restructuring of company-owned property may involve complex issues of trust, tax and property law, it is imperative to seek legal advice before taking action. For more information please contact us on 0207 611 4848.

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