TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES. February 2013

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1 TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES February 2013

2 SPEECHLY BIRCHAM AT A GLANCE 90 partner full service law firm with main office in the City of London Offices in Zurich and Luxembourg Sector specialisations include private wealth and financial services Private Client approximately 25% One of the seven leading firms in the world for international private client work (Chambers Global) Tax driven work historically at the core of Private Client but in past decade diversified to provide full service integrated offering Wide range of private clients catered for both domestically in the UK and internationally: from the affluent to billionaire family offices

3 OVERVIEW Background to the use of property structures Summary of the Government s proposals - as updated and revised in the Government s response to the consultation published on 11 December 2012 and the draft legislation published then and on 31 January 2013 Reminder of the current tax regime Assessment of the impact of the proposed tax changes Options for existing structures Options for new acquisitions Next steps

4 TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES BACKGROUND Common structures for high value UK residential properties held by non-uk domiciliaries - Offshore companies - Offshore trusts with underlying company - Double trust arrangements - Foundations Reasons for structuring - Stamp duty land tax (SDLT)? - Inheritance tax (IHT) protection - Confidentiality - Limited liability - Succession planning

5 TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES ORIGINAL PROPOSALS BUDGET 2012 ORIGINAL PROPOSALS TO TAKE EFFECT FROM APRIL 2013 Annual tax charges to catch 2M + dwellings held by: - Companies - Partnerships with corporate members - Collective investment schemes (CIS) Band 2M- 5M 5M- 10M 10M- 20M Annual charge 15,000 p.a 35,000 p.a 70,000 p.a 20M+ 140,000 p.a Extended CGT regime to catch disposals of 2M + dwellings held by: - The above entities + offshore trusts - Expected rate of tax 28% - Expected to catch historic latent gains Extended CGT regime also to catch disposals of shares in companies holding such dwellings Coupled with immediate (March 2012) introduction of new SDLT rates: - 7% for residential properties of 2m+ - 15% SDLT if acquired by a company, partnership with corporate member or CIS

6 UK TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES REVISED PROPOSALS December 2012 revisions to CGT proposals Extension of CGT will only catch post-5 April 2013 growth - Dwellings held by offshore companies effectively rebased on 6 April CGT rate confirmed at 28% (with tapering for properties sold for just over 2m to avoid market distortion) Extension of CGT will NOT apply to offshore trusts - To be limited to offshore companies, partnerships with corporate members and CISs holding 2M + dwellings Extended CGT regime will NOT catch disposals of shares in companies holding such dwellings

7 UK TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES REVISED PROPOSALS December 2012 reliefs for genuine property businesses Significant exemptions from the annual tax charge (or ARPT ) for: - Properties let commercially to unconnected persons - Properties used for a trade, e.g. hotels and B&Bs - Properties acquired for development - Other genuine property businesses, including enveloped farmhouses Relief will need to be claimed by submitting an APRT return to HMRC Parallel reliefs from the extension of CGT for these genuine property businesses Significant exclusion (though effective only from the date of Royal Assent of FA 2013) from the 15% SDLT rate for acquisitions by companies for genuine property businesses

8 UK TAX ATTACK ON UK RESIDENTIAL PROPERTY STRUCTURES CGT FURTHER DETAILS IN THE DRAFT LEGISLATION 31 January 2013 Draft CGT legislation published - largely as anticipated, but with some nuances Extended CGT regime will only catch ARPT related gains Automatic rebasing to 6 April 2013 (possible to elect out of rebasing, which may be desirable in the some scenarios) Growth prior to 6 April 2013 or which is not ARPT related subject to the ordinary CGT regime

9 MEET HASSAN AND ALAIN Hassan Non-UK domiciled, non-uk resident MOTIVATIONS? IHT protection Alain Non-UK domiciled, UK resident CGT protection OFFSHORE COMPANY ARPT protection OFFSHORE COMPANY Confidentiality Limited liability 25m property 2.5m property

10 NON-UK DOMICILED, NON-UK RESIDENT SHAREHOLDER COMPANY STRUCTURE Hassan s townhouse Current tax regime IHT protection CGT protection For as long as nonresident. OFFSHORE COMPANY ARPT protection Confidentiality N/A Limited liability 25m property

