Offshore Companies buying UK Real Estate

Please note that tax and property law are complex subjects and you should not rely on this article without professional advice on the facts of your case

UK property and in particular Central London property, both residential and commercial has always been popular with investors. The recent economic slow down has only driven the increased popularity in the UK property market with investors wanting to snap up a bargain, take advantage of the prosperous UK rental market and potential future growth of the market. Many buyers are now purchasing property in the name of offshore companies and the main reasons are given below.

Brief outline of how real estate works in the UK

• Types of property – There are two different types of interest in property.

  • Freehold – this is effectively absolute ownership of the land, there are no time constraints imposed on ownership.
  • Leasehold – this is a time limited interest in land with rights of possession and use of the land but not “ultimate” ownership. Ultimate ownership remains with the freehold owner. As a leasehold interest is for a specified period of time, a lease is a diminishing asset.

• The buying process – There are three distinct stages to buying property in the UK: -

  • Pre-contract – All the necessary searches and enquiries, including enquiries of the managing agent where the property is leasehold, are requested or raised. If all search results and replies to enquiries are satisfactory then exchange of contracts can take place.
  • Exchange – On exchange of contracts the seller is legally bound to sell and the buyer is legally bound to buy the property. The buyer usually pays a 10% deposit on exchange.
  • Completion – On completion the buyer pays the remaining 90% balance. In addition to the completion monies sufficient money will also need to available to pay the Stamp Duty Land Tax due, which must be paid within 30 days of the completion date. An application is then submitted to HM Land Registry to register the buyer as the new legal owner. If the property is leasehold there will also be other additional requirements, which can include the transfer of any company shares and the notice of transfer and charge.

Offshore companies – Incorporation and management

There are various possible offshore jurisdictions commonly used to hold UK property, these include Seychelles or BVI registered companies.

Incorporation - There are a number of key factors which should be borne in mind when determining the jurisdiction for your offshore company:-

1. Tax – Provided the company is not trading locally it should not be required to pay local taxes.
2. Administration – There is a distinction between the country of incorporation and the country in which the company is administered. It may for example be possible for the company to be incorporated in the BVI of Cayman Islands but administered and controlled elsewhere, for example the Channel Islands or Switzerland.
3. Security and stability – Many offshore jurisdictions have entered into tax information sharing agreements with the UK. In principle this should pose no problem though it is open to you to use a company in a jurisdiction which does not have an exchange of information treaty with the UK.
4. Anonymity and confidentiality – In most jurisdictions the identity of the ultimate beneficiaries must be disclosed, usually for anti-money laundering purposes. However, in some jurisdictions this information is not made public but kept confidential. This is the case for example with Seychelles companies.
5. Acceptability to third parties – Asset transactions involving offshore companies are becoming more and more common. As such most lenders and commercial vendors have no problems dealing with offshore companies.

Management – As with UK registered companies, offshore companies must also file documents and undertake annual ‘secretarial’ tasks. There are companies, including company formation agents who will, at a cost, deal with such administrative tasks. It is important that such requirements are dealt with diligently or this could impact upon the assets held by the company.

It is possible for the shares in the offshore company to be owned by a trust vehicle which does not have to be located in the same jurisdiction as the offshore company. This provides an extra level of confidentiality and means that the ultimate beneficial owners do not have to be identified on any company shareholder list. It also provides additional tax planning opportunities.

Tax implications for offshore buyers

CGT – Capital Gains Tax is payable by the seller on any gain made - difference between the price paid when purchasing the property and the price paid when selling. Companies pay CGT at the applicable corporation rate for the company. However where the owner is a company not resident or domiciled in the UK then there is no CGT payable. There may however be gains tax payable in the country of residence.

Income Tax - The UK rental income of landlords who are resident outside the UK is taxable in the UK as it is UK source (any double tax treaty will generally give the UK this right to tax). When the properties are held by a company, the income will be taxable only at the basic rate of income tax (20%) unless the company is trading in the UK in which case it may be subject to UK corporation tax.

