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UK property owned by offshore companies – Finance Bill 2017 – Important changes for French and Swiss investors

This article is for general information only. Tax law is a highly specialised area and you should only act or refrain from acting after receiving full professional advice on the facts of your particular case. This article is for general information and does not constitute investment advice.

Non UK domiciled people have traditionally been advised to own UK property via an offshore company. In its simplest form the property is owned by an offshore company and the individual ultimate owners own the shares in the company. The shares can also be held by an offshore trust. This is advantageous because on death the non UK shares pass and not the property and the offshore company shares are outside the scope of UK Inheritance tax. It does not work for UK domiciled people because they are taxed on a worldwide basis because they are domiciled here.

It has important implications for French residents who own UK residential property because the current important protection of the UK France Inheritance Tax Treaty will be affected. This is dealt with below.

It will have a big impact on Swiss owners of UK residential property who are currently unlikely to be paying Inheritance Tax in the UK or Switzerland because of the favourable UK Swiss Inheritance Tax Treaty. This is likely to be disapplied and they are likely now to be fully liable to Inheritance Tax in the UK.

Offshore companies taxable

The Finance Bill 2017 is set to change all this for deaths (and other events such as gifts or settlements) after 5th April 2017. When this is passed into law it will make all residential UK property owned by a close company (a company controlled by 5 or fewer shareholders) taxable. This is a major change in UK tax law and another attack on non-domiciled persons. Similar provisions apply to properties held through partnership vehicles.

The Inheritance Tax charge is on the interest that a shareholder has in the offshore company. In other words you look through the offshore company to the shareholder and this interest is taxable to Inheritance Tax.

Loans

The Finance Bill also makes loans to individuals and companies taxable to Inheritance tax to the extent they are made to finance a UK residential property purchase. This is to cover the situation of an individual or a company buying a UK residential property with a loan which is deductible for Inheritance Tax purposes on completion.

2 year period

The sale proceeds from a residential sale by an offshore company remain taxable to Inheritance Tax for a period of 2 years from the date of disposal of the property.

UK France Inheritance Tax Agreement

The UK has a limited number of Double Tax Treaties covering Inheritance Tax. For instance the UK France Treaty of 1963 provides in Article V (1) that “Where a person was at the time of his death domiciled in some part of France duty shall not be imposed in Great Britain on any property which neither is situated in Great Britain, nor passes under a disposition or devolution regulated by the law of some part of Great Britain; and, in determining the amount or rate of duty payable in Great Britain, such property shall be disregarded.”

It also provides in Article IV (e) that shares or stock in a company … shall be deemed to be situated at the place where the company was incorporated.

On the face of it this double tax treaty prevents shares in a non UK company owning UK residential property and owned by a French domiciled person from being subject to inheritance tax in the UK.

The Finance Bill 2017 however contains a provision that nothing in any double taxation relief arrangements made with the government of a territory outside the United Kingdom is to be read as preventing a person from being liable for any amount of inheritance tax by virtue of paragraph 1 or 5 in relation to any transfer of value if under the law of that territory:-

(a) no tax of a character similar to inheritance tax is charged on that transfer of value, or

(b) a tax of a character similar to inheritance tax is charged in relation to that transfer of value at an effective rate of 0%.

This means that if there is no inheritance tax payable in France the protection of the tax treaty does not apply. Article 750 ter of the French Tax Code provides that if the deceased was domicilié in France all assets are taxed in France regardless of their location. By “domicilié” French law means resident rather than domiciled in the English law sense. In such a case the tax treaty would appear still to apply because French tax would be payable.

The protection of the tax treaty could however be lost if there is a specific exemption from French inheritance tax (so the effective rate is 0%) but no such exemption from UK Inheritance Tax. This will be an unusual situation but could arise. An example is a French domiciled person who leaves a UK house worth £1M to his sister. Under French law no French inheritance tax is payable if the sister is single, aged over 50, and has lived with her brother for 5 years before his death. There is no similar provision in the UK. In this case it would appear that the position will change after 5th April 2017 in that the current exemption from Inheritance Tax in both France and the UK will end and the estate will be taxed in the UK.

Another situation is if a debt relating to the property is accepted as deductible in France but not in the UK. In such a case no tax is payable in France but the residential property is taxable in the UK. This could easily arise if there are debt arrangements are which are likely to be challenged as artificial under UK law. It is sensible to review any such arrangements in the light of the new arrangements because the treaty protection will go.

There are likely to be unexpected situations which will occur here. Tax planners have been accustomed to advising on the basis of the tax treaty applying which will shortly end.

UK Swiss Inheritance Tax Agreement

Shares in an offshore company which owns UK residential property will come within Article 8 (1) (b) of the treaty. These are only taxed in the country in which the deceased is domiciled. Accordingly a Swiss domiciled person is currently only taxed in his canton of residence and not in the UK (subject to Article 8 (4)).

However many cantons do not tax gifts on death between say parents and children. This means that currently no Inheritance Tax is payable either in the UK or Switzerland. The changes in the Finance Bill 2017 are likely to mean that from 5th April 2017 such gifts will be taxable in the UK because the UK Swiss Tax Treaty will not be applied. Swiss residents are likely to be severely impacted by the new law.