11 NON-UK DOMICILED, NON-UK RESIDENT SHAREHOLDER COMPANY STRUCTURE Impact of proposed new tax regime post 1 April 2013 IHT protection CGT protection X Growth from 6 April 2013 caught. OFFSHORE COMPANY ARPT protection Confidentiality X 140,000 per annum as above 20m. Limited liability 25m property

12 NON-UK DOMICILED, NON-UK RESIDENT SETTLOR TRUST/COMPANY STRUCTURE Hassan s country house Current tax position IHT protection TRUST CGT protection ARPT protection N/A For as long as nonresident. OFFSHORE COMPANY Confidentiality Limited liability 15m property

13 NON-UK DOMICILED, NON-UK RESIDENT SETTLOR TRUST/COMPANY STRUCTURE Impact of proposed new regime post 1 April 2013 IHT protection TRUST OFFSHORE COMPANY CGT protection ARPT protection Confidentiality Limited liability X Growth from 6 April 2013 caught. X 70,000 per annum. 15m property

14 NON-UK DOMICILED, NON-UK RESIDENT SETTLOR TRUST/COMPANY STRUCTURE What if the Property is rented out to a friend on a commercial basis? IHT protection TRUST CGT protection ARPT protection OFFSHORE COMPANY Confidentiality Limited liability The rental income will be subject to UK income tax at 20% 15m property

15 HASSAN OPTIONS? TRUST Option 1 Option 2 Do nothing Dismantle OFFSHORE COMPANY OFFSHORE COMPANY Option 3 Restructure into an offshore trust (without any underlying co.) 15m property 25m property

16 OPTION 2: DISMANTLE Liquidate companies (and wind up trust) so that Hassan (as a non-uk domiciled, non-uk resident) holds the properties personally Principal advantages Avoids ARPT No CGT on future growth IHT protection X Leverage or insure liability? Principal disadvantages Exposure to IHT (10M on the townhouse) but consider leveraging property or life insurance CGT protection ARPT protection Confidentiality Limited liability X But is this really a concern? Watch for IHT on dismantling 15m property 25m property

17 OPTION 3: CONVERT INTO OFFSHORE TRUST STRUCTURE Convert structure so that each property is directly held by trustees of an indebted offshore trust (ideally with separate structures for each property) Principal advantages No CGT on future growth (provided no UK resident beneficiaries) Avoids ARPT Mitigates IHT Principal disadvantages IHT protection may be incomplete IHT protection CGT protection ARPT protection Confidentiality Mitigated by leveraging. TRUST Limited liability Watch for IHT on restructuring 25m property

18 OTHER THEORETICAL OPTIONS FOR RESTRUCTURING Changes announced on 11 December 2012 make some alternative solutions look redundant Offshore partnerships: Risk of being treated as a company if no property business being carried on? But if a property business is being carried on, on a commercial basis, no scope for ARPT or CGT anyway IHT protection afforded by offshore partnership questionable QNUPS: Only likely to be valid / tax efficient in cases where there is no need for an alternative structure, because of the reliefs for genuine property businesses

19 SO WHAT SHOULD HASSAN DO? Intended holding period Expectations re property market Cost of borrowing Mortality risk Cost of insurance Genuine home or investment? Need for succession planning?

20 NON-UK DOMICILED, UK RESIDENT SHAREHOLDER COMPANY STRUCTURE Alain s townhouse Current tax regime OFFSHORE COMPANY IHT protection CGT protection ARPT protection Confidentiality X N/A Until deemed domiciled. Unless non- UK resident when gain realised. Limited liability Benefit in kind risks Central management and control risks 2.5m property

21 NON-UK DOMICILED, UK RESIDENT SHAREHOLDER COMPANY STRUCTURE Impact of proposed new tax regime post 1 April 2013 IHT protection Until deemed domiciled. CGT protection X Growth from 6 April 2013 caught. OFFSHORE COMPANY ARPT protection X 15,000 per annum. Confidentiality Limited liability Other tax risks remain 2.5m property

22 NON-UK DOMICILED, UK RESIDENT SHAREHOLDER COMPANY STRUCTURE What if the property was worth less than 2m on 1 April 2012 and property is to be sold before 1 April 2017 and once Alain non-resident? IHT protection CGT protection Assuming Alain doesn t become deemed domiciled. OFFSHORE COMPANY ARPT protection Confidentiality Limited liability Other tax risks remain 2.5m property

