David Anderson can be contacted by email on 020 3178 3770.
Q. Can I shelter my UK based investment properties from UK Income Tax, Capital Gains Tax and Inheritance Tax?
A. Yes, in certain circumstances through the use of an Offshore Trust. You need to be non-domiciled for UK tax purposes and fulfil a number of other criteria. It is easier if properties are put into the Trust when they are bought rather than transferred in later.
Q. How do I know if I can be non-domiciled?
A. In the UK, a distinction is drawn between residence, ordinary residence and domicile. If you live here you will be resident, and probably ordinarily resident, but you could still be domiciled outside the UK even if you have been living here for years or were even born here. You need specialist advice in this area in order to obtain the necessary confirmation of your non-domiciled status from the Inland Revenue.
Q. Can I be non-domiciled for UK tax purposes if I was born and brought up in the UK but my parents are from another non-UK country?
A. Yes. Particularly if your father has retained his non-domiciled status. If you wish to preserve your non-UK domicile you should at least retain your original passport and links with your home country. This could mean retaining a holiday home in that country, or ensuring that you make frequent visits to that country. You should preserve links with your friends and family in that country and you may for example have the intention to retire back to your home country.
Q. What is a Trust?
A. A Trust is an arrangement by which assets are transferred to Trustees who hold them for named Beneficiaries. The details of the Trust are set out in a Trust Deed. The “Settlor” is the person who sets up the trust i.e. you, the “Trustees” are the people who have the assets registered in their names and the “Beneficiaries” are the people who can benefit from the Trust, say your family.
Q. How would a Trust based in Cyprus help me?
A. A Cyprus International Trust (“CIT”) is a particular kind of Trust available to Settlors and Beneficiaries who are not permanently resident in Cyprus. At least one Trustee must be a Cyprus resident and this could be a professional or an individual e.g. family or friend who lives there. The Trust cannot include Cyprus land.
Q. Why are you suggesting Cyprus?
A. Cypriot law is similar to English law in so far as companies and Trusts are concerned. There are also favourable tax rules since there is no IHT and CGT is only charged on immovable property located in Cyprus. Income tax is only charged on residents of Cyprus. A Trust is only resident in Cyprus for income tax purposes if the Beneficiaries are resident there.
Q. Can I set up a Trust resident in say France or Spain as I have a holiday home there?
A. The legal system in Greek Cyprus is based on the English Legal System and therefore recognises trusts and the taxation system takes account of this. France, Spain and various other European countries do not recognise trusts and those countries tax Trustees as though they own the Trust Fund themselves, or they treat them as nominees and tax the Beneficiaries of the trust.
Q. Does the Trust own the UK property?
A. It can do but it is normally better for the UK land to be owned by an offshore company (which can be a Cypriot company). The Trustees can be directors of the company. The shares in the company are then owned by the Trustees who hold them subject to a CIT.
Q. I understand that a Cypriot company could own the property. What Cypriot tax would have to be paid?
A. Previously it was 4.25% but it is now 10% which is the lowest Corporation Tax rate in the EU.
Q. Can I simply use a company in one of the tax havens and pay no Corporation Tax?
A. That may be the best solution for you and will not stop the shares in the company being held in a CIT. The advantage of a Cypriot company is that you will have the protection of the UK-Cyprus double tax treaty and it will be far easier to show to the Inland Revenue that the structure is bona fide if you are Cypriot domiciled and have made all arrangements to invest in Cyprus from there. Cypriot banks are likely to be more relaxed about mortgage finance if they are lending to a company structure they understand.
Q. I will be the main person dealing with the properties and I live in the UK. Does this cause a problem?
A. To be effective for UK tax purposes the Trust needs to be run from outside the UK. This means that the general administration of the Trust must be carried out abroad and decisions as to the purchase, letting and sale of the property taken abroad. Minutes of Trustees’ meetings should be kept. The Trustees could resolve that you are to deal with the day to day running of the properties but they will take major decisions. It is a good idea to have this documented especially if you appoint family members in Cyprus to be your Trustees.
Q. Is a CIT a Discretionary Trust?
A. Usually yes it will be drafted to be a discretionary trust. This is a trust in which the trustees have a discretion as to whom they pay out money. They have a group of nominated people (the beneficiaries) whom they can benefit and they decide what if anything these people receive. Other kinds of Trust give a Beneficiary an interest say to receive income for life or on marriage but for offshore tax planning normally only discretionary trusts are used. It is a good idea to get the trust deed drawn up by a lawyer to avoid inadvertently setting up the wrong kind of Trust.
