Three Simple Ways for UK Non Domiciled Persons to Own UK Property

We are very familiar with setting up and administering structures for UK resident non domiciled persons for holding UK Property.

 
Recent changes in UK legislation, such as the introduction of the Annual Tax and Enveloped Dwellings (ATED), new Stamp Duty rules and Capital Gains Tax on UK high value residential properties mean that some reorganisation of Real Estate assets may be required.
 
I am not a tax advisor, therefore the information detailed below is high level; be aware, it is not a substitute for professional advice. If you do require detailed advice, my colleague Aaron Maxwell is the person to ask and will be pleased to assist.
 
The three most common strategies are as follows:
(i)  Own the property via an offshore Company (‘SPV’)

(ii) Transfer the properties into personal ownership (or a corporate nominee / bare trustee)

(iii) Transfer the properties into the ownership of Isle of Man trustees of a discretionary trust.

Looking at these in turn …
 
(i) Own the Property via an Offshore Company (SPV) (hopefully Isle of Man)

This is the ‘traditional’ way for UK resident non domiciled persons to hold UK property but residential properties in excess of GBP2m (update; now GBP1m from 2015 and soon to be GBP500K -2016) attract the ATED – Annual Tax on Enveloped Dwellings if they are not rented out. It is this charge that has led to significant reorganisation.
 
Ownership in this way is inheritance tax efficient (‘IHT’). In the event of the death of a non domiciled owner, the UK properties held by the offshore companies will not trigger a charge on death. (UK IHT rate is 40% above nil rate band)
 
From a capital gains tax (CGT) perspective – if the properties have a value in excess of GBP2m there will be CGT on the gain if there is a future sale. The base value will be that at 5 April 2013. Of course, following the autumn statement – it now looks like a CGT charge on residential property held by non residents will be introduced, but we don’t know what shape this will take yet.
 
10 year charge is not relevant.
 
ATED – Annual Tax on Enveloped Dwellings … charge will be payable annually based on a sliding scale as noted below. (2015 Update: Charges now much higher GBP23,350 for GBP2m in 2015 – check HRMC website for current rates)

Property Value

Annual Tax 2013-14

£2,000,001 to £5,000,000

£15,000

£5,000,001 to £10,000,000

£35,000

£10,000,001 to £20,000,000

£70,000

£20,000,001 and over

£140,000

 

There is a 15% SDLT charge on residential properties above £2m which are purchased by companies.

 
(ii) Transfer the properties into personal ownership or corporate nominee /bare trustee

Using a corporate nominee to own the UK property is the mechanism that is increasingly popular. It’s really a privacy, rather than tax strategy as the tax treatment is identical to personal ownership.
 
This is IHT inefficient – as the property is UK situs; there would be a 40% charge on the full property value above the nil rate band. It makes no difference that the ultimate beneficial (UBO) owner is non domiciled. There should be no CGT on the sale of the property as the UBO is non resident for UK tax purposes – as noted above, we now know – following the autumn statement that this will change – but we don’t know how. Of course, for owner occupiers the Principal Primary Residence (‘PPR’) exemption from CGT might exempt them from this.
 
10 year charge is not relevant.
 
ATED – Annual Tax on Enveloped Dwellings … is not relevant.
 
So the main issue with this is the potential IHT charge. Depending on the age of the UBO, this might be mitigated by life insurance.
 
Unwinding existing structures needs to be looked at case by case – usually  a liquidation of the existing SPV can help to avoid stamp duty – but there are other traps depending on the client’s residence, the existence of loans and other issues.
 
(iii) Transfer the properties into the ownership of Isle of Man trustees of a discretionary trust

This third strategy is designed to keep the property separate from the client (privacy) – and avoid the ATED charge. It involves owning the properties directly by Isle of Man trustees (i.e. not beneficially owned by the SPV as in (i) or held as a nominee for the UBO as in (ii).
 
This is IHT efficient – as the property is owned by the trustees; there would be no charge on the death of the UBO. A separate trustee (private trust company) for each property seems like a sensible idea worth consideration.
 
There should be no CGT on the sale of the property as the trustees would be non resident for UK tax purposes – although as noted above, we now know – following the autumn statement that this will change – but we don’t know how.
 
ATED – Annual Tax on Enveloped Dwellings … is not relevant as properties owned by trustees.
 
10 year charge is relevant as the trustees own UK situs property. This wouldn’t be relevant if the property was sold before the 10 year anniversary. Alternatively depending on how the structure is set up the problem might be minimized. Tax Counsel might be useful here.
 
The 10 charge is in substance a replacement for the annual ATED charge.
 
Unwinding existing structures – some initial thoughts …
 
It’s complex, so professional advice will be required. Liquidation of existing SPVs might not trigger an SDLT charge. Thought needs to be put to dealing with 10 year charges.
 
It would also be sensible to check and properly document the position with respect to Disclosure (DOTAS), Preowned Assets (POAT) & Gift with Reservation of Benefit (GROB).
 
photo credit: thinkpanama via photopin cc

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