23 NON-UK DOMICILED, UK RESIDENT SETTLOR TRUST / COMPANY STRUCTURE Alain s country house Current tax regime IHT protection TRUST CGT protection ARPT protection X N/A Beneficiary charge - unless non- UK resident when gain realised. OFFSHORE COMPANY Confidentiality Limited liability 6.5m property

24 NON-UK DOMICILED, UK RESIDENT SETTLOR TRUST / COMPANY STRUCTURE Impact of proposed new tax regime post April 2013 IHT protection TRUST CGT protection ARPT protection X X As before + company charge for growth from 6 April ,000 per annum. OFFSHORE COMPANY Confidentiality Limited liability 6.5m property

25 ALAIN OPTIONS? TRUST Option 1 Do nothing Option 2 Dismantle OFFSHORE COMPANY OFFSHORE COMPANY Option 3 Restructure into an offshore trust 6.5m property 2.5m property

26 OPTION 2: DISMANTLE Liquidate companies (and wind up trust) so that Alain (as a non-uk domiciled, UK resident) holds the properties personally Principal advantages Avoids ARPT May avoid CGT on future growth Principal disadvantages Likely immediate charge to CGT Exposure to IHT but consider leveraging property or life insurance CGT protection depends on main residence relief IHT protection CGT protection ARPT protection Confidentiality Limited liability X X Leverage or insure liability If main residence but can only have one! But is this really a concern? Watch for CGT and IHT on dismantling 6.5m property 2.5m property

27 OPTION 3: CONVERT INTO OFFSHORE TRUST STRUCTURE Convert structure so that each property is directly held by trustees of an indebted offshore trust (ideally, with separate structures for each property) Principal advantages Avoids ARPT May avoid CGT on future growth Mitigates IHT Principal disadvantages Likely immediate charge to CGT but may be avoidable IHT protection not complete CGT protection depends on main residence relief TRUST IHT protection CGT protection ARPT protection Confidentiality Limited liability Mitigated by leveraging If main residence but can only have one! Watch for CGT and IHT on restructuring 2.5m property

28 SOME COMPLICATING FACTORS Leasehold properties Licence to assign? Enfranchisement rights? Debt against the property or company borrowing? SDLT traps for the unwary Other assets in the company? - These will not benefit from rebasing! Local tax issues? In country of residence or in any event if US person!

29 THE FUTURE Some clients may wish to retain existing corporate structures for homes - ARPT + CGT on future growth = a price worth paying for IHT protection? Others will want to dismantle and hold personally - IHT exposure can be addressed through leveraging / life insurance although may be cheaper to pay the ARPT? - Watch for SDLT on DIY dismantling (e.g. where company has bank borrowings) Appropriate offshore trust structures remain attractive - Benefits: no ARPT, no CGT, IHT protection (although not complete), succession planning - Especially attractive for higher value properties / properties intended to be held on longer term basis Generally no need for re-basing exercises before 6 April Exception: where existing company structure is to be converted into a trust structure and the trust may have UK beneficiaries in future

30 NEW ACQUISITIONS Options to consider Personal ownership - Leveraging - Life insurance - Nominee Offshore trust structure - Leveraging For non-uk residents, buying shares in existing company structures may (ironically) still be attractive For non-uk residents, using a company to buy a property may still make sense if the property is to be let commercially / used for another genuine property business But defer completion of new 2M + acquisitions by companies for genuine property businesses until next summer to benefit from 7% SDLT rate?

31 KEY DATES ARPT Effective from: 1 April 2013 Valuation date: 1 April 2012 Filing date: 30 April (1 October in the first year it applies) Extended CGT Effective from: 6 April 2013 Rebasing date: 6 April 2013 Filing date: (We assume) 31 January 15% SDLT Generally effective from 21 March 2012 Carve out for genuine property business to take effect from the date of Royal Assent of FA 2013 (some time next summer)

32 NEXT STEPS Review existing property structures now in the light of the revised proposals See questionnaire Obtain advice on pros and cons of retaining the existing structure, dismantling or restructuring into offshore trust

33 FURTHER INFORMATION For more information on our services, please contact: Lisa-Jane Dupernex +44 (0) Alice Neilan +44 (0)

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