Time to review the UK’s tax treatment of SCIs
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Sociétés Civiles Immobilières (“SCI”s) are simple French (or Monegasque / Luxembourg) companies designed for holding property. They do not have any commercial activity. They are vehicles, which have often been used by UK buyers of French real estate. The predominant reason behind this is to fall outside the scope of French forced heirship rules. They have also been simple and helpful structures for avoiding French wealth tax although this has become less straightforward over recent years.
Tax treatment in France
One of the key principles of these companies is that they are taxed in France in a similar manner to a partnership i.e. the shareholders are taxed directly on the profits of the company.
Usually the only profit which such a company will make will be the capital gain arising on the disposal of the French property. When this happens the shareholders are taxed directly on any capital gain. If the property is the shareholder’s main residence then they are entitled to the same tax relief they would get if they owned the property directly.
Problem in UK
One issue is that these companies do not exist under English Law and so HMRC has to judge how it will tax the profits received in relation to these companies by UK based shareholders. Do they adopt the same approach as the French authorities and tax the shareholders on the underlying profits or do they consider the SCI to be “opaque” (i.e. a taxable entity in its own right). Since November 2005, HMRC has maintained a position that the SCI should be considered “opaque” – this means that it is taxed in the same way as a company.
This means the shareholders are deemed to receive dividends from the SCI – this complicates the position because the dividend is not the same as the underlying profit of the company. This calls into question whether the shareholder can claim double tax relief in respect of any tax paid in France. Because the income is not the same according to HMRC, the present position is that there is no entitlement to double tax relief. You can be left with a situation where an individual pays 19% tax in France on their capital gain and then pays say 32.5% in the UK on the net profits, with no credit for the French tax.
This situation appears odd but HMRC has so far refused to review its position. It has a number of characteristics which it considers to be consistent with tax transparent entities and with tax opaque entities. Their view is that the characteristics of an SCI point towards the opaque vehicles.
Treatment of US “transparent” vehicles
As you might expect, France is not the only country where this type of issue arises. The recent case of Anson v HMRC has seen the Supreme Court provide a judgment in respect of the profits arising in the USA to a US Limited Liability Company (“LLC”). The LLC is viewed in the US as a partnership with the members all taxed directly on profits of the entity. Similarly to SCIs, HMRC has maintained that the LLC should be tax opaque. This has led to UK residents being unable to claim double tax relief in respect of the US tax paid at source on their share of profits. Instead they have been subject to US tax at source and then been taxed in the UK as if they have received a dividend.
In Anson, the Supreme Court decided that double tax relief should apply in the case of an LLC. They stated that the taxpayer was being taxed on the same income twice under HMRC’s current approach.
As a result UK members of an LLC should now be taxed on the underlying profits and should claim a credit for the US tax paid at source. In many cases this will mean that no further tax is due in the UK.
The future for SCIs
The decision should be of interest to SCI shareholders as it may well trigger a review by HMRC of their adopted position. In our view, the position should be seen as similar by HMRC. In fact, an LLC carries more of the characteristics of an “opaque” entity according to HMRC’s standards than an SCI.
We are speaking directly with HMRC to see whether they will be considering a change to their currently held views.