In recent years, the practice of holding residential properties in corporate structures, often referred to as "enveloping," has come under increased scrutiny and regulation in the United Kingdom. This approach was primarily utilised to mitigate taxes and maintain privacy.
However, with changes in legislation and growing concerns about tax evasion and money laundering, many property owners are considering the option of de-enveloping their properties. The term "de-enveloping" refers to the process of removing a property from a corporate structure and holding it directly in an individual's name. In this article, we’ll discuss the pros and cons of de-enveloping UK residential property.
Benefits of De-Enveloping UK Property
De-enveloping UK property has emerged as a strategy offering a range of benefits for property owners and investors. Here are some of the benefits of de-enveloping UK property:
1. ATED Exemption
The UK government introduced the Annual Tax on Enveloped Dwellings (ATED) to address the perceived advantages of holding UK residential properties through corporate entities or trusts. ATED charges can be substantial, particularly for high-value residential properties.
However, by transitioning to personal ownership through de-enveloping, property owners have the potential to avoid ongoing ATED charges and achieve significant annual savings. Nonetheless, it is essential to carefully consider the ATED charge for the period leading up to the de-enveloping date.
2. ROE Exemption
One advantage of de-enveloping UK property is the Register of Overseas Entity (ROE) exemption. By de-enveloping the property and transferring ownership to individuals, the property no longer falls within the scope of the registration requirements imposed by the ROE.
Previously, the confidentiality offered by offshore structures was diminished due to the introduction of the ROE, which necessitates annual updates to the information provided on Companies House, even in the absence of any changes.
Non-compliance with the registration requirements can result in severe consequences, including property freezing, daily fines of £2,500 from 1 February 2023, and potential prison sentences of up to five years. Therefore, de-enveloping UK property eliminates the need for ongoing ROE compliance and the associated administrative complexities and risks.
3. Cost Savings
Another benefit of de-enveloping UK property is the potential for cost savings.
Holding property within a corporate structure can incur various expenses, including annual company filing fees, professional services fees, and compliance costs. By de-enveloping the property, these expenses can be eliminated, leading to significant long-term savings.
4. Simplified Administration
Managing a corporate structure for property ownership involves additional administrative tasks, such as filing annual accounts and complying with company law requirements. De-enveloping simplifies the ownership structure,
reducing administrative burdens and allowing property owners to focus on the core aspects of property management and investment.
Drawbacks of De-Enveloping UK Property
While de-enveloping UK property can hold enticing benefits, it is essential to carefully navigate the potential drawbacks.
Here are some of the drawbacks of de-enveloping UK property:
1. Higher Tax Rates
When de-enveloping UK property, it is important to consider the potential influence on tax rates.
While keeping the property within a corporate framework might lead to lower corporation tax rates, transferring ownership to individuals can lead to increased tax obligations.
Income derived from the property will be subject to individual income tax rates, which can be as high as 45%. This higher tax rate for individuals needs to be considered when assessing the overall tax implications of de-enveloping the property.
2. Stamp Duty Land Tax (SDLT)
De-enveloping UK property can result in significant Stamp Duty Land Tax (SDLT) liabilities when transferring from a corporate structure to an individual's name. This can result in substantial upfront costs, particularly for high-value properties.
However, it is important to note that if there is no consideration involved, such as in the case of a debt-free company, or if the
debt is solely owed to the shareholder, there would be no SDLT liability. Careful consideration and evaluation of the specific circumstances surrounding the property and its debt structure are crucial in determining the potential SDLT implications.
3. Capital Gains Tax (CGT)
Transferring a property from a corporate structure to personal ownership can trigger CGT on the increase in value since its purchase. This tax can be significant, depending on factors such as the length of ownership and the property's appreciation.
Effective from 6 April 2015, non-resident CGT was applicable to direct disposals of UK residential property.
Furthermore, as of 6 April 2019, the scope of CGT was extended to encompass both direct and indirect disposals of any UK property or land. Consequently, non-UK resident companies that were previously exempt from UK CGT will have their gains calculated based on the difference between the current market value and the value as of April 2015.
4. Legal and Administrative Complexities
De-enveloping a residential property requires careful consideration and professional advice. The process involves legal and administrative complexities, including property valuation, tax implications, and restructuring ownership.
Engaging the services of tax advisors, accountants, and legal professionals can help navigate these complexities but may add to the overall costs and time involved.
To sum up, de-enveloping UK residential property presents a range of potential advantages and disadvantages.
Consulting with tax and legal professionals can provide invaluable guidance, ensuring property owners make informed decisions based on their individual circumstances. By carefully weighing the benefits against the drawbacks, individuals can determine whether de-enveloping is the optimal choice for their UK residential property.
Looking to De-Envelope Your UK Property?
Allow us to manage your de-enveloping process. Our skilled team will assess the tax implications and ensure legal compliance.
Reach out to us now for a smooth transition and to maximise UK property benefits.