Q. I will need to borrow money to buy the property. Who signs the mortgage deed and who signs the contract to buy?
A. All this has to be done by the Offshore Company which owns the land and you will in practice have to explain the structure to the lender. You may have to give a guarantee to the lender as they will have no record of your Trustees. You do not need to explain anything about the Trust to the seller of the land or indeed to any buyer in due course and no mention of the Trust will appear at the Land Registry. Buying the land using an Offshore Company rather than by the Trustees direct shields your other assets from creditors and enhances your privacy.
Q. I do not know yet whether I want to keep the property as an investment and rent it out or sell it on straight away. Does this make any difference?
A. This is very important. The offshore trust route only works if the property is held as an investment. If you are going to sell it on quickly you are likely to be dealing in land and this will be taxed in the UK as a dealing profit whether or not it is owned offshore. If you rent the property out for a couple of years and show it as a capital asset on your balance sheet rather than as stock you will probably be all right. The Trustees will sign the lease and the rent will be paid to them.
Q. How do you get the properties into the names of the offshore Trustees without paying tax in the first place?
A. The easiest way is to buy future investment properties in the names of the offshore Trustees. You will have to transfer some cash to the Trustees at the outset and although this may have some Inheritance Tax implications it will not involve any Capital Gains charge. If you transfer existing properties into the Trust there is likely to be a Capital Gains Tax charge. It may be possible to get round this though this will depend on the facts of each case.
Q. Assuming I am non-UK domiciled with Cypriot resident Trustees can the Trustees sell the property and not pay Capital Gains Tax?
A. Yes. However if you (the “Settlor”) were domiciled here then you would be liable to capital gains tax, which would defeat the whole object of the exercise. This is one reason why the issue of establishing your non-UK domicile is so important.
Q. After the Trustees have sold the property tax free and have the money in a bank account in Cyprus can they pay it to my children in the UK or does the money have to stay in Cyprus?
A. If the money is paid to a beneficiary who is resident and domiciled in the UK then the beneficiary pays Capital Gains Tax on the money received. If the children are not domiciled in the UK the money can be paid to them free of any Capital Gains Tax liability. Of course if you have relatives abroad they could be the beneficiaries and no tax would be payable because they are not resident or domiciled here.
Q. What about income tax?
A. Income earned in the UK will be liable to UK withholding tax which is generally at the rate of 22%. The Offshore Company could register as an offshore landlord with the UK Revenue and will normally be given permission to receive the rent gross and this would then be accounted for in an annual tax return to the UK Revenue. There would be no local tax charge in Cyprus if you are not resident there. If the Cypriot company is resident there, it will pay 10% income tax.
Q. When could I personally receive an income tax bill in the UK at higher rates, as I am a 40% taxpayer?
A. If you or your spouse could benefit from the Trust you may be personally taxable as though this was your income. This could apply to rental from the property as well as otherwise tax free income from say bank interest paid in Cyprus. It is usually possible to avoid you having any higher rate liability in the UK if the Trust structure is set up properly.
Q. If I exclude my spouse and me but my family outside UK and Cyprus are the Beneficiaries under the Trust will this work for avoiding income tax on me personally?
A. Yes it will work for UK tax purposes but there may be a tax liability in the country in which the Beneficiaries are resident. You should be aware that there are UK anti avoidance laws which are likely to apply if say your family made a gift of the money back to you.
Q. How does this affect my Inheritance Tax position?
A. For Inheritance Tax purposes you will no longer own the properties. They will be owned by the Offshore Company the shares of which are owned in turn by the Trustees. It is important that a Discretionary Trust (such as a CIT) is used so that no one has an actual right to the properties or their income. Everything rests with the Cypriot Trustees discretion.
Q. So on my death, no Inheritance Tax is payable?
A. Broadly yes. If you are not domiciled in the UK (or deemed domiciled here) then the UK Inland Revenue will only tax you to IHT on assets you own which are located in the UK. You will need to ensure that you are not deemed domiciled for UK IHT purposes by living here for 17 out of the last 20 years.
Q. Anything else I need to know?
A. Yes be very careful and have everything checked by a specialist tax adviser. The rules are technical and small matters of detail in each particular case can make the difference between paying tax and legally avoiding it.
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