Next year could bring some interesting changes for non-UK domiciled developers and investors in UK property. Businesses that undertake the development of commercial or residential property or the letting of commercial property may gain the tax-free use of offshore income and gains in the UK. The Government is consulting on a proposal to allow this from 6 April 2012.

The key points of the proposal are -

  • To qualify for tax-free treatment, the investment must be made through a company which is UK resident or has a permanent establishment in the UK. The Government is considering whether to include listed companies.
  • Investments in a company that develops commercial or residential property as its trade will be permitted as well as investments in certain types of residential property such as nursing homes or hospitals where a commercial trade is carried on. However, the letting of residential property will not qualify.
  • An investment may be made through subscribing for or acquiring share or loan capital in the company (or a mixture). There will be no restriction on the size of the investment. The investment may be made directly by the non-domiciled person or through any kind of offshore investment vehicle or trust.
  • There will be anti-avoidance provisions to prevent abuse of the relief which will include the making of non-commercial payments (such as inflated salaries or non-commercial loans) to ‘leak out’ the value of the investment to the individual. Non-domiciles will be prevented from selling a business they already own to a new company funded by overseas income. 
  • If the investment is disposed of, the proceeds must be taken out of the country within two weeks or be reinvested in another qualifying business within two weeks. If this is not done, the offshore income and gains originally invested will become subject to UK tax in accordance with normal rules.

The proposal may change as a result of the consultation and if it does we will post an update.