How many properties in your street are owned by BVI companies? And does it really matter?
On Tuesday the BBC and a number of other news outlets published articles stating that ‘…a quarter of property owned in England and Wales owned by overseas firms is held by entities registered in the British Virgin Islands…’ (see http://www.bbc.co.uk/news/business-42666274) and that ‘there are around 97,000 properties in England and Wales held by overseas firms, as of January 2018’. Out of curiosity I dug into the BBC research and discovered that two properties on my street are in fact owned by offshore companies! It looks like West Acton is more desirable than I had thought, and is now ripe for investment from the international tax dodger (or so the BBC would have you infer).
The implication being that there is a tax ‘avoidance’ motive when an individual purchases a UK residential property through an offshore entity. I should like to explore this idea and establish whether this is a legitimate point. My conclusion may surprise those unfamiliar with this area. For purposes of length this article primarily considers properties bought for the use of the ultimate beneficial owners (‘UBO’) (rather than bought as investments).
Why hold property via an offshore entity?
Disregarding any genuinely nefarious reasons for holding a UK residential property via an offshore entity (and I am sure there are numerous), holding UK property in this way used to be sensible and vanilla planning for non-domiciled/non-deemed domiciled individuals. By holding a UK residential property via a BVI company (say), the non-domiciled/non-deemed domiciled individual ensured that the property was not included in his estate for inheritance tax purposes. Many readers will be aware that non-UK domiciliaries only pay inheritance tax on UK situs assets (subject to the recent changes, discussed below). By holding the UK property via an offshore company, the assets the individual holds are shares in an offshore company – i.e. not a UK situs asset. If the individual were coming close to becoming deemed UK domiciled (i.e. having been UK resident in 17 out of the previous 20 tax years under the old rules – formerly s267(1)(b) IHTA 1984) then frequently a trust would be settled into which the shares in the offshore company would be transferred. Thus creating an excluded property trust which would ensure the property and the holding company remained outside of the UK IHT net, even after the settlor had become deemed domiciled in the UK.
This was standard tax planning for non-domiciliaries. HMRC were fully aware of it and allowed it to continue for years without issue. It was one of the reasons why the UK was so attractive to the internationally mobile wealthy individual. Together with the remittance basis of taxation (which let us not forget was available indefinitely to non-domiciliaries up until the introduction of the concept of deemed domicile for all tax purposes (s 29(1)FA No2 2017) and without charge up until 2008 (when Labour introduced the Remittance Basis Charge (Schd 7 FA 2008)), these established tax policies made the UK a tax haven for non-domiciliaries. If wealthy enough, non-domiciliaries could rely on the remittance basis to protect the vast majority of their wealth from income tax/CGT, and the concept of excluded property to protect the majority of their estates from UK IHT. In theory the extremely wealthy could live in the UK and pay little or no tax during their lifetimes and little or no tax on their deaths. All the while taking advantage of the benefits that go along with living in the UK. Neither politicians nor HMRC can argue they were unaware of this. It was encouraged with a view to attracting wealth to the UK. This was the status quo for many years, but things began to change after the 2007 crash and the subsequent backlash against what many, not unfairly perhaps, perceived as an unjust system of taxation in the UK.
The government sets its sights on non-domiciliaries
A brief history lesson now, to illustrate the change in approach to the taxation of non-domiciliaries implemented by successive governments. The non-domicile status as a concept has been in existence for over 200 years.
In 2008 the Labour government introduced the remittance basis charge (the’RBC’), to the effect that non-domiciliaries who had been living in the UK for 7 out of the previous 9 tax years would be required to pay an annual charge (£30,000) for the benefit of using the remittance basis of taxation (i.e. paying income tax on UK source income and gains and income and gains brought in or otherwise remitted to the UK) (Schd 7 FA 2008) . Up until this point there had been no charge for a non-domiciled individual to opt to be taxed on the remittance basis, no matter how long they had been resident in the UK. The charge was increased in April 2012 for individuals who had been resident in 12 of the past 14 tax years (initially £50,000 (Part 1 Schd 12 FA 2012) then increased to £60,000 s 24(2)(e)(ii) FA 2015) and in 2015 if an individual had been resident in the UK for 17 of the previous 20 years then he would have to pay £90,000 to use the remittance basis of taxation (s 24(2)(e)(i) FA 2015). This was quickly superseded by the introduction of the concept of deemed domiciled for all tax purposes from 6 April 2017 (s 29(1) FA No2 2017) which, inter alia, said that if an individual had been resident in the UK for 15 of the previous 20 tax years he would be considered deemed UK domiciled and the remittance basis of taxation would no longer be available.
