While holding UK property through a limited company was once tax-efficient, recent UK tax changes have reduced these benefits for non-residents. Non-residents now face Capital Gains Tax (CGT) on disposals, Annual Tax on Enveloped Dwellings (ATED), and no longer have protection from Inheritance Tax (IHT) and face the new regulations known as the Register of Overseas Entities (ROE). De-enveloping into personal ownership might be a more cost-effective option.
Today’s success story involves the background of a non-resident client and how we helped the client save millions by reducing their tax implications to NIL. Let us explore how we were able to help our non-resident client.
What is De-enveloping?
De-enveloping UK property is the process of removing a property from a limited company structure. De-enveloping is more popular for non-residents or offshore companies, but it’s essential to weigh the benefits against any associated costs and legal implications.
In 2013, the Annual Tax on Enveloped Dwellings (ATED) was introduced, imposing an annual tax on properties held by companies. The minimum ATED charge is £4,400 currently. Non-residents then faced changes to Capital Gains Tax (CGT) on both direct and indirect property disposals. The 2017 reforms extended the Inheritance Tax (IHT) to UK residential properties held in offshore structures. Most recently, the 2022 Economic Crime Act introduced the Register of Overseas Entities (ROE), requiring overseas entities to disclose their beneficial owners, which adds a compliance burden. These changes have made holding UK properties through a limited company structure less advantageous.
How We Helped?
Our client, a non-resident shareholder, held three UK properties through a BVI company. Due to evolving UK tax legislation, including the Annual Tax on Enveloped Dwellings (ATED), increased compliance burdens, and administrative costs, the client decided to explore de-enveloping as a solution.
After an initial consultation, we outlined the tax implications and a clear strategy for de-enveloping. We assisted the client through the entire process, ensuring compliance with UK tax laws while minimising tax exposure.
De-enveloping a property can be achieved through Distribution in Specie or Liquidation/Winding Up. With a Distribution in Specie, the property is transferred directly to shareholders as a dividend, which may incur corporation tax on any gains but usually avoids additional tax for non-resident shareholders and is typically free from Stamp Duty Land Tax (SDLT) if no charge and no external debt are involved.
Liquidation/Winding Up involves closing the company and distributing its assets, including the property, to shareholders. This method can also be exempt from SDLT if no consideration is involved, though the company may face corporation tax on gains, and the process can be costly due to high liquidation expenses.
Due to high liquidation costs, the client decided to proceed with Distribution in Specie, also known as Dividend in Specie.
Key Challenges and Solutions
1. Corporation Tax on Property Disposal
Upon de-enveloping, the company disposes of the properties, triggering potential corporation tax on capital gains. To minimise this, we applied three allowable methods for calculating capital gains under UK tax law. We selected the method that produced the lowest capital gain, thereby significantly reducing the tax liability.
- Offsetting Losses - Using one of the allowable calculation methods, we identified a capital loss on one of the properties. We leveraged this loss to offset other gains within the company, reducing the overall corporation tax burden.
- Applying Indexation Allowance - We applied the indexation allowance, as permitted under pre-2017 corporation tax rules, to account for inflationary increases in property values. This further reduced the chargeable gains on disposal.
2. No Dividend Tax for the Non-Resident Shareholder
The relief is available only to individuals. All the purchasers, including joint purchasers, must be individuals and first-time buyers to claim the relief. No relief is available if the purchaser is a company or limited liability partnership (LLP).
Outcome
By carefully applying UK tax legislation and utilising indexation relief, we successfully minimised the client's tax exposure, bringing their tax liability to Nil. The properties were de-enveloped efficiently, allowing the client to hold them personally without ongoing compliance burdens or ATED liabilities.
This strategic approach saved the client significant costs, streamlined their property ownership, and ensured full compliance with UK tax laws.
Reducing tax liabilities and finding the right process to do so can be different for each taxpayer and company. So, at UKPA, we assess the client’s situation and give you the best deal possible.
Conclusion
UKPA’s expertise in tax planning and property investment strategies has once again proven invaluable, helping our client reduce their tax liability to 0. Through the Dividend in Specie method and strategic offsetting of losses against gains, we were able to reduce the client’s tax liability.
This success story underscores the importance of seeking professional advice for complex scenarios like de-enveloping, especially for non-resident investors facing unique tax challenges. At UKPA, we pride ourselves on providing customised solutions that align with each client’s financial goals, making property investment not just feasible but highly rewarding. Reach out today to discover how we can help you achieve similar results.
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