Using a company to buy a property in Germany tax efficiently
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There are a number of considerations when looking at buying a property in Germany. Of key importance will be the structure of the purchase. In particular whether you should purchase via a company and if so which type (UK company, offshore company or German company).
Purchase via a UK company
The most straightforward option would be to purchase via a UK company. The company would be charged to UK corporation tax on the overseas rental profits as well as any gains arising on a future disposal of the German property. This applies irrespective of your residence status.
Dependent on the size of the gain arising particularly over a number of years, and the lack of reliefs available to a company asset disposal, the company could end up paying corporation tax at 30% or even at a marginal rate of 32.75%. If you were UK resident, there would also be further tax charge on the distribution of cash from the company to you (charged at an effective 25% on you). You could potentially eliminate the tax charge on the dividend payment by becoming non UK resident, but you would not be able to avoid the tax charge in the company on a disposal. The only way around this would be for you to dispose of the shares in the company, in which case you could arrange to be non resident and realise the gain tax free, however this would depend on the purchaser and they may in any case seek a reduction due to the inherent tax charge in the company.
In terms of UK tax on the rental income, the company could be beneficial, as it would be taxed at a rate of 19% or 22%, as opposed to the 40% tax charge you would suffer personally. If you extracted the cash from the company, this benefit would be largely eradicated, and you'd threfore need to retain cash within the company for future reinvestment. As stated above you could always become non resident for a tax year and extract the cash free of UK tax.
The UK-German double tax treaty states that:
(1) Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 12, may be taxed in the territory in which such property is situated. This therefore gives both the UK and Germany the right to tax any gain arising on a disposal of the property. A similar rule is in place for rental income. Therefore as well as the UK tax charge, German tax would need to be looked at.
In German tax terms Gains realized from the sale of real estate by a foreign company are always taxable, and the standard rate of corporation tax is 25% although an additional charge is added to companies which own German property to ensure an effective rate of 26.375%. The company would need to account for German tax via a tax return as no tax is withheld on rental payments to non-resident companies holding German property.
The treaty would however then provide for double tax relief. The effect of this would be that the German tax would be deducted from the UK tax liability.You'd therefore be subject to the 26.375% tax charge on rental income (ie the German tax charge) in the UK company, but potentially a 30% or 32.75% tax charge on the disposal (UK tax charge). In addition there could be the tax issues on the extraction of the funds. In terms of inheritance tax, you'd be subject to UK IHT on your worldwide estate given you are a UK domiciliary. However the shares in a UK company holding German property would be exempt from German estate taxes.
Another option would be to use a foreign company. This could be either a German company or another offshore company.
Using an Overseas company
In UK tax terms it would be difficult to avoid UK taxes, particularly if you were UK resident. The first issue to decide would be whether the company was UK resident or not. If it was controlled from the UK, it would be UK resident. The fact any shareholders are resident would influence this. Even if it could be argued that the company was non resident, there are a number of anti avoidance provisions that would attribute income and gains of the offshore company to you. Therefore although the company may not be subject to UK corporation tax on the rental income or gain, the income and gains could be taxed on you. If the company was UK resident, it would be taxed as a UK company (above).
In German tax terms the German tax implications will depend on whether a German or other overseas company is used. The German tax rates would be as for a UK company (above), and if you used a non German overseas company any gain would be fully taxable. Note that any dividends paid to you from a German company would generally suffer withholding tax. The advantage of a Germany company is that a gain realized on the disposal of land or buildings that has been held for at least six years may qualify for a tax deferral if the sales proceeds are reinvested in qualifying replacement assets located in Germany.
Therefore the net effect of using a German company would be that again you'd be entitled to deduct the German tax suffered from the UK tax charges (even if the UK charge arose on you via the anti avoidance provisions). The effect of this would be that you'd effectively be subject to UK tax charges as a minimum. Even if you obtained the German deferral relief on the disposal of the German property, this would not have significant impact if you were still subject to UK tax charges (as the German tax would be likely to be fully offset against the UK tax in any case).
Therefore the only corporate option of totally avoiding tax charges on a disposal would be to use an offshore non-German company and become non UK resident and sell the shares in the company. No UK CGT would arise provided you satisfied the non residency requirements and no German tax would apply as this does not extend to the gain derived by a foreign shareholder from the sale of shares of a foreign company, even if the company owns German property.
If you used a German company and sold the shares in that the UK -German double tax treaty would tax any gain in the UK (ie an effective 24% tax charge after 10 years ownership).
However if you were not UK resident, and no tax treaty applied the German authorities could tax the gain arising. This though assumes you could sell the shares in the offshore company. If not you could be subject to a tax charge in the company and on the extraction of the funds as a dividend.
Own personally?
Another option would be to simply own the properties personally or via a pass through entity (such as limited liability partnership('LLP')). There would then only be a tax charge on you, as opposed to a tax charge in the company and on you. In terms of UK tax you would be taxed on rental profits and gains at your marginal rate of tax. Therefore rental profits could be taxed at 40% (or 22% if you are a basic rate taxpayer). Assuming you owned the property for at least 10 years the CGT rate could be an effective 24%.
Owning the property personally could eliminate any German tax charges on a disposal (assuming you owned the property for 10 years and that it was treated as an investment and was non speculative), and rental income would be taxed at standard rates as for a resident (but a minimum 25% up to approximately 40%). You could therefore consider becoming non UK resident in the future and avoiding both UK and German taxes on the disposal. Note that you'd need to remain non resident for at least five complete tax years to obtain the UK CGT exemption.
By holding the properties personally you'd be potentially subjecting the properties to German estate tax, however, given you'd be subject to UK IHT in any event, this would just reduce the UK liability (as you can claim unilateral tax relief in the UK, even though there is no UK-German estate tax treaty). Therefore there are advantages to both holding personally and via a company, dependent on your plans for the future.