Tax Implications for Offshore Property Ownership

Prior to the 1st of April, 2013, it was a common practice for non-UK domiciled and non-UK resident individuals to acquire high-value UK residential properties using offshore companies. The shares of the offshore company were typically owned by an offshore trust, which meant that since the shares were not situated in the UK, there were no implications for UK Inheritance Tax (IHT). However, if the individual had bought the property directly, IHT implications would have arisen.

However, over time, the advantages of this type of structure have been gradually diminished due to various changes in tax laws:

1. On the 1st of April, 2013, the HM Revenue and Customs (HMRC) introduced the Annual Tax on Enveloped Dwellings (ATED), a fixed-scale charge based on the property’s value. For revaluation, properties are evaluated every five years. The next revaluation date is set for the 1st of April, 2023. If a property is commercial, an ATED exemption can be granted. However, it is still mandatory to file an ATED return.
2. The HMRC implemented capital gains tax for non-residents selling UK residential property on the 6th of April, 2015. This tax was later expanded to include all UK land and property on the same date in 2019.
3. On the 6th of April, 2017, the HMRC brought UK residential property within the scope of the Inheritance Tax. In the structure mentioned earlier, the offshore trust becomes liable for IHT. The rules are far-reaching and have significant implications.

Due to these changes, there has been an increasing trend to “de-envelope” UK residential and commercial properties by transferring them to a new UK company. Therefore, it is crucial to carefully consider the tax implications and engage in proper planning to avoid unnecessary tax charges. Our firm has extensive experience in this area.

From an IHT perspective, offshore trusts will face an IHT charge on each tenth anniversary following the 6th of April 2017. So, for example, if a trust were established on the 1st of July, 2009, the first Ten Year Charge would arise on the 1st of July, 2019 (although the tax payable would only be calculated from the 6th of April, 2017). In cases where trusts were set up many years ago, IHT reporting is sometimes overlooked, leading to HMRC charging interest and penalties on the tax due.

HMRC has raised concerns about overseas companies failing to report rental profits in the UK. To address this issue, the tax authority has issued “nudge letters” to encourage these companies to comply with UK tax regulations.

If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.