Caribbean companies holding high value residential property in the UK

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1 December 2012 Caribbean companies holding high value residential property in the UK During the 2012 UK budget, the UK government announced changes to the rate of Stamp Duty Land Tax ( SDLT ) on UK residential property acquired after 21 March 2012, valued at more than 2m and held by an ownership structure including nonnatural persons such as companies, collective investment schemes (including unit trusts) and partnerships in which a non-natural person is a partner. These changes were enacted immediately by the 2012 Finance Act, but the UK Chancellor also announced the potential introduction in April 2013 of an annual charge for non-natural persons on property held and valued at more than 2m. The combination of the increased SDLT rates and the proposed annual charge are obviously intended as disincentives to the creation or continuation of such ownership structures. Those contemplating the creation of such structures will have time to consider their position. For those with existing ownership structures, the time to act is running out but against this is set the uncertainty of precisely how, and perhaps whether, the annual charges will be implemented. What is the current position? The changes enacted by the 2012 Finance Act are: - creation of a 7% rate of SDLT for acquisitions of UK residential property where the consideration exceeds 2m; - creation of a 15% rate of SDLT for acquisitions of UK residential property where the consideration exceeds 2m by non-natural persons; and - amendments and clarifications on the sub-sale rules on the assignment of an option in respect of any schemes seeking to avoid SDLT. The proposed changes for inclusion in the 2013 Finance Bill are as follows: - a recurring annual charge on UK residential property where the value exceeds 2m and it is held by non-natural persons, expected to be 15,000 for properties valued between 2-5m, 35,000 if valued between 5-10m, 70,000 if valued between 10-20m and 140,000 if valued at more than 20m; - non-uk resident non-natural persons to be liable for Capital Gains Tax ( CGT ) on gains arising from the transfer of UK residential property valued at more than 2m; and

2 - a general anti-abuse rule to tackle artificial and abusive tax avoidance schemes, particularly in relation to SDLT. On 31 May 2012, the UK s HM Treasury commenced formal consultation on these proposed changes entitled Ensuring the fair taxation of residential property transactions. The consultation period ended on 23 August 2012 but there remains a lot of uncertainty over the precise details of the 2013 Finance Bill. This uncertainty is unlikely to be lifted until the draft legislation is released as it ensures that those affected do not act ahead of time. The draft 2013 Finance Bill will be published on 11 December 2012 and it is now unlikely that a public announcement on the outcome of the consultation will be made ahead of this. What are the implications? The implications for increased liability to the UK s HM Revenue & Customs tax authority for SDLT are abundantly clear. What is perhaps less obvious is that this increased SDLT will apply equally to UK and foreign registered companies that hold UK properties valued at more than 2m. It is likely that, as a popular region for offshore ownership structures, there will be a significant number of companies registered in the Caribbean holding such high value UK property. Those affected will have to consider, amongst other things, the existing ownership structure, the increased SDLT rates, the potential for liability towards annual charges, CGT and inheritance tax ( IHT ) implications from making any changes to the ownership structure. Affected parties face a short period of time before the enactment of the 2013 Finance Act within which they will also need to consider valuation of affected property, update corporate records and registers, seek independent tax, legal, restructuring and other professional advice. What are the options? The options will, of course, be dependent upon the circumstances on a case by case basis and upon the actual provisions following the enactment of the 2013 Finance Act. Affected parties will need to seek advice on the options available to them, the implications in their circumstances and tax efficient organisation of their financial affairs, which might include some or all of the following: - do nothing to affect the ownership structure. If the property in question is owned by a non-natural person then this is likely to result in incurring and paying annual charges, but, on balance, this may be preferable in the circumstances for those who would otherwise face more significant CGT or IHT. - dispose of the property before the provisions of the 2013 Finance Act take effect. The purchaser will be responsible for SDLT, the annual charge will be avoided and it may be the case that CGT will be mitigated or avoided depending upon the circumstances of the transaction and the corporate structure within which the property is presently held. - transfer the property to an individual or individuals (e.g. the beneficial owner(s) of the company) before the provisions of the 2013 Finance Act take effect. The individual(s) will pay SDLT at 7%, but the annual charge will be avoided. Advice will be required on the CGT implications for such a transfer and the individual(s) concerned may need to consider efficient IHT planning. - dissolution of a corporate entity holding the property. Depending on the circumstances, this might be an appropriate option but extreme

