STRUCTURING UK RESIDENTIAL PROPERTY NICHOLAS JACOB WRAGGE LAWRENCE GRAHAM & CO LLP London, Paris, Munich, Monaco, Moscow, Dubai, Singapore, Guangzhou
UK REAL ESTATE - HISTORICAL POSITION Reason for buying UK property in offshore company was for Inheritance Tax ( IHT ) purposes 40% charge on full value above 325,000 per person if held personally Trust holding property directly no IHT protection No CGT unless UK res and no principal private residence relief 2
INHERITANCE TAX & INCOME TAX IHT on all UK property owned directly - 325k pp exemption - Put in several names - Mortgage - Life assurance Income Tax - Only on rental properties - Different rates 20% for cos; higher rates for individuals - Mortgage interest - Shadow Director charge not to be forgotten
STAMP DUTY LAND TAX Increased charge of 15% on res properties worth over 500k if the purchaser is a company, or partnership where at least one member is a company, or a collective investment scheme Relief applies if property is acquired exclusively for either a rental business, development, as an exchange in a property development trade, or for resale in a property trading business. 0 on the first 125,000 of the property price 2% on the next 125,000 5% on the next 675,000 10% on the next 575,000 12% on the rest (above 1.5 million) Max 4% on commercial properties 4
ANNUAL TAX ON ENVELOPED DWELLINGS ( ATED ) The ATED applies to property valued over 1m (from 6.4.16 500k) and held by a company, or a partnership where at least one of the members is a company, or a collective investment scheme The rates are: o o o o o Property value 1m to 2m - 7,000 per annum Property value 2m to 5m - 23,350 per annum. Property value 5m to 10m - 54,450 per annum. Property value 10m to 20m - 109,050 per annum. Property value 20m plus - 218,200 per annum. 5
ATED (cont) The first valuation date will be 1 April 2012 or date the property is acquired if later and is fixed for a five year period Reliefs for property developers, rental business, property traders An ATED return needs to be submitted - returns and payments by 30 April of each year. Penalties for failure or delay ATED related CGT
CAPITAL GAINS TAX Three potential charges: ATED related CGT Trust gains related CGT New CGT from 6 April 2015
CAPITAL GAINS TAX - ATED Company, or a partnership where at least one of the members is a company, or a collective investment scheme will be subject to CGT when disposing of a property from 6 April 2013 for consideration above 2m Base value is the open market value at 5 April 2013 or the acquisition value if later Rate 28% on gain element Charge linked to ATED if the entity is not subject to ATED, ATED related CGT is not chargeable on that proportion of the gain 8
CAPITAL GAINS TAX - TRUST CHARGE Trust gains clocked inside trust for charge on future distribution to UK resident & domiciled beneficiaries Matching of charges Care over trusts that have: - UK residential property in their structure - Also have other income or gain producing assets (whether in separate company or not - And UK residents occupying the property As income and gains can be taxed on beneficiary occupying rent free
CGT - NEW RULES - OVERVIEW Apply from 6 April 2015 Departure from existing rules Who do the rules apply to? What do the rules cover? Calculating and reporting the gain Application of principle private residence relief
WHO DO THE RULES APPLY TO? The rules will apply to gains made by non-uk resident: - Individuals 18% or 28% - Trustees 28% - Companies (closely held) 20% Certain non-uk resident entities/arrangements fall outside the rules including funds (widely marketed), pensions, real estate investment trusts If a company is liable to an Annual Tax on Enveloped Dwellings ( ATED ) related CGT charge (28%), this will take precedence over the proposed new CGT rules
WHAT DO THE RULES COVER? Gains on a property used or suitable for use as a dwelling, which includes: - A place that is, or has the potential to be, used as a residence - Property in the process of bring constructed or adapted for such use - Disposals of a contract to purchase an off plan property Residential property that is let out will be covered (different to ATED rules) All disposals covered irrespective of value (no threshold amount as in the ATED rules) Properties used for communal use (boarding schools, nursing homes, and purpose built student accommodation) are excluded
CALCULATING AND REPORTING THE GAIN Three options for calculating the gain: - The default position is that the property is rebased to its market value at 6 April 2015 - An election can be made to calculate the gain on a time apportionment basis (unless the property is also caught by an ATED related gain) - An election can be made to calculate the gain over the entire period of ownership The calculation route is decided when the gain is reported Losses can only be used against property gains if remain non-uk resident
PRINCIPAL PRIVATE RESIDENCE RELIEF ( PPR ) PPR will not apply for a tax year unless the non-uk resident spent 90 days at the property in that tax year In respect of the 90 day rule: - This is met for a day if the individual is present in the property at the end of that day question as to what presence means - Spouse occupation counts but no double counting - If the individual has multiple UK properties, the midnights spent in all properties can be aggregated Periods of occupation prior to 6 April 2015 will be taken into account when determining the PPR position A claim for PPR by a non-uk resident will be made at the time the gain is reported
THE NEW CGT Has the introduction of a CGT charge for non-uk residents pushed the balance back in favour of corporate ownership for UK residential property by non-uk residents? PPR acts as a good relief, but in satisfying the 90 day rule a client may become UK resident need to be careful The right ownership structure going forward will depend on the value of the property and the aims in respect of it (i.e. long-term holding, personal use, let out, borrowing used, etc)
WHAT TO DO? - NEW PURCHASES IHT is still a major consideration 40% charge on full value irrespective of residence and domicile of the individual Offshore company will protect against inheritance tax, but could lead to a 15% Stamp Duty Land Tax charge on acquisition, and ongoing ATED charge, and a CGT charge on sale If held personally: o o IHT but look at how to mitigate with mortgage (but be aware of pitfalls), life insurance & nil rate band. ATED does not apply to personal ownership. Non-tax considerations confidentiality and succession. Each decision is client specific considering age of purchaser, what the property will be used for, & the expected length of ownership 16
WHAT TO DO? EXISTING OWNERS If personal ownership & to be rented out, consider transferring to offshore company - 15% SDLT (based in current value) is better than 40% IHT (based on future value at death) - No ATED charge if rented out, but will be new CGT If corporate ownership, consider liquidating company to avoid ATED - But need IHT protection eg life assurance or buy (SDLT) with mortgage - No SDLT if no loan to co or no loan capital
CONCLUSIONS SDLT is expensive, so vital to get it right first time Need to decide in good time; it not get provision on exchange for assignment or sub-sale Get purchasers to decide what they will use property for and for how long they will retain it There is no one size fits all every purchase must be considered New CGT has not affected appetite for UK property!