For UK tax purposes, each landlord will be classed as a “Non-Resident Landlord”. The consequence of this is that an agent should be appointed to collect the rental and they should deduct the applicable tax before sending the funds to the landlord. If no agent is appointed, the tenant will have to deduct this tax before transferring the funds to the landlord. The agent or the tenant will have to calculate the tax due after deducting expenditure, which is incurred wholly and exclusively for the purposes of the rental business and is not of a 'capital' nature. For example - interest payments on loans, insurance premiums, council tax and repair costs.

It is possible for non-UK resident landlords to apply to HMRC to receive their rental income gross. Such an application can be made if the landlord can show that either: their UK tax affairs are up to date; they have never had any UK tax obligations; or they do not expect to be liable to UK tax in the tax year the application is made.

Even if the application is accepted by HMRC this does not mean that the income is exempt from UK tax and an annual tax return would still be required. HMRC will inform the landlord and the letting agent/tenant if they approve the application. The agent/tenant would then be able to pay the rent gross to the landlord.

SDLT – Any transfer of land, for consideration or value, will attract Stamp Duty Land Tax. The current thresholds for Stamp Duty Land Tax vary depending on the type of property. There are three different categories: residential, commercial and mixed use. It may be worth considering mixed use properties are they are not subject to the new 5% tax band which was implemented recently in respect of purely residential property.

Types of Property	Purchase Price	Stamp Duty Land Tax rates
Residential / Commercial / Mixed Use	Up to £150,000	Zero
Residential / Commercial / Mixed Use	Over £150,000 to £250,000	1%
Residential / Commercial / Mixed Use	Over £250,000 to £500,000	3%
Residential / Commercial / Mixed Use	Over £500,000	4%
Residential only	Over £1,000,000	5%

Where a company owns property it may be possible to either on the purchase or on any future sale of the property to buy the property owning company and opposed to the property. Stamp Duty Land Tax will not be payable as the property does not change ownership but rather ownership of the company changes, this means there is no transfer of land for Stamp Duty Land Tax purposes. This is usually only possible where the owning company is a single asset company. One point you will need to consider is the additional work and due diligence that must be undertaken not only on the property but also the company. From 4 July 2011 HMRC will require the purchaser to supply a ‘unique identifier’ on the Stamp Duty Land Tax return. For individuals this will be their National Insurance Number and date of birth, for companies this will be its company registration number or VAT registration number. If the purchaser does not have any of these references a tax reference should be given, if one. If the purchaser does not have one of the required unique identifiers then HMRC must be contacted in order to obtain a reference. HMRC are due to publish more information closer to 4 July.

VAT – Value Added Tax, is a tax on the supply of goods and services made by a taxable person. When purchasing a property you should establish the VAT status of the building. The sale of freehold and leasehold commercial property is exempt from VAT subject to an option exercisable by the seller to charge VAT. Offshore companies can register for UK VAT and reclaim VAT paid.

IHT – Inheritance Tax, property owned by an offshore company is not subject to IHT. However, depending on the tax laws of the country of residence for the company may impose duties on interests held in a company by an individual on death.

If you would like further information or advice on using offshore companies to purchase UK property please contact Katie Mear (katie.mear@sykesanderson.com) or Christopher Sykes (chris.sykes@sykesanderson.com)

About us

Our expertise in property and international tax goes back more than 20 years. Our team is led on the property side by Christopher Sykes, the author of a Law Society book on leasehold property, and on the tax side by David Anderson, a solicitor, chartered tax adviser and an international tax specialist with numerous published articles in technical journals and national newspapers.

June 2011

Katie Mear
Property solicitor
Sykes Anderson LLP
9 Devonshire Square
London EC2M 4YF

www.sykesanderson.com

Telephone + 44 20 3178 3770

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