3 care needs to be taken in adopting this approach, advice needs to be sought in the relevant jurisdiction(s) and this approach may not be palatable for a number of reasons. This is explored further from a British Virgin Islands ( BVI ) and a Cayman Islands perspective in the section below. - solvent voluntary liquidation of a corporate entity holding the property with the intention that the property be distributed in specie. This option brings finality to the company and is explored from BVI and Cayman Islands perspectives in more detail in the section below. - insolvent liquidation of a corporate entity holding the property if its liabilities exceed its assets and/or it is unable to meet its liabilities as and when they fall due. Depending on the jurisdiction in question, this process may commence as a result of voluntary action by shareholders or following an application to the c o u r t. T h e r e a r e n u m e r o u s o t h e r considerations in this regard and legal and professional insolvency advice should be sought by the company and its directors in the event that it is considered that the corporate entity is insolvent. Dissolution of companies registered in the BVI and the Cayman Islands This may seem an attractive proposition due to its simplicity, but this could be viewed as an irresponsible approach to the end of the life of a registered company and there are a number of unsatisfactory implications for such an approach. Different jurisdictions will have different rules on dissolution of registered companies and the effect of this on unrealised assets. Advice should be sought in the relevant jurisdiction(s). BVI In the BVI, a company can be struck off if the Registrar is satisfied that the company has ceased trading. The company may also be struck off if it no longer has a registered agent or if it fails to pay its annual fees. The latter will of course involve unpaid liabilities that, in the case of the annual fees, will continue to accrue even after strike off. In addition, nonpayment of fees represents a breach of statutory duty and so deliberate non-payment is not an appropriate step, nor is it something that we recommend. Once a company has been struck off for 7 years it can then be dissolved. Once dissolved, any unrealised assets vest in the Crown. Therefore, if this route is adopted, it will be very important to ensure that all company assets are properly identified and legally distributed beforehand. A dissolved company may be restored at any time within 10 years; the effect is to reinstate the company as if it had never been dissolved and the Crown will be required to account to the company for assets that vested upon dissolution. It may be the case that liabilities are incurred during the period following striking off and in the 10 years after dissolution. Cayman Islands In the Cayman Islands, the Registrar may strike off a company if there is reasonable cause to believe that a company is not carrying on business or is not in operation. In these circumstances, the company is considered defunct and is thereupon dissolved following strike off. As is the case with the BVI, nonpayment of liabilities represents a breach of statutory duty. Deliberate non-payment is not appropriate, nor is it recommended.

4 The company, a creditor or a member may apply to court to reinstate a company dissolved in this manner within a period of two years after dissolution. This can be extended up to 10 years after dissolution if allowed by the Governor in Cabinet. To obtain a restoration order, it will be necessary to satisfy the court that either the company was still carrying on a business or operation at the time of being struck off; or that it is a just remedy. Outstanding fees and penalties will also need to be paid. The Cayman Islands companies law provides that striking off and dissolving the company does not affect the liability of directors or members, so any liability they have will continue and can be enforced against them as if the company had not been dissolved. As in BVI, the assets of a dissolved company pass, bona vacantia, to the Crown so assets should be identified and properly distributed prior to allowing the company to be dissolved. UK Land Registry When dealing with high value UK residential property, as envisaged by this article, the UK Land Registry may, once informed of dissolution of the proprietor of a registered estate following striking off, enter notice of that fact in the register and that it belongs to the Crown. Solvent liquidation Depending on the circumstances and the legislation in the relevant jurisdiction, this approach is an option to give finality and an orderly wind down of the company at the hands of a professional. The intention would be for a distribution in specie of the property to the shareholders in short order. Due to the nature of the high value property asset in question and the complexities associated with it, it will be necessary to appoint an experienced insolvency practitioner with the necessary skills to administer the estate. The process in the BVI and the Cayman Islands is explored briefly in turn below. BVI The process can be initiated either by the directors or shareholders passing a resolution, depending on the circumstances of the company and its constitutional arrangements as set out in its Memorandum and Articles of Association. There are two key steps to be taken by the directors: - Prepare a declaration of solvency in which the directors confirm the ability of the company to pay it debts as they fall due; and - Approve a liquidation plan, dealing with the proposed voluntary liquidation. The powers of the directors cease from the date of passing of the resolution but they remain in office. Whilst the liquidator does not need to be a licensed insolvency practitioner, recent amendments to the BVI Business Companies Act, 2004 (the BC Act ) have extended restrictions on who may act including those who have been directors or senior management in respect of the company in the past 2 years. The duration of the liquidation is dependant upon the nature of any assets and liabilities existing at the time of the Liquidator s appointment. It will be necessary to advertise the appointment in the BVI and, following amendments to the BC Act, in the company s principal place of business if that is outside of the BVI. At the completion of the liquidation, the company is dissolved and struck from the register of companies. It is not unrealistic for

