During a recent instalment of our property owners post-COVID webinar series, our panellists explored overseas investment in the UK. In particular the conversation included the typical issues which arise for non-UK resident trustees, what lenders look for, when they may or may not be prepared to lend and what may impact pricing, and how to select investment opportunities, as well as the relevant UK tax issues to be aware when structuring deals and ownership.
Alexander Dickinson, Partner, Womble Bond Dickinson, chaired the panel comprising:
- Alice Huxley, Associate – RICS Registered Valuer, Knight Frank
- Steven Rowland, Head of New Business, Vistra (Jersey) Limited
- Yvonne Coughlan, Executive Director, J.P. Morgan Private Bank
- Will Ford, Partner, Womble Bond Dickinson.
Overview of the UK property market
Alice opened the discussion with an analysis of recent trends, accompanied by examples of recent deals. In brief:
Residential markets had performed very strongly the past 12 months, particularly in the countryside, with residential and rural assets valued at £5m or higher showing 8% increase in value year on year.
In London, prime residential markets had suffered significantly from having the lack of availability of international buyers, albeit market practices have adapted.
Certain commercial yields, especially warehousing, had seen positive growth.
Key recent behavioural drivers included ESG issues, especially environmental/carbon neutral. There has, for instance, been very significant interest in "re-wilding" agricultural estates (albeit this is an area where specialist input is important, for instance the impact on key reliefs).
Structuring from a UK tax perspective
Will led an overview of tax structuring for UK property purchases in general:
- For owner-occupied residential properties the default advice tends to be for clients to keep it simple and buy in their own name (or via a nominee). If borrowing will form a key part of inheritance planning, it should be taken out from inception
- For let residential properties and portfolios, the default structure tends to be a UK resident but non-UK incorporated company – potentially offering remittance basis advantages and better treatment of finance costs than personal ownership, plus the benefit of relatively low UK corporation tax rates
- For commercial investment property, the default structure for this asset class is same as above, but probably (and if possible) with a non-UK resident trust holding the shares in the company, adding significant additional UK inheritance tax advantages. This tends also to be the default structure for development assets, which may in limited circumstances also benefit from business property relief from UK inheritance tax
- Purchases of diversified rural estates tend to use each of these structures as appropriate to the asset class, plus partnership structures where appropriate.
Given the discussion so far, the panel emphasised the need for the key advisors – surveyors, bankers, tax and property lawyers and trustees – to liaise from the outset. Structuring has to be approached practically and with sensitivity to the client's particular needs and goals, including their desired speed of acquisition. Without forward planning and collaboration, deal timeframes may become unnecessarily challenging, or key potential benefits may be lost.
Yvonne outlined some dos and don'ts in this contexts, including valuable insight into the significant flexibility of many lenders in this context, for instance looking to broader forms of collateral – across multiple asset-classes – although (as she outlined with Will) many more flexible lending solutions may come with technical tax issues which need thought. There may well be trade-offs, however, between the cleanest tax structure, and the keenest pricing for the lending.
Where non-UK trusts or corporate structures may be formed or involved, early collaboration is again key. These deals will give rise to particular issues for trustees, including the ability to service any proposed borrowing and manage related areas of risk for the broader structure – for instance concerning security over other assets. As Steve noted, family dynamics around any particular proposed transaction can also prove challenging: investment of time in knowing the key beneficiaries well tends to be well-rewarded.
Trustees and their tax advisors need to be very aware of potential tax risks around funding a purchase and structuring debt, including direct, indirect or "constructive" remittances in order to prevent unexpected and avoidable charges to UK tax arising.
Where lending is concerned, broader structuring issues including choice of jurisdiction can have a key impact on the appetite of a bank to lend. Returning to tax, and particularly inheritance tax, wherever there is borrowing, the rules on priority of deductions for inheritance tax purposes need particularly careful attention.
War stories, example deals and top tips
The discussion was punctuated with example transactions and lessons learnt by each of the panel from their very broad shared professional experience.
The panel wrapped up the discussion with each of their top-tips in this context.