Avoiding UK capital gains tax on UK land & property by becoming non UK resident/using a UK company. Includes a consideration of S776 and the anti avoidance rules.
Question:
I own some land in the UK that has increased in value significantly from the date of the original purchase (even in this current economic climate!). The land itself is a former car park which I purchased for less than £30,000 over 10 years ago. It's value 'as is' is around £90,000, but the area has been undergoing massive development and the value with planning permission would be over £500,000. I've spoke to the planning department and have had verbal (ie informal) agreement to a planning application.
I'm now looking at any options I have to reduce my UK tax bill when I sell the land.
One thought I had would be to sell the land to a UK company before I get planning permission. I could then hold most of the profit in the company and use this for other property purchases?
If I transferred the property to the company this would presumably then allow me to extract that value out in the future free of tax. Would this also apply if I transferred my main residence to the company?
I could also consider leaving the UK if needs be to avoid a UK tax charge?
Answer:
There is no problem with the establishment of a UK property company, and transferring the land to the company. Clearly a gain would arise on this, however, provided the transfer was before planning permission was granted, the gain would exclude any of the significant development profit.
The establishment of a Directors Loan Account ('DLA') by transferring your current main residence, and providing a cash loan to the company, would also be an acceptable method of funding the company. You would however, need to pay a market rent for your occupation of the property to prevent a benefit in kind arising on you, which would be subject to principal private residence ('PPR') relief. Note that on a transfer out to you any uplift in value (ie that exceeds the loan) should be a distribution (like a dividend) and would be subject to UK income tax, assuming you are UK resident.
If the properties were sold or rented, you could extract funds from the company equivalent to the amount of the DLA free of UK income tax and NI.
Therefore the only short term tax charge should be in the UK company, which would be taxed on the uplift in value from the transfer date.
As an alternative to incurring this, you could ensure you are non UK resident and dispose of the shares in the property company. Provided you were a resident in a jurisdiction that did not levy capital gains tax on the share disposal, there would be no tax charge arising.
In terms of UK tax, your absence from the UK would need to be for at least five complete tax years to avoid a UK CGT charge on your return.
You would also need to ensure that after leaving the UK, any disposal of the shares did not occur until after the start of the following tax year, as the split year basis would not generally apply for CGT purposes. Therefore if you left the UK in December 2008, the disposal of the shares should be delayed until at least 6 April 2009.
Of course an alternative if disposing of the shares could prove difficult, could be to retain the ownership in your own name. Providing you become non UK resident/non UK ordinarily resident (eg by going overseas for at least three tax years) and you satisfy the five year requirement, you could dispose of each property free of UK CGT.
The problem with this is the risk of HMRC arguing that you are undertaking a property development trade in the UK. As such, even a non resident would still be charged to UK tax on any profits made. A disposal of the shares in a company would avoid this risk.
You should also consider the impact of S776 ICTA which is an anti avoidance provision aimed at transactions in land. Essentially it applies when capital gains arise which are in reality trading profit, and where there has been an avoidance of tax. The use of an offshore/tax haven company can trigger this.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.