Changes to UK property taxes to take effect in April
People have three months to change offshore ownership of British real estate to avoid fees
As expected the draft legislation was published on December 11 outlining the new taxes and charges, which will have to be paid by offshore companies that own property in Britain. There have been some significant changes from the consultation paper, which was circulated last year. There is still a chance that there will be further changes before publication of the actual legislation in April, but no further surprises are expected. Property owners should plan accordingly.
The main features of the proposed legislation will affect properties that either are, or will become, valued at more than £2 million (HK$25 million) and owned by "non-natural persons". This is a reference to companies, partnerships, funds and the like.
Previously many buyers of British property have chosen to register their real estate in the name of an offshore company to avoid British inheritance tax, which would otherwise be charged at 40 per cent of the property's value, after allowances, upon the owner's death. As a company never dies, the property becomes the shares of the company, which is a non-British asset and therefore not subject to Britain's inheritance tax as long as the owner is not domiciled in Britain.
Owners living in Britain are subject to inheritance tax on their worldwide assets, so the tax catches the whole estate. Many British expatriates will remain domiciled in Britain despite living abroad for many years. Offshore company ownership also facilitated the avoidance of stamp duty 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 Britain unaltered. This would mean the incoming purchaser avoided stamp duty and allowed the seller to charge more or made it easier to sell as it was cheaper for the buyer, or a bit of both.
Offshore companies that own property worth more than £2 million will now be faced with: an annual charge of a minimum of £15,000 and a maximum of £140,000, depending on the value of the real estate. This is the annual residential property tax.
Capital gains tax, which was previously not paid by non-Britain resident sellers whether they were individuals or companies, will be charged on the resale of a property a rate of 28 per cent.
New offshore company purchasers will pay stamp duty at 15 per cent, while people will pay stamp duty at the bargain rate of only 7 per cent.
A transfer of property to an individual or individuals (presumably the beneficial owner or owners of the company) who own the company will avoid these charges. But it will expose those individuals to British inheritance tax at 40 per cent, so this is an option that will appeal only to the young and healthy. This will not be a sensible option for anyone else.
It is possible to cover the liability through life insurance, but actuaries of solvent life insurance companies have got it right. You will pay more than you receive, so this is an expensive option that normally appeals most to life insurance salespeople.
The good news is that there are exemptions from the above taxes. The main one is that corporate trustees are not subject to these new taxes.
For many, transferring property already owned by an offshore company to an offshore trust will be the most cost-effective way forward. For new buyers making the purchase by an offshore trust will be best.
Luckily, there has been one change to the original proposals. Capital gains tax will be based on the difference between the sale price and the presumed value in April this year.
Trustees who hold assets in Britain are subject to the 10-year anniversary charge, which could be as much as 6 per cent of the value of the property. But this charge is only made on the equity on the property. The equity on a real estate asset is the difference between the property value and any loans against it.
It is therefore recommended that the properties be laden with debt, whether that be loans from a bank or from loans injected by the settlor or other people associated with the trust.
Before April this year, properties can still be transferred to a new structure without capital gains tax applying. After that, tax consequences are likely and the annual charge will start biting.
In summary, there is a brief window when action can be taken at minimal cost to avoid future capital gains tax and the annual residential property tax so urgent action is required.
Howard Bilton is a UK and Gibraltar barrister, professor of law at Thomas Jefferson School of Law, San Diego and chairman of The Sovereign Group