Many international individuals have used an offshore company to buy their home in the United Kingdom. Important changes are taking place from April 2013 in relation to UK residential properties which were worth over £2 million in April 2012.
The UK Government is targeting existing property-owning companies with two important new tax charges. These will apply to all owner-occupied UK residential properties worth over £2 million unless the property is rented out to an unconnected tenant.
Why do the changes cause a problem?
Individuals who have previously bought valuable UK residential property using a company will have to pay two new taxes.
Annual charge from April 2013This is similar to a wealth tax. The annual charge ranges from £15,000 to £140,000. The charge is a fixed amount payable every year from April 2013 onwards. It is based on the value of the property as at April 2012 and then on the value of the property every five years after that.
Capital gains tax from April 2013If the company sells the property in the future for more than it was worth on 6 April 2013, it will have to pay a new capital gains tax charge at 28% on all gains above the April 2013 valuation.
What are the solutions to the problem?
The correct solution for any individual will depend on their own personal circumstances. Unfortunately there is no "one size fits all" solution to the problem. Some options are set out below, but a thorough review of each individual's circumstances will always be needed to establish the best solution in every case.
Personal ownership of the property
One solution could involve taking the property out of the company before April 2013 so that the individual owns it in their personal name. This will avoid the annual charge. In most cases it will also avoid capital gains tax on a future sale. However, there are other tax issues which need to be considered carefully. This route may give rise to a significant inheritance tax charge in the future, although there are techniques for managing this risk, including using bank loans.
There can also be significant tax charges on the dismantling itself which need to be considered. In many cases it will be very difficult to dismantle the structure before the new rules apply in April 2013 unless the dismantling process is started immediately.
For individuals who are concerned about confidentiality, the solution might be to own the property through a nominee company. Again, this would avoid the annual charge and possibly also capital gains tax on a future sale because the individual will be treated as owning the property personally for tax purposes. However, some of the other tax problems associated with personal ownership and with dismantling will remain.
Individuals who wish to transfer property out of a company into their personal name where there is a mortgage in place will need specialist advice to avoid stamp duty land tax on the dismantling process. A refinancing of the existing loan can provide a solution to this problem.
What are the next steps?
Individuals with valuable, owner-occupied UK residential properties held through an existing company structure will need bespoke tax advice on the best way forward. In many cases, international individuals will also need to consider the tax position in their home country.