Tax Planning for UK Domiciled Individuals
The purpose of this note is to set out, in outline, some of the arrangements we have for individuals resident, ordinarily resident and domiciled in the UK who wish to make investments in real property, either in the UK or overseas.
New Acquisitions
Where clients acquire properties or interests in land, it is often attractive to put those investments in to companies which are managed and controlled and resident in lower tax jurisdictions. However, for UK domiciled individuals one has to use a jurisdiction with an appropriate double taxation treaty with the UK and we have used both Cyprus and Estonia (and in earlier times the Netherlands Antilles) for this purpose. The double taxation treaty protects the individual shareholders against UK anti-avoidance legislation.
There are clearly issues about central management and control but property transactions often lend themselves to this sort of approach and clients usually manage to find ways of working with local directors.
If the property transaction involves actual construction activities on the site in the UK for a period in excess of 6 months, then there is inevitably going to be a UK branch and it is usually important to split any developers profit (which can be enjoyed overseas) from the building profit which has to be subject to UK tax and which might be dealt with by way of, for example, contributions to an Employee Benefit Trust once the profit has been realised.
Provided the foreign entity is carrying on a trading activity in properties, business assets taper relief should be available and so, correctly structured, it may be that the UK individual can fully enjoy the profits of the property venture at a total tax cost of 10%.
It might also be possible to shelter the shares in the foreign property company in, for example, a pension structure of one sort or another; that might, itself, be offshore as well. It really depends on the client’s preferences and whether 10% tax on the deal is too much for him.
Properties Pregnant with Gain
Often one is asked to solve the problem of a client who has a property already pregnant with gain and the client holds it in a UK company and wants to make a disposal.
Such properties can be held either as trading stock or on fixed capital account. At present, we are working on an idea for trading stock but I wouldn’t say that that was ready for public use; I hope it will be shortly.
However, in respect of items on fixed capital account (typically old commercial properties that are no longer needed but now have a chance of obtaining enhanced planning permission and therefore enhanced value) then we have a number of structures relying on principles of European Union law which should enable the property to be sold, via an intermediate subsidiary company in another EU jurisdiction, at a very low tax cost.
Costs
For both scenarios outlined above (properties pregnant with gains and those yet to increase in value) we typically undertake tax planning in anticipation of a possible sale. I would stress the necessity of not having a sale agreed (and, ideally, the property should not have been marketed).
In order to prevent there being a double charge to Stamp Duty Land Tax, the period between the planning and the anticipated sale should not exceed 24 months.
Our fees are 25% of the tax saving (plus VAT) with a minimum fee of £75,000. Of this, one third is payable on implementation of the structure and the balance is contingent on the success of the planning, payable on the closure of the relevant self assessment enquiry window.
Within the fees outlined, we would accompany the client to Cyprus to meet with the directors. We would also arrange for the Cypriot directors to visit the UK property to enable them to make informed decisions when back in Cyprus.
Implementation
Most property transactions have their own peculiarities; for example, there will be SDLT, VAT and possibly capital allowance issues to consider and that means that each transaction needs some real care but I should say that we have been using structures of broadly this sort since the late 1980s with complete success.
