Using an offshore company to buy and sell UK residential property
By Christopher Sykes, Solicitor and Partner in Sykes Anderson LLP Solicitors, London.
Please note that tax and property law are complex subjects and you should not rely on this article without professional advice on the facts of your case
The London residential property market and in particular that of Central London, has bucked the trend of the difficult conditions faced by other parts of the country in the last few years following the credit crunch. A large driving force has been overseas buyers who have seen London as a safe long-term investment and have also taken advantage of weaker sterling. There is often competition between buyers for desirable, high value properties.
Obtaining mortgage finance remains difficult particularly if a high loan to value ratio is required and as always cash is king in terms of both financing an acquisition and securing a property against the competition. However, sophisticated investors may want finance against the property for other reasons and may also have this secured against other assets.
Wherever possible, an overseas buyer should consider acquiring a UK property in the name of an offshore company or other offshore vehicle. This is subject to consideration of the administration and running costs of the company and the tax implications. It is generally not advisable for an offshore buyer of high value property to purchase in the name of an individual. Purchases in the name of a trust/trust company are becoming an increasingly attractive option in light of the new taxes on companies owning residential properties worth more than £2M. It is expensive to transfer a property into the name of a company at a later stage.
Advantages of using an offshore company.
The main benefits are as follows:
- Tax (although the benefits have been diluted by recent legislative changes)
- Potential benefits when selling
See below for details.
Potential disadvantages of using an offshore company
- Set up and running costs of the company. There will be annual fees and transactional fees. The level will depend on matters such as the jurisdiction of the company and the level of service required and varies between different companies offering the services. More sophisticated structures have an offshore trust behind the company which comes with an additional layer of cost which is justified if the value of the property is high and the tax and other benefits outweigh the cost.
- Loss of control. You have to trust the administrators of the company to deal honestly with you and the property and to follow your instructions particularly where the director(s) of the company are nominees or similar or otherwise not directly under your control. Most corporate services companies offer a professional service but due diligence should be undertaken on any company agent you are planning to engage.
- As from 1st April 2013 a company (whether offshore or not) owning UK residential property worth more than £2M must pay an annual charge which is on a sliding scale according to the market value of the property (with no deduction for any debt). There are certain exemptions, for example buy to let properties and the charge does not apply where the company is a nominee for an individual or a trust.
- The potential liability to capital gains tax (“CGT”) on the sale of the property (rather than the sale of the shares in the company). This is again subject to the same exemptions as the annual charge. See further below.
- The financing and associated security arrangements are likely to be more complex and hence costly.
The ownership and other details relating to the title of the property are recorded at HM Land Registry. This includes the name and address of the owner and the price paid. The register is open to public inspection and copies can be obtained on payment of a fee. Most wealthy and sophisticated buyers do not want their names as owners publicly available. There are security and general confidentiality reasons for this. By having an offshore company as owner someone searching the Land Registry website can only see the name of the company. A determined enquirer would then have to try to search against the offshore company which is likely to be difficult and indeed, depending upon the jurisdiction of the company and the manner in which it is set up, it should be virtually impossible for someone to find out details of the beneficial ownership.
The main potential tax advantages in buying an offshore company are:
- A property can be sold by selling the shares in the company with no UK CGT. However CGT is payable (subject to certain exemptions) on any gain from the sale of the property itself where the sale price is more than £2M regardless of the country of incorporation of the company or the tax status of the shareholders/beneficial owners. A buyer acquiring a property by purchasing the shares in a company should note that they could be acquiring a liability to pay CGT on the latent gain in the company built up during the seller's ownership and which will be triggered on a subsequent sale of the property.
- If the property is in the name of an individual then on their death inheritance tax (IHT) is potentially payable on the net value of the property. In simple terms IHT is presently at 40% on the net value less an exempt amount currently £325,000. There are some special circumstances by which IHT can be mitigated but the risk is avoided simply by using an offshore company, provided that this is not just a nominee/”see through”). Use of a trust can be helpful here but requires careful thought including the use of debt in the structure.
- Regardless of who owns the property any rental income will remain taxable in the UK. If the property is owned by an offshore company only the basic rate of UK income tax (20%) will apply regardless of the level of income. This can result in a substantial saving when compared with personal ownership under which the banded UK income tax rates (up to 50%) will apply. In all cases, the default position is that the basic rate tax should be deducted at source by an agent or the tenant. It is possible though for the owner to apply to HMRC for a clearance which allows them to receive the income gross.
- No stamp duty land tax is payable by a buyer of the shares in the company. See further below.
It should be noted that the above assumes that the beneficial owners of the company are not UK resident or domiciled for tax purposes. There may be capital or other taxes payable in the jurisdiction of the incorporation of the company concerned and/or in the country in which the beneficial owners are tax resident. The acquisition of a UK property, particularly a high value one, should be considered as part of an overall tax strategy with appropriate advice.
Advantages on selling the property
Particularly if the owning company is a single purpose one, i.e. its only business and reason for existence is the ownership of a single property, then there are benefits if the property can be sold by way of a sale of shares in the company rather than the sale of the property itself. There is one particular financial advantage for the buyer as there is no stamp duty land tax (SDLT) (in effect a property transfer tax) on a sale of the shares of an offshore company. SDLT is at 5% on the sale of a property for more than £1,000,000 7% if more than £2M and 15% if more than £2M and bought in the name of a company so the saving is considerable on high value properties. The seller may want to share in this benefit by requiring the buyer to pay a proportion of the SDLT saved although there may need to be a trade off as the buyer will be taking on any latent gain in the property.
There is an advantage for both parties in that the transaction does not appear on any public register in the UK as the ownership of the property does not change. From the seller's point of view it is the shareholder who will be a party to the contract and although the contract is not a public document some sellers may not want their name to appear on any legal document for legitimate reasons of confidentiality. If the shares are held in the name of a nominee then this issue does not arise.
Weighed against this, is the fact that a sale of a company is a much more complex process than selling a property and it can also take longer. It tends to be considerably more expensive in terms of legal and possibly accountancy fees. This emphasises the need for a seller to make sure that a significant portion of the SDLT saved is received from the buyer as an incentive and to cover the additional costs. On the sale of a company, there is greater due diligence to be undertaken by the buyer's solicitors and indeed the share sale agreement is more complex and bespoke than that for the sale of the property and it will include for example, detailed warranties by the seller. There is likely to be considerable involvement by the administrators of the company for which they will charge a fee. The financing and securing arrangements are more complex and hence costly.
When considering selling UK property which is in the name of an offshore company, it is recommended that you take legal advice prior to marketing on the advantages and disadvantages of selling the company against selling the property and the likely cost of both. It is also helpful if the correct structure for the ownership of the property is set up when the property is first bought as this can make the sale of the company easier.
One potential issue for ownership of a property in the name of an offshore company, particularly where it is an investment property to be rented to tenants, is the risk of fraud. Unfortunately a few years ago the Land Registry 'dematerialised' the proof of title system so that there is no longer a physical document proving title. Ownership is recorded purely electronically. This has provided an opportunity for fraudsters to sell property by pretending to be the owner. This fraud is more difficult if the property is in the name of a company but it is by no means impossible. The risk is increased if the fraudster operates in conjunction with a solicitor who is less than scrupulous or does not carry out proper checks. There are ways in which the risk of this type of fraud can be minimised and we are able to advise in this respect.