Tax efficient investment in an overseas property development company

Given the growth in overseas property investment by UK residents there are a lot of 'managed' opportunities around. These are often structured 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 usually pretty flexible in how arrangements are structured as the offshore company won't be subject to tax in its country of incorporation in any case. The investors are looking to minimise their UK tax. This raises the question - how should the funds be invested? 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 this will reduce the capital gains tax rate to 18% (or even 10% if you qualify for Entrepreneurs Relief. 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.