Navigating tax changes for non-resident companies owning UK residential property
Until relatively recently, an offshore company structure was often the obvious choice for non-resident landlords wanting to hold UK residential property, as well as for non-domiciled individuals and offshore trustees wanting to acquire such property for family use.
Until relatively recently, an offshore company structure was often the obvious choice for non-resident landlords wanting to hold UK residential property, as well as for non-domiciled individuals and offshore trustees wanting to acquire such property for family use. That decision has become more complicated as HMRC has progressively introduced new rules over the past decade. From April 2023, there will also be a new consideration: a hike in corporation tax from 19% to 25%.
The gradual expansion of new rules for companies owning UK residential property started with the annual tax on enveloped dwellings (ATED), introduced in April 2013. This was initially for properties worth at least £2 million, but now catches those worth over £500,000. From 6 April 2017, the inheritance tax protection for UK residential property held in an offshore company was removed, although it still applies to commercial property and farmland. These changes are part of a wider drive from HMRC to remove the tax advantages of offshore companies holding UK residential property.
With every tax change, there will be those for whom the company structure will still be right, those for whom the decision is marginal and those who may need to restructure their property ownership. The right option may depend on whether the intention is to hold the property for the short-term or long-term, whether or not it is let and for how much, and the anticipated inheritance tax bill. The size of any unrealised capital gain is also an important consideration.
Corporation tax change from April 2023
UK companies with profits below £50,000 will generally be taxed at 19%, and profits between £50,000 and £250,000 will be taxed at a tapered rate between 19% and 25%. The 25% main rate will usually only apply when profits exceed £250,000. The lower rates, however, are not available to non-UK resident landlord companies, which will pay tax at 25% on all taxable profits.
The new 25% flat rate for offshore company property income and gains will undoubtedly increase tax payments for many. Property prices have also shifted quite significantly over the past two years. Now is therefore an ideal time for such property investors to consider their plans for the property and whether or not to restructure their property ownership while taxes are currently lower.
Equally, if property investors are already considering selling, particularly in light of recent price rises, it may be worth accelerating these plans to lock in a lower tax rate. London property prices have moved little over the past two years, while prices on ‘work from home’ properties in the countryside have risen. Long-term buy-to-let landlords may consider their rental income too low to merit a change, but large unrealised capital gains may also be a consideration.
In most cases, the gain on a residential property held in an offshore company will be based on the April 2015 market value, and an indexation allowance of 7.8% of that value usually applies for properties held since then. Only increases in value over that indexed amount would therefore be taxable on a sale.
There are many ways to reorganise a property holding structure. The property could be sold and the structure retained, or the property could be extracted from the structure and held personally. A UK company may be a more tax-efficient structure, or consideration could be given to moving the management and control of the offshore company to the UK to access the lower corporation tax rate available to UK resident companies.
If residential properties are used by the shareholder’s family, or by beneficiaries of an offshore trust shareholder, a detailed review is even more important. There are several reasons why it may now be much cheaper to ‘de-envelope’ the property, in other words to extract it from the company, than previously. These include using a different market value date when considering the base cost of the property, as well as a lower tax rate applying to any gain arising, 19% currently as compared to 28% in recent years. There is also a potentially significant saving on ATED costs, which can be £237,000 per year for a property worth over £20 million. The potential capital gain on de-enveloping can pay for itself once the savings in ATED and offshore company fees have been factored in.
We cannot advise on whether or not to hold a property long term. We can, however, help quantify the tax liability of different options. There could be several solutions, but they will be unique to the individual and the property. A review now could help avoid a large tax bill later on. It is better to start considering options sooner rather than later. and while the offshore company structure will still make sense for some property owners, it does need to be considered carefully.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.