Without becoming too technical or discussing the cumulative changes to UK legislation (primarily over the last decade) the ‘historic’ tax benefits of using an offshore company were extremely attractive for both the non-domiciled UK based community and foreign based investors wishing to purchase UK property. The advantages of using an offshore company could (depending on specific circumstances) have included:
- The legal avoidance of capital gains tax on the sale of the property;
- The legal avoidance of stamp duty land tax (SDLT) where shares in the offshore company were exchanged by suitably qualified individuals;
- The legal avoidance (were pertinent) of inheritance taxes (IHT)
- Asset protection from 3rd party litigation
In short, there is no doubt that the UK was until relatively recently an extremely attractive place for the international wealthy to both invest and live in with the UK’s traditionally very lenient and attractive tax treatment of non-doms having played no small part in making London the natural habitat of the world’s mega-wealthy. At the time of writing, July 2017, there still remain certain tax benefits for the international wealthy but it is certain that these remnants from more ‘tax friendly’ times will be whittled away until extinct probably within the next 5 years.
WHY DE-ENVELOPING IS NOW SO URGENT!
As predicted, the historic tax benefits and/or shelters offered to non-domiciled but ordinarily UK resident individuals (NDOR’s) has been whittled away to the point of non-existence. Under S.110 of the Finance Act 2014, the annual chargeable amount payable for a single-dwelling interest in a residential property – commercial property is outside the scope of ATED – held by a company worth over £500,000.00 is £3,500.00 per annum. Where a residential property is valued between £2 and £5 million S.70 of the Finance Act of 2015 increased the annual tax from an already high £15,400.00 per annum to a staggering £23,350.00 per annum. The valuation of a property is assessed every 5 years based on the original date listed in the Finance Act of 2013 which was the 1st of April 2012. This means that most properties will have been or will need to be valued again based upon a 1st of April 2017 assessment date, which at the time of writing could result in an ‘over-valuation’ given the ongoing and downward price adjustments now occurring in prime London locations.
THE ANNUAL TAX ON ENVELOPED DWELLINGS (ATED) NOW APPLIES TO PROPERTIES WORTH AS LITTLE AS £500,000.00
THE CURRENT POSITION, HMRC RELIEFS & EXEMPTIONS & WHY DE-ENVELOPING IS PRIMA FACIE TAX PUNATIVE
Most individuals/beneficial owners of a UK residential property worth over £500,000.00 will prima facie now find themselves not only liable for the upkeep of their offshore company but now since the 1st of April 2014 are also required to register and pay for an annual tax on enveloped dwellings (ATED) within 30 days of the beginning of the first day of the applicable charging period. Thus, for example a chargeable period commencing from the 1st of April 2017 would require that the ATED is paid by the 30th of April 2017 or penalties would be imposed. The ATED rate varies from £3,500.00 to £220,350.00 per annum (See Chart ‘A’) not to mention exposure to the previously avoidable capital gains and inheritance taxes. In short, it would save for one crucial fact seem self-evident that nearly all non-commercial properties individually* worth over £500,000.00 owned by offshore companies should seek to de-envelop. However, the fly in the ointment is that the process of conveying a property – a legally separate limited liability entity to its owner – triggers stamp duty land tax (SDLT) which in the UK is extremely punitive (See Chart ‘B’) and in effect creates a double SDLT taxation exposure to the same ultimate beneficial owner for the same property! More to the point, current anti-avoidance provisions and in particular the relatively recent ‘substance over form’ General Anti-Abuse Rule (GAAR) mean that any conveyance must be at verifiable market value if it is to stand up to scrutiny. There are of course HMRC reliefs and exemptions but to receive these an application must be made to HMRC showing that the offshore company is involved in a commercial enterprise in the UK subject to UK corporate and related taxes. This requirement in effect means that should an offshore company wish to apply for any reliefs and/or exemptions it would need to first register as a branch in the UK and then show it is a property development company holding stock, a qualified property rental company and/or has let out its property/ies on a commercial basis to a 3rd party at market rates.
HOW TO LEGALLY DE-ENVELOPE & AVOID DOUBLE SDLT EXPOSURE
This seems like ‘Having your Cake and Eating it’ but for many offshore companies (but not all unfortunately) it is possible to re-structure a company’s articles or their equivalent to allow distributions to be made to shareholders in a manner that does not trigger an SDLT charge. However, the process is not easy and involves an intricate legal procedure, many ‘Companies House’ or its equivalent submissions, the use of specialist lawyers in the offshore and the UK jurisdiction, legal opinions, official declarations, transfer of ownership (if nominees have been used) to the individual beneficial owners, up-to-date accounts from a qualified accountant, confirmation that the relevant company has sufficient assets to make the distribution and most importantly that there are no 3rd party creditors and/or debts owed and/or being paid form the distribution. There can also be further difficulties where properties are leasehold rather than freehold due to the addition of extra parties but these difficulties are more bureaucratic/procedural rather than absolute obstacles. As can be imagined, this type of process is very intensive but the end result is that a property can be transferred to its ultimate beneficial owner for a fraction of the cost of the otherwise applicable SDLT charge.
THE MORE VALUABLE THE PROPERTY TO BE DE-ENVELOPED THE CHEAPER THE PROCESS
As many of the costs, professional fees, disbursements and statutory lodgments are the same no matter the value of the residential property the economic sense of de-enveloping a property increases with the value of property. This means that whilst it can make economic sense to de-envelop a property worth £750,000.00 it makes even more sense if the property is worth £2 or £5 million as the savings become much greater given the sliding scale of SDLT charges (See Chart ‘B’ below).