Offshore property development companies and UK tax implications

Given the growth in overseas property investment by UK residents I've seen a lot of 'managed' opportunities around. These are often structure with an offshore company being formed (eg in the Seychelles, BVI or Panama) and this is then used to acquire land and develop properties in a stated destination. The company obtains funds from investors, either in the form of debt or as share capital, and an agreed 'exit method' is agreed for, say five years time. The developers are using pretty flexible in how arrangements are structured as the offshore company won't usually be subject to tax in its country of incorporation in any case. Obviously from your perspective you're looking to minimise your tax bill, and this will be primarily any UK tax, although there may also be tax in the country of the development. This raises the question -- how should you invest the funds? As debt or share capital? Debt has the advantage that it's simple. You invest the funds and receive an agreed rate of return. In tax terms the return will be taxed as income (either interest or as a distribution (which is like a dividend)). If you invest as shares and can arrange for the future exit in the form of a shares disposal you may qualify for business asset taper relief (on the basis the company is trading)-- potentially reducing your UK tax rate to 10%. This is clearly preferred to the debt option above -- the problem is actually structuring the exit as a capital disposal. Any market for the shares is likely to be limited so you'll effectively be looking at either a share buy back by the company, or a winding up of the company. I've looked at the tax implications of these in an article here If you're a non UK domiciliary your options are wider than these as you can retain the interest overseas and avoid UK income tax in any case. You'd also be exempt from the various anti avoidance rules in this case which could apply.