5 this entire process to take up to 45 days or longer and this timescale should be borne in mind given the fast approaching enactment of the 2013 Finance Bill. Cayman Islands Subject to the Memorandum and Articles of Association, a company can enter voluntary liquidation following a special resolution by its shareholders. The directors are required to swear a declaration of solvency within 28 days of appointing a liquidator. Like the BVI, the liquidator does not need to be an insolvency practitioner, but the Cayman Islands does differ from the BVI in that the liquidator may be a director, the company's accountant or another appropriate party. UK Land Registry A distribution in specie by a liquidator can be undertaken without triggering a liability for SDLT. This requires that the ownership of the property be distributed in the same proportions as the shareholding of the company. Accordingly, it may not be practical for all situations but in circumstances of a small number of shareholders, particularly family members, this option does present an advantage over a distribution by the directors as a prelude to dissolution. In order to amend the register without incurring SDLT, a liquidator of a BVI or Cayman Islands company would be required to make an application to the UK Land Registry to register a distribution in specie in form AP1 and must be accompanied by appropriate evidence of the liquidation and of its effect. The liquidator will need to file: - certified copies of documents relied upon; and - the written opinion of a lawyer qualified to practice company law in the country of incorporation of the company as to the nature and effect of the proceedings on the company and as to the powers of the liquidator or other person representing the company, including the power to execute documents on behalf of the company. Relevant case Zolfo Cooper has previously been called upon to assist in connection with a BVI registered company that held an apartment complex in Monaco. The complex was valued in excess of US$200m and it was intended that the apartments and a commercial space comprised within it would be removed from the corporate structure. Working closely with the legal advisers we provided advice and assistance to the directors and shareholders in respect of: - a review of the Memorandum and Articles of Association of the company; - directors and shareholders entering into a distribution agreement which governed the circumstances and terms under which the property was to be distributed in specie to shareholders; - the preparation of resolutions and notices of the appointment of a voluntary liquidator, the liquidation plan and declaration of solvency in respect of the company; and - satisfying the requirements of a notary in Monaco, including obtaining a BVI legal opinion, in order to register an Acte de Partage at the Monaco land registry to record the distribution.

6 The company was dissolved within 2 months following the distribution and conclusion of the liquidation. Conclusion Although informal closure followed by dissolution may appear, superficially, a cheaper solution than voluntary liquidation, a voluntary liquidation process can achieve a distribution in specie of the high value property in question without triggering an SDLT liability. In addition, proceeding via a dissolution would require extreme caution, could give rise to greater uncertainty and personal liability and any prima facie cost saving would have to be offset against the additional cost of seeking sufficient legal and other advice. Voluntary liquidation is a responsible approach to the issue in question that should be administered by experienced professionals to ensure that any high value asset is distributed properly. There are a lot of unknowns, a lot of options and many implications to be considered by potentially affected parties. Advice will be required from a number of professionals and there will be a number of practical matters to address, such as ensuring that public records are up to date, time taken to obtain assistance from professionals and complete processes, whether by professionals or by government bodies, and there is not much time to achieve this. It would be a dangerous approach to be doing nothing at this stage. The matters considered briefly in this article can be explored now as part of the formation of a strategy to ensure that potentially affected parties have their tax efficient affairs in order before the end of the current UK tax year. Confidential Discussion? Should you have any matters which you would like to discuss, or need any more information about the topic dealt with in this article, please contact Eleanor Fisher or Stuart Mackellar. Stuart Mackellar Managing Partner Zolfo Cooper P.O. Box 4571, 2nd Floor Palm Grove House, Tortola British Virgin Islands T: F: E: stuart.mackellar@zolfocooper.vg Eleanor Fisher Partner Zolfo Cooper Postal address: Suite 776, 10 Market Street Camana Bay, Grand Cayman Cayman Islands KY T: F: E: eleanor.fisher@zolfocooper.ky This publication does not constitute professional advice. Whilst every care has been taken in its preparation please note that it is intended as general guidance only. Before acting upon any information provided within this publication you should consult with a suitably qualified professional advisor. Zolfo Cooper accepts no liability for any loss sustained by any person who chooses to rely on this publication. Copyright Zolfo Cooper (BVI) Limited All rights reserved.