By Fletcher Day
Background: Over the past 10 years it has been popular for non-domiciled clients to purchase residential and commercial properties in the UK through an offshore corporate entity. This has been particularly popular with clients domiciled in Africa, Asia and the Middle East who have chosen to set up these corporate entities in the BVI, Seychelles or Jersey as single purpose vehicles through which to own and manage their properties.
Those properties either form part of their investment portfolio or a main residence to serve as a family home, especially if their children attend school in the UK. Historically, the main reason for doing this was for inheritance tax saving purposes, although some clients did like the fact that they could retain some element of privacy as to the nature and extent of their property assets held in the UK.
How properties are taxed
Fast track to 2012 and HMRC overhauled the Stamp Duty (SDLT) rules for corporate entities owning residential properties with a value of more than £2 million with the introduction of ATED, Annual Tax for Enveloped Dwellings.
At that time, this only affected High Net Worth clients. However, since 1 April 2016, the value limit has been significantly reduced to widen the class of corporate entity owned residential properties falling within the value threshold.
By way of example, the current rate of ATED (as at June/July 2017) is £3,500 per annum for a property value of more than £500,000 but not more than Â£1 million, and £7,050 for a property value of more than £1 million but not more than £2 million. If you are considering owning your property for several years, the tax burden could be significant.
(This last change aligns itself with the amount payable by corporate entities for Stamp Duty on residential property purchases valued in excess of £500,000, which attracts a 15% rate of stamp duty.)
Should I de-envelope?
Offshore clients who are aware of these changes have enquired of us as to whether '˜De-Enveloping' is a possible option for them. As individuals, they have also had to consider the introduction on 1 April 2016 of the additional surcharge of 3% stamp duty on property purchases where the property is not their main dwelling.
They have therefore had to consider the most tax efficient way to own their UK home or portfolio and the tax implications of future purchases. This is a lot to take in for experienced overseas property investor clients that keep up with the tax changes in the UK, but what about those who do not?
For those corporate entities and individuals who are unaware of the changes, or have ignored the fact that their properties have now fallen with the ATED threshold, they will need to carefully consider their options with their tax and legal advisors and weigh up the lesser of two evils; do they pay ATED on an annual basis, along with the continued expense of running an offshore company or do they strip back the corporate veil and de-envelope their existing assets by transferring them from their offshore companies to their individual names?
What should I do next?
There is no emphatic and clear answer here. Each case must be considered with their specific set of circumstances and facts. Ultimately, clients always want to make savings, but they have to decide if de-enveloping is the right option for them without opening other potential avenues of attracting a stamp duty payment to HMRC.
There are triggers that may incur stamp duty that may not be overcome. For example, if the property is subject to a third-party mortgage and the shareholders redeem this either before or simultaneously with the transfer of property to the shareholders' personal names, stamp duty will be payable.
If there is no third-party loan, the de-enveloping process may be possible without any stamp duty payable at all, which will negate the ongoing ATED liability or the need for the corporate entity, thus saving ongoing costs.
For more information, please contact us
Moving forward, de-enveloping is a potential minefield and is an issue that offshore company owners will need to consider with expert advice.
For more information about how we can help you to understand and mitigate the tax burden on your offshore property investments, please contact Jude Fletcher, Head of Residential Property.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.