You may ask what all this has to do with property owned by non-resident companies. The point I am trying to illustrate is the slow erosion of the attractiveness of the UK for non-domiciled individuals. It started with the introduction of the RBC (although it is acknowledged that for the extremely wealthy the RBC was not really an issue) and has been gathering strength since 2008. The RBC charge crept up in 2012 and 2015 and the remittance basis of taxation is no longer available to long term residents as of 1 April 2017. This together with the change in legislation relating to offshore companies holding UK property has impacted the attractiveness of the UK for the extremely wealthy as a longterm base.
Introduction of the Annual Tax on Enveloped Dwellings (‘ATED’)
Whilst not overtly a tax aimed at non-domiciliaries, the introduction of the ATED charge did have a massive impact on the way that non-residents and resident non-domiciliaries structured their property holdings.
From 1 April 2013 the government introduced ATED, an annual charge on UK residential properties that are held by ‘non-natural persons’ (‘NNPs’) (including offshore companies) (s 94-174 FA 2013). Initially the charge was a fixed amount on properties exceeding £2m. The ATED charge increases depending on the value of the property and is adjusted each year for inflation. As of 1 April 2015 the charge became applicable to properties held by ‘NNPs’ with a value of £1m or more and as of 1 April 2016 properties with a value of £500,000 or more. There are a number of reliefs, most notably property rental businesses are not subject to the charge (s 133 FA 2013), but to the extent the property is used by the UBO as the family home (or is available to the family to use) then it is subject to the charge. In addition to this Schd 25 FA 2013 introduced a CGT charge on residential property disposals falling within the scope of ATED (albeit the property would be rebased to its value as at 6 April 2013 for the purposes of calculating the gain). Finally, Schd 35 FA 2012 introduced a punitive SDLT rate of 15% for the purchase of high value residential property by a NNP from 21 March 2012.
What value protection from IHT?
This left non-domiciliaries with a decision to make. Were the IHT benefits of holding UK residential property via an offshore company worth the additional cost of paying the ATED charge, being exposed to ATED related gains and paying a punitive rate of SDLT? Many took the view that the cost did not meet the benefit and unwound their structures (or ‘de-enveloped’ their properties) before any ATED related gain took effect. In doing so taxpayers would need to be wary of s13 TCGA 1992 which attributes any non-ATED related gain to the shareholders of a an offshore company that would be a close company if UK incorporated (i.e. has five or fewer participators or shareholders). If the property had been held in the company for a long time this gain could be significant and as it was a UK situs gain the remittance basis would not protect a UK resident non-domiciliary from liability to tax. These were all issues that needed to be considered when taking account of the value of existing structures. Holding property via non-UK companies was becoming less and less attractive from a strictly tax perspective, but unwinding them was not necessarily going to be cheap. The one remaining benefit was the IHT protection that was afforded by non-domiciliaries holding UK properties via offshore companies (and in some instances holding those companies in trust). But at what cost?
The final nails in the coffin of offshore holding structures for residential property?
Schd 7 FA 2015 introduced the non-resident capital gains tax or NRCGT regime which took effect from 6 April 2015. This meant that a CGT charge would not only apply to companies paying the ATED charge, but any non-resident person (individual or company) who held UK residential property (used by the UBO or let). Again, there was an effective rebasing to 6 April 2015.
From 6 April 2017, Schd 10 FA (No. 2) 2017 ended the IHT protection gained by non-domiciliaries holding UK property via offshore companies. To the extent that the value of shares in such companies is attributable to UK residential property, the shares are not excluded property (i.e. they will form part of the individual’s estate for UK IHT purposes). For UK IHT purposes, there is now no practical difference between holding a UK property directly and holding via an offshore company.
Given these numerous changes aimed at holding UK residential properties via offshore companies, it really is no longer an attractive option from a UK tax perspective.
Current position if a UK residential property is held by a non-domiciled individual via an offshore company
There is now nothing attractive from a UK tax perspective about holding a UK residential property via an offshore company. If the intention is to increase the Treasury’s coffers then, if anything, the government and the BBC should be encouraging non-domiciliaries to hold properties via offshore companies as HMRC now hits the jackpot with these structures. It is a tax nightmare for the UBOs. Even trying to extract properties from these structures can be a costly exercise.
Judging by the numbers of properties still held by offshore companies as highlighted in the BBC article, it seems there are a lot of people who have not taken advice as to the effectiveness of these structures and have not taken the opportunity to de-envelop. Individuals should seriously consider seeking advice in respect of de-enveloping as soon as possible.
I shall indeed be knocking on a few doors on my street with my business cards in hand….