Foreign footballers using offshore companies for holding UK property
It's been reported that foreign footballers have been using offshore companies to purchase UK property. This can be advantageous in terms of avoiding UK tax, and in this article we look at exactly how using an offshore company can be a benefit in purchasing UK property.
Who can benefit from using a company?
You'll note that it's foreign footballers that can benefit from using a company. This is because it mainly non UK domiciliaries that stand to gain from using an offshore company.
The main advantages of using an offshore company can be twofold.
Firstly there can be an Inheritance tax ('IHT') advantage, as a non UK domiciliary would be exempt from UK IHT on the overseas shares. However, if they held the UK property directly it would be classed as part of their UK estate and as such could be subject to IHT.
Secondly the offshore company would be exempt from UK capital gains tax when it is sold. This is on the basis that the company is non UK resident and would therefore be exempt from UK CGT on investment assets.
There are however anti avoidance rules that can apply and which would need to be considered.
We'll take a brief look at some of the key issues in this article.
Residence of the company
Just because you use an offshore company to hold the property does not mean that the company is automatically non UK resident. In order to be classed as an overseas company (and therefore an overseas asset) the company would need to be controlled from overseas. For many this will make it very difficult to own the shares in the company and live in the UK. If they did it would be difficult to argue that the company was not UK controlled and resident.
If the company was UK resident this would usually be disastrous, as any disposal by the company would also be subject to corporation tax on the gain arising (making it worse than holding personally, as principal private residence relief would then have been available).
It is therefore advisable if the shares are held offshore, either by family members (eg parents) or by a separate offshore entity, such as a trust.
Income tax on occupation
Another problem is the potential income tax charge on any 'benefit' provided by the company. The legislation states that a charge to tax arises where living accommodation is provided by reason of the employment rent free, or at a low rent.
Therefore it will apply where accommodation is provided for the use of employees. The employee is also within this definition where living accommodation is provided by reason of his or her employment for members of the employee's family or household. The tax legislation defines family or household as including the employee's:
Lets say for example a property was to be purchased by parents for family use.
If the parents owned the share capital of the company, an income tax charge could only arise if they were employees. If they fell to be taxed the occupation by family and friends would also be taken into account when calculating the charge.
If the parents were directors they would clearly be employees and would be within these provisions. If they were not directors HMRC could still class them as 'shadow directors' if the parents actually control the company and are the one's who 'pull the strings of the company'.
Note, however, that even if the parents are classed as shadow directors under this definition, if they are non UK resident and non UK ordinarily resident they should not be subject to a UK income tax charge on any benefit arising as they would not have an employment which involved carrying out UK duties. Providing any occupants of the property could also not be classed as 'employees' of the company or shadow directors there would be no other income tax charge.
In this case the UK property would then not be classed as a UK asset for inheritance tax ('IHT') purposes and would be outside the scope of UK IHT.There should be no income tax charges based on the above and provided the company was controlled from overseas there would be no UK capital gains tax charge on a future disposal.
Summary
In order to obtain the above benefits of an offshore company to hold the property the conditions are generally:
The advantages of this are clear in that the use of the overseas company would allow UK CGT and UK IHT to be avoided.
The disadvantages would be if any of the above conditions aren't met (eg control was from the UK, or a UK employee occupied the property) which could lead to UK tax charges.
foreign footballers could therefore certainly use offshore companies to avoid tax on properties by following the above guidelines. You could also use similar planning techniques yourself providing you were careful as to how they were structured.
Comparison with purchasing personally
An alternative would be to purchase personally instead of via a company. If the property was purchased personally by the overseas shareholders they would still avoid UK CGT on a future disposal (as they are non UK resident), but the value of the property would be classed as part of their estate for UK IHT purposes.
This may not be a big problem depending on the value of the property and source of funding. The non UK domiciliary footbeller would be able to offset the UK nil rate band against the property value. Therefore a property of around £650,000 could be exempt from IHT even if owned personally provided there were no other UK assets (and they owned with their spouse). In addition as the property value is the net value, if the property was purchased partly via a mortgage then it would be the amount after deducting the mortgage that would be taken into account.
Therefore personal ownership, particularly where the net property value is below the nil rate bands may in any case be the simplest and most straightforward method to obtaining the CGT and IHT exemption.
How about UK domiciled individuals?
UK domiciliaries would see no inheritance tax or capital gains tax advantages from using an offshore company. For inheritance tax purposes the value of the shares (ie the property value) would be included in their estates. In addition the company would not qualify for the principal private residence relief on a disposal. On top of all this there's the potential income tax charge on occupation. Therefore using an offshore company would be unlikely to be beneficial and could in fact put you in a worst position.
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.
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