December 2016

David Anderson

UK property owned by offshore companies – Finance Bill 2017 – Important changes for French and Swiss investors

 

David Anderson, Sykes Anderson Perry Limited Solicitors London

www.saplaw.co.uk

 

This article is for general information only. Tax law is a highly specialised area and you should only act or refrain from acting after receiving full professional advice on the facts of your particular case. This article is for general information and does not constitute investment advice.

 

Non UK domiciled people have traditionally been advised to own UK property via an offshore company. In its simplest form the property is owned by an offshore company and the individual ultimate owners own the shares in the company. The shares can also be held by an offshore trust. This is advantageous because on death the non UK shares pass and not the property and the offshore company shares are outside the scope of UK Inheritance tax. It does not work for UK domiciled people because they are taxed on a worldwide basis because they are domiciled here.

 

It has important implications for French residents who own UK residential property because the current important protection of the UK France Inheritance Tax Treaty will be affected. This is dealt with below.

 

It will have a big impact on Swiss owners of UK residential property who are currently unlikely to be paying Inheritance Tax in the UK or Switzerland because of the favourable UK Swiss Inheritance Tax Treaty. This is likely to be disapplied and they are likely now to be fully liable to Inheritance Tax in the UK.

 

Offshore companies taxable

 

The Finance Bill 2017 is set to change all this for deaths (and other events such as gifts or settlements) after 5th April 2017. When this is passed into law it will make all residential UK property owned by a close company (a company controlled by 5 or fewer shareholders) taxable. This is a major change in UK tax law and another attack on non-domiciled persons. Similar provisions apply to properties held through partnership vehicles.

 

The Inheritance Tax charge is on the interest that a shareholder has in the offshore company. In other words you look through the offshore company to the shareholder and this interest is taxable to Inheritance Tax.

 

Loans

 

The Finance Bill also makes loans to individuals and companies taxable to Inheritance tax to the extent they are made to finance a UK residential property purchase. This is to cover the situation of an individual or a company buying a UK residential property with a loan which is deductible for Inheritance Tax purposes on completion.

 

2 year period

 

The sale proceeds from a residential sale by an offshore company remain taxable to Inheritance Tax for a period of 2 years from the date of disposal of the property.

 

UK France Inheritance Tax Agreement

 

The UK has a limited number of Double Tax Treaties covering Inheritance Tax. For instance the UK France Treaty of 1963 provides in Article V (1) that “Where a person was at the time of his death domiciled in some part of France duty shall not be imposed in Great Britain on any property which neither is situated in Great Britain, nor passes under a disposition or devolution regulated by the law of some part of Great Britain; and, in determining the amount or rate of duty payable in Great Britain, such property shall be disregarded.”

 

It also provides in Article IV (e) that shares or stock in a company … shall be deemed to be situated at the place where the company was incorporated.

 

On the face of it this double tax treaty prevents shares in a non UK company owning UK residential property and owned by a French domiciled person from being subject to inheritance tax in the UK.

 

The Finance Bill 2017 however contains a provision that nothing in any double taxation relief arrangements made with the government of a territory outside the United Kingdom is to be read as preventing a person from being liable for any amount of inheritance tax by virtue of paragraph 1 or 5 in relation to any transfer of value if under the law of that territory—

(a) no tax of a character similar to inheritance tax is charged on that transfer of value, or

(b) a tax of a character similar to inheritance tax is charged in relation to that transfer of value at an effective rate of 0%.

 

This means that if there is no inheritance tax payable in France the protection of the tax treaty does not apply. Article 750 ter of the French Tax Code provides that if the deceased was domicilié in France all assets are taxed in France regardless of their location. By “domicilié” French law means resident rather than domiciled in the English law sense. In such a case the tax treaty would appear still to apply because French tax would be payable.

 

The protection of the tax treaty could however be lost if there is a specific exemption from French inheritance tax (so the effective rate is 0%) but no such exemption from UK Inheritance Tax. This will be an unusual situation but could arise. An example is a French domiciled person who leaves a UK house worth £1M to his sister. Under French law no French inheritance tax is payable if the sister is single, aged over 50, and has lived with her brother for 5 years before his death. There is no similar provision in the UK. In this case it would appear that the position will change after 5th April 2017 in that the current exemption from Inheritance Tax in both France and the UK will end and the estate will be taxed in the UK.

 

Another situation is if a debt relating to the property is accepted as deductible in France but not in the UK. In such a case no tax is payable in France but the residential property is taxable in the UK. This could easily arise if there are debt arrangements are which are likely to be challenged as artificial under UK law. It is sensible to review any such arrangements in the light of the new arrangements because the treaty protection will go.

 

There are likely to be unexpected situations which will occur here. Tax planners have been accustomed to advising on the basis of the tax treaty applying which will shortly end.

 

UK Swiss Inheritance Tax Agreement

 

Shares in an offshore company which owns UK residential property will come within Article 8 (1) (b) of the treaty. These are only taxed in the country in which the deceased is domiciled. Accordingly a Swiss domiciled person is currently only taxed in his canton of residence and not in the UK (subject to Article 8 (4)).

 

However many cantons do not tax gifts on death between say parents and children. This means that currently no Inheritance Tax is payable either in the UK or Switzerland. The changes in the Finance Bill 2017 are likely to mean that from 5th April 2017 such gifts will be taxable in the UK because the UK Swiss Tax Treaty will not be applied. Swiss residents are likely to be severely impacted by the new law.

 

 

December 2016

 

David Anderson