I own a residential property in the UK through an offshore company, should I be concerned following recent tax changes?
'Penalties and interest will arise if ATED is not paid on time or if returns are submitted late'
This article was first published in CityAM, Friday 17 March 2017.
You may want to whisper this, but yes the chances are that if you own a property in the UK through an offshore company you have historically enjoyed a UK tax saving; not something you can say too loudly given the current attitude towards all things ‘offshore’. Whether this was your motivation for setting up the arrangement is another issue. There may be other reasons why you own your property in such a way, one of them being a need to preserve your privacy.
From a taxing perspective, until now the basic rationale has been that you are treated as owning the shares in the company and not the property itself, and if you are not domiciled in the UK you are not then subject to UK inheritance tax (IHT) on the value of the property. All of this is about to change from the start of the next tax year (i.e. from 6 April 2017), with the introduction of new rules to bring such structures within the scope of IHT.
You should also be aware that on 1 April 2013 the government introduced an annual tax on UK residential properties owned through companies (the practice of ‘enveloping’ to give it its appropriate phraseology) otherwise known as the annual tax on enveloped dwellings (ATED) along with some other taxing measures targeted as such arrangements.
If your company is not currently ATED compliant you should seek professional advice as soon as possible as the sums at stake could be significant. For example, the amount of ATED payable for the next ATED period (i.e. from 1 April 2017 to 31 March 2018) ranges from £3,500 for properties worth between £500,000 and £1m to as much as £220,350 for properties worth more than £20m.
A crucial consideration is whether you let your property out on a commercial basis. If so, there specific reliefs from the payment of ATED, including a specific relief for companies carrying on genuine lettings businesses. The company is still required to complete an ATED return though each year to claim this relief. Penalties and interest will arise if ATED is not paid on time or if returns are submitted late.
The new IHT charge will mean that if the value of the property is not already in your estate for IHT purposes, it will be from the start of 6 April 2017. Broadly IHT is chargeable on the value of a person’s estate over £325,000 at a rate of 40%. For example, for a property worth £5m this would result in an IHT liability of £1.87m.
The combined effects of both ATED and IHT means that there are now no UK tax advantages of owning a property through an offshore company. You should review your ownership structure as soon as possible, particularly if you want to carry out any planning to reduce your exposure to IHT going forward. Restructuring does not come without its own costs though and there may be non-tax reasons why you may wish to retain the structure.
Our dedicated de-enveloping webpage now live
All existing UK residential property owning structures should be reviewed and their future viability from a UK tax perspective considered on their facts and bespoke advice sought in all cases. To assist we have launched a dedicated de-enveloping site where we are pleased to offer a complimentary initial review of an enveloped structures based on the answers given in our short online de-enveloping questionnaire.
17 Mar 2017