Tax planning when investing in UK property

February 04, 2011

We're often asked for tax structure where a UK non-resident and non-domiciled individual wishes to purchase a UK property. In this article we look at some of the tax planning issues and opportunities available. Jack is resident and domiciled in Spain. He has relatives in the UK and is interested in purchasing a property here because (a) he wants somewhere to stay when he visits and (b) he has heard that UK property prices are set to rise. The question is, how from a tax perspective should he structure the purchase? There are broadly two ways to buy the property:

By using direct ownership, or

Using some form of intermediary like a trust or company.

DIRECT OWNERSHIP

Capital Gains Tax From a capital gains tax perspective direct ownership is potentially attractive:

The Principal Private Residence (PPR) relief operates to exempt a gain on the disposal of an individual's main residence. Even if the property is not, on the facts, Jack's main residence, he could certainly submit an election to have it treated as his main residence.

As he is non-resident, he would not in any case be liable to UK capital gains tax on the disposal of any assets.

Inheritance Tax The inheritance tax position is, however, not as good. The holding of property in the UK would mean that Jack has a UK estate and, as well as probate being required on his death, the house would be subject to inheritance tax to the extent that the value exceeds the £325,000 nil rate band. As the value of the property is expected to rise rapidly, this could result in a significant tax bill were he to die while still owning the asset. There are, however, a number of methods available to Jack to reduce or eliminate any inheritance tax charge: Use of Multiple Ownership The property could be acquired in multiple ownership. For example, Jack, his wife and children could all own the property jointly. Provided the individuals have no other UK assets, it is likely that each share will be below the nil rate band. In order to avoid problems with the 'gift with reservation of benefit' legislation, it is necessary to gift cash to the family members, which they can then use to purchase their shares of the property. The gift with reservation of benefit (GROB) provisions apply to property in particular, where an interest in a property is given away, yet the person gifting the interest still continues to reside in the property. For inheritance tax purposes, the whole value of the property is still regarded as included in the occupier's estate for inheritance tax purposes. Gifting of Property Another solution would be to gift cash to a younger member of the family who can then make the acquisition. The gift will be exempt from inheritance tax, provided the person making the gift survives seven years. The above GROB rules would not apply as the gift was a cash gift. The UK pre-owned assets tax charge should also not be relevant if Jack is non-UK resident. The property will then belong to the donee (the younger family member) and if the donee were to die, it would be included in his estate for inheritance tax purposes. Mortgages The value of an individual's estate is essentially the market value of the assets at the date of death, less any liabilities outstanding at the date of death. It is therefore possible to effectively reduce any inheritance tax charge to zero by obtaining a substantial loan against the value of the property. Provided the mortgage reduces the 'net value' of the property to below the nil rate band (currently £325,000), there will be no inheritance tax payable. The mortgage funds obtained can be invested overseas and any interest return would then be exempt from UK income tax provided the interest income is not remitted to the UK.

USING A TRUST TO OWN THE PROPERTY

Capital Gains Tax The Principal Private Residence relief is extended to situations where a beneficiary is entitled to occupy a house under the terms of a trust deed. In these circumstances, the trustees would be able to claim PPR relief when they sell the property. In the case of a non-UK domiciliary, as the trustees are non-resident they would not, in any case, be liable to UK capital gains tax. It would only be if the settlor of the trust (or his close family) was also a beneficiary and became UK resident that the gains of the trust could be attributed to him under the anti-avoidance provisions. Inheritance Tax The trust will be subject to special inheritance tax rules. One of the key implications is that it could be subject to an inheritance tax charge every 10 years starting with the date of commencement.

USING AN OFFSHORE COMPANY

The property could be owned by a non-resident company. In this case the non-domiciliary would own the shares in the company. As the shares are non-UK property, they would be exempt from inheritance tax. Key risks with this are:

The company's residence position may be closely scrutinised by the taxman and it may be difficult to show that the central management and control is exercised outside the UK, particularly if all directors are UK resident and the asset of the company is a UK property. If HMRC is able to successfully argue that the company is UK resident, any gain on the disposal of the property would be subject to UK corporation tax and no PPR relief would be available.

In addition, on a disposal of the shares in the company, no capital gains tax would be payable by Jack provided he remained non-resident. If he was UK resident, he may not be charged to UK CGT provided the proceeds were retained outside the UK and he was subject to the remittance basis, as he's a non-UK domiciliary.

Tax planning when investing in UK property

DIRECT OWNERSHIP

USING A TRUST TO OWN THE PROPERTY

USING AN OFFSHORE COMPANY

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