Owning UK property in an offshore company

Until recently UK resident and non-domiciled individuals investing in UK property would have been advised to use an offshore company to hold the title. This not only allowed the owner to avoid the 40% UK inheritance Tax (IHT) but also offered the potential for future buyers to avoid stamp duty (SDLT) by acquiring the company shares rather than property title to the UK property. Perhaps not surprisingly the UK government decided to legislate in this year's Budget to prevent this loss of revenue from residential properties (commercial properties are unaffected).

The draft legislation published on 11th December 2012 outlines the new taxes and charges which will have to be paid by Non-Natural Persons (NNP) owning property in the UK. There is already a new punitive rate of Stamp Duty (SDLT) where a NNP acquires a UK residential property for more than f2m (15% instead of 7%). And from April 2013, NNPs owning properties valued in excess of £2m will also be subject to an annual charge (called the Annual Residential Property Tax or ARPT). The charge will be £15,000 for properties valued between £2m and £5m, £35,000 for properties valued between £5m and £20m and £140,000 thereafter.

Finally, the government will extend the Capital Gains Tax (CGT) regime and charge tax (at 28%) when residential properties held into by a NNP are sold. It was announced earlier this week however that it will be possible to rebase the property for CGT calculation purposes as of April 2013.

The good news is that there are exemptions from the above taxes. The main one of these is that corporate trustees are not subject to these new taxes. If the property is held by a company and if this company is held by a trust, the company will be able to gift the property to the trust without paying any SDLT and without CGT applying. Moreover, ownership of the property by a trust would allow the trustees to claim main residence relief (PPR relief) and therefore avoid capital gains tax on any subsequent re-sale. Care needs to be taken however if the property is mortgaged.

Additional transition measures will be announced but you would have expected this to be done by now. It's probably better to act now than wait for some relief that will not come and end up being caught by this new legislation.