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SCMP Reporter

INVESTORS in British property beware: a court ruling in July has made a tax minefield out of one popular method of managing your property.

 Financial advisers in Hong Kong have often recommended that residents buy properties in Britain through offshore companies as a way of protecting the investment against inheritance tax.

 Their reasoning has been that by owning the property through a British Virgin Islands registered company, the assets would not be held in Britain and they would not be deemed liable for inheritance tax on the death of the owner.

 Because many Hong Kong buyers sought property in Britain as an investment, the issue of property tax could be a key consideration in the way the property was managed.

 Using an offshore company still protects the property against inheritance tax, but a court ruling on July 14 (Regina vs Dimsey and Allen) now leaves the investment potentially open to income tax.

 Should the owner choose to live in the property at some time, it would be deemed a taxable benefit, and taxed as income tax in Britain.

 'This is serious dynamite,' said Peter Vaines, author of Tax For Overseas Domiciliaries, of the ruling. 'It will have enormous reverberations.'  The ruling decided in favour of an Inland Revenue assertion that if an individual effectively controlled the offshore company that owned the property, he could be categorised as a 'shadow director' of the company.

 As such, he would count as an employee of the company and should he choose to live in the house, it then would be considered a benefit.

 Mr Vaines said that to calculate the tax payable, in broad terms, Inland Revenue would take the benefit as equal to 6.25 per cent of the property, but would ignore the first GBP75,000 (about HK$927,839).

 This meant that for a house costing GBP1 million, the shadow director could have to pay as much as GBP20,000 a year in tax.

 He said the ruling meant many people would have to radically change their approach to property investment in Britain.

 'What you have to do is to avoid having a company at all,' he said.

 Doris Lau, senior vice-president of HSBC Trustees, said she had seen many Hong Kong investors use offshore companies to own British properties, but she would tend to advise against it - particularly following the July ruling.

 'I don't think we would allow this situation. It's not effective planning for our customers,' she said.

 Mr Vaines said alternatives existed for overseas buyers who wanted to keep their property investment tax efficient but retain the option to live in it at some point.

 Owners could hold the property in their own name, leaving them at risk of inheritance tax, or leave the property to their husband or wife in their will in order to take advantage of spousal exemptions.

 It also was possible, although a more complex solution, to borrow against the property and deposit the funds in an offshore account, or to set up a trust structure of some type.



Tax worry for UK property investors