For Investors and Individuals looking to expand their real estate investments in the UK, owning property through offshore company has become one of the popular strategies. A thorough understanding of the key consideration is important prior to making the decision.
Holding UK property via offshore companies requires in detailed understanding of current tax implications. Whether as an investor, a business owner, or engaging in property trading understanding tax implications is important.
Introduction to Offshore Property Ownership
Offshore companies are legal business entities which can also operate in a foreign jurisdiction different from where its owners reside. The offshore companies for property ownership, particularly in the UK has been growing as individuals and investors seek privacy, tax advantages and asset protection.
Many offshore jurisdictions offer streamlined incorporation processes and minimal reporting requirements.
Key benefits of using an Offshore Company for Property in the UK
An Offshore company used to hold property in the UK offers financial, legal and strategic advantages to a certain level. However, it comes with increased scrutiny, regulation and potential tax implications. Here are the key benefits of using an offshore company for property in the UK:
- Succession planning: It is comparatively easier to pass shares in an offshore company than the UK real estate
- Asset protection: Offshore company can also help in the protection of the company from local creditors, lawsuits or bankruptcy.
Tax Risks and Implications
Annual Tax on Enveloped Dwellings (ATED)
ATED is a UK tax payable by companies which applies to residential properties worth more than £500,000, with annual charges increasing based on the property’s value. The main motive behind its introduction was to discourage the use of corporate “envelopes” (i.e., companies, especially offshore ones) to hold high-value UK homes, often for tax avoidance purposes.
When ATED applies?
Offshore companies are triggered by ATED when residential properties are held by non-natural person (NNPs), with a taxable value exceeding £500,000. While ATED is designed to tax high value residential properties held by companies in the UK, companies can claim certain exemptions if the property is used for qualifying purpose. Below are the qualifying purposes that can exempt companies from ATED charge.
- Let to third party on a commercial basis.
- Held as trading stock for resale or further development.
- Held for qualifying employee accommodation.
- Held by charity and used for charitable purposes.
Remember, you must still file a return even if you are claiming a full relief and no tax is payable. And all returns must be actively claimed via a submitted return.
Key Dates
Tax year: Runs from 1 April to 31 March
Return and payment deadline: 30 April each year
Property Valuations
The main valuation of the property dates every 5 years. Valuation is also required at acquisition or after significant improvements. The values should reflect open market value and valuation must be reasonable.
Stamp Duty Land Tax (SDLT)
SDLT is a tax payable when purchasing a property in the England and Northern Ireland, regardless of whether an offshore company or individual is purchasing. However, additional surcharges apply to properties purchased by companies, particularly those buying high-value residential properties.
Offshore companies are considered non-resident for SDLT purposes due to which they will be subject to additional 2% non-resident surcharge. This charge applies to residential property purchased by non-UK residents.
Key SDLT rules for Offshore Buyers
Offshore companies buying UK residential properties are subject to:
- Standard Residential SDLT Rates: Applies progressively based on property value.
- 2% Additional Surcharge: Introduced in 2021, this applies to non-Uk resident buyers which includes offshore entities.
- 5% Additional Surcharge: Applies to purchases of second homes or buy-to-let properties.
Capital Gains Tax (CGT)
CGT is a tax on profit incurred through selling or disposing of an asset that has increased in value. For many years, non-residents were exempt from paying CGT on disposals of UK property. However, since major reforms in 2015 and 2019, Offshore companies (non-UK resident companies) are liable to pay UK CGT on the disposal of UK property, both residential and non-residential.
Key Considerations for CGT- Offshore Companies
- Offshore companies are subject to UK Corporation Tax on gains (25%)
- No annual exempt is available for offshore companies
Deciding on an Appropriate Offshore Jurisdiction
It is essential to select the right jurisdiction for incorporating offshore company. While considering jurisdiction, factors such as tax treaties with the UK, incorporation costs and reputation should be considered. Popular jurisdictions for offshore real estate companies include:
- British Virgin Islands (BVI)
- Hong Kong
- Cayman Islands
- Isle of Man
- Jersey
It is also important to choose a jurisdiction that has a Double Taxation Agreement (DTA) with the UK to avoid being taxed twice on the same income.
Step-by-step process for buying UK property through an offshore company
Selection of the right Jurisdiction: The right Jurisdiction should be researched and selected based on the tax, privacy and investment objectives.
Incorporation of the offshore company: It is necessary to work with legal advisors to set up an offshore company in the chosen jurisdiction.
Acquire Financing: Financing options are to be acquired depending on the offshore jurisdiction and the property.
Purchase the property: Once the setting up process and funding process is completed, proceed with the property purchase.
Compliance with UK regulations: Ensure all taxes including SDLT, ATED and CGT are accounted for and register the company with the UK land registry.
Key Risks for Offshore structures holding UK property
- Tax inefficiency
ATED and CGT for offshore companies being introduced, the tax savings may be less significant than anticipated. The earlier tax advantages would be lost.
- Complex and Costly Administration
The legal and administrative costs of maintaining an offshore company can be higher than the traditional ownership, usually due to annual filings and audits required by some jurisdictions.
- Public Transparency Requirements
The UK government has introduced measures to increase transparency and prevent tax avoidance. Non-compliance can prevent property sales or purchases and penalties.
Conclusion
There are several factors to consider before buying a property in the UK as an offshore company. The benefits include tax efficiency, privacy and asset protection. However, recent legislative changes require the property owners to be more diligent in compliance.
It is necessary to seek expert advice before proceeding to ensure the offshore structure aligns with the investment goals of the company and tax and legal implications have been fully understood.
FAQs
No, it is not required to be a UK resident or citizen to purchase property in the UK.
Yes, if the property meets the criteria, ATED is payable annually and return must be submitted by 30 April each year.
In addition to ATED, offshore owners may be subject to capital gains tax (CGT), Stamp Duty Land Tax (SDLT).
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