Offshore structures owning UK residential property

Prior to 1 April 2013 it was fairly common for individuals who were both non-UK resident and non-UK domiciled to purchase high value UK residential property through an offshore company, with the shares in that company being owned by an offshore trust.

Because the shares were not situated in the UK, there were no UK IHT implications (as there would have been if the property had been purchased directly by the individual).

Over the years the benefits of this type of structure has gradually been eroded:

• From 1 April 2013, HMRC introduced an Annual Tax on Enveloped Dwellings (ATED) which is a fixed scale charge based on the value of the property. Properties are revalued every five years for these purposes so the next revaluation date is 1 April 2023. If the property is commercially let, an ATED exemption is available, but an ATED return still needs to be filed.

• From 6 April 2015, HMRC introduced capital gains tax for non-residents disposing of UK residential property, which was extended to all UK land and property  from 6 April 2019.

• From 6 April 2017, HMRC brought UK residential property into the Inheritance Tax net. The rules here are far-reaching and in the structure outlined above, the offshore trust becomes liable to IHT.

In view of the above changes, there is a marked trend to ‘de-enveloping’ UK residential and commercial property from the structure by moving it to a new UK company and here the tax implications have to be carefully considered and planning taken to avoid unnecessary tax charges. We have considerable experience in this area.

From an IHT perspective, offshore trusts will have an IHT charge on each ten year anniversary after 6 April 2017. So if, for example a trust was established on 1 July 2009, the first Ten Year Charge would arise on 1 July 2019 (although the tax payable would only be calculated from 6 April 2017). Where the trust was set up many years ago, the IHT reporting is sometimes overlooked which can lead HMRC charging interest and penalties on the tax due.

HMRC also believes many overseas companies have not declared rental profits and has issued ‘nudge letters’ urging such companies to regularise their UK tax position.

Next Steps

If you or your clients have offshore structures holding UK property and would like us to consider the ongoing suitability of these and the tax consequences of ‘bringing the structure back onshore’ please do get in touch.