The UK Constitution requires us to rejoice on the death of a monarch “The King is Dead. Long Live the King!” which I always thought was a disrespectful proclamation to the deceased King until I was told it referred to the succeeding monarch, inferring that the monarchy never dies. The prospective ‘death’ of the Greek economy this month seemed to have similarly suggested to European finance ministers that they should chant “Long Live the Euro”! My belief is that it may well outlive our current monarch, but not by many years!! After all, the Euro is not the basic tenet of the European Union and its founding members; it is the free movement of capital and labour that form the underlying principle of Sovereign countries uniting into an Economic Cooperative Union.
The free movement of capital prompted me to ask Dmitry to write this month’s article on investment in real estate. As regards free movement of labour, I have been presenting lectures on transfers of personal residence recently for independent organisations, and we will be discussing this issue at the European branch of the IBSA in Zurich on 1st December. But prior to that, the European branch is holding a discussion group on 30th September in Paris at the offices of Jeantet Associés, 87, avenue Kléber – 75784 Paris Cedex 16 on the topic of ‘Supply Chain Methodology’. The discussion will be led by Dr Emmanuel Llinares of NERA Economic Consulting and will provide attendees with invaluable insight into the possibilities and impediments in ensuring transfer pricing is managed effectively within the value chain. IBSA members from Luxembourg, Switzerland, Malta and similar countries offering incentives within the value chain will also be presenting their analyses of likely changes following the OECD BEPS conclusions to be announced on 15th September. Readers who are not yet members of the IBSA are invited to attend the meeting as my guest so that you can learn at first hand the professionalism, transparency and integrity of this global association of professional advisors dealing with entrepreneurial clients. The meeting is also open to members of other IBSA branches in Asia, North America and the UK.
The previous day on 29th September, the UK branch is holding a meeting at Ince & Co LLP, International House, 1 St Katharine’s Way, London, E1W 1AY and the topic for the evening is ‘Business Growth’, in particular funding via methods such as IPO, private equity, club funding, M&A and the potential impediments to these. We are really lucky to have some excellent speakers on the panel from the business community who will share their experiences of steering businesses through funding cycles.
Our annual conference on 19th November will be held at The Landmark hotel in London and the topic will be ‘Issues Affecting the International Development of SMEs.’ The sessions will cover financing and tax issues, relevant economic issues, business strategies for developing SMEs and the protection and development of intellectual property throughout the SME development phase. Readers who would like to attend the conference are invited to let me know (click here) but all the IBSA events can be viewed on the IBSA website.
Finally, I hope that you are enjoying the excellent summer and that you don’t have to think too much about work until we get nearer September!
Key considerations when structuring home ownership in the UK
Along with immigration procedures if required, buying a home is often the next step for those looking to relocate to the UK. There are many legal and regulatory issues that the expectant property owner should consider, but because the value of the new investment is likely to be considerable, tax issues often shape how the property is acquired, used and later disposed of.
Recent years have seen the enactment of numerous anti-avoidance provisions aimed at reducing the possibility of avoiding UK tax in connection with property ownership. These have forced professional advisers to review the traditional holding methods and have caused confusion amongst the buyers. Following the Budget on 8th July, our July newsletter article provides a brief overview of the key tax considerations that influence the structuring of a typical property transaction.
Given the rapid increase in values of UK residential properties, particularly in London, it is not uncommon for the average home price paid by wealthy foreigners to be in the range of £3–4 million. Until a few years ago, a typical structure involved a non-UK registered and resident company owning the house whose shares were settled on a non-UK resident trust. This method had ensured the absence of inheritance tax liability in case of the owner’s death and the minimisation of capital gains tax when the house was sold.
Recent enactments have made creating and maintaining this arrangement both tax inefficient and suitable only for the most expensive properties with values substantially in excess of £20 million. The first hurdle consists of a penal 15% stamp duty land tax (SDLT) chargeable when a “non-natural person” (this includes a company) buys a residential property costing more than £500,000 (click here). Then there is annual tax on enveloped dwellings (ATED), which a corporate owner should pay simply because it is a non-natural person holding the property. It is a fixed amount chargeable on the value of the property depending on which band it falls into and the annual chargeable amounts for ATED increase each year in line with the Consumer Prices Index (click here). Finally, since April 2015 non-UK resident persons, including companies and individuals, have been liable to UK capital gains tax on disposals of UK real estate. It is still possible to sell the shares of the property holding company and avoid UK tax liability on their disposal. However, it raises a whole lot of other issues, such as the UK tax liability arising to UK resident beneficiaries of the trust that receives the proceeds, and also the amounts of SDLT and ATED incurred while the property was in corporate ownership.
In light of these facts, we have increasingly been recommending to own family homes direct by the individuals and their family members. There is of course SDLT to pay, however, recently its “slab” method of calculation has been replaced by marginal tax rates reaching the maximum of 12%. HMRC run a useful SDLT calculator on their website, available here (click here). When the property is disposed of in the future there is of course 28% capital gains tax liability. However, this can be fully avoided if the home meets the conditions of the Principal Private Residence Relief (click here). The relief is also available to individuals who are resident outside the UK provided they spend a certain number of days in the property (click here).
The main disadvantage of owning the property direct is UK inheritance tax (IHT) liability that arises on the owner’s death (click here). The tax is charged at 40% on the net value of the property less the exemption amount of £325,000 (aka the nil rate band, NRB). In the situation where the surviving family is asset rich and cash poor, they might have to sell the home or other property in order to pay the liability. Fortunately, if the owner is married, the surviving spouse receives the property free of IHT and when they die the children may have the benefit of the combined £650,000 exemption. Also in the July 8th Budget, it was confirmed that the combined allowance in respect of the family home will reach £1 million in April 2020 under certain conditions (click here).
Depending on the number and ages of family members, they can own the property as joint tenants or alternatively as tenants in common in equal shares. In the latter case the availability of multiple NRBs might help to substantially reduce the IHT liability. Alternatively, the home owner can give their share of the property to the children and provided the donor survives for another seven years, the gift will result in taking the home out of their estate. However, it should be cautioned that if the same parent continues living in that house without paying rent to the children, the gift will be considered a gift with reservation of benefit (GROB) (click here), which will offer no IHT advantages.
If there is a mortgage secured over the house, the liability reduces the asset value on which IHT is charged. It is equally possible to reduce the property value by charging loans over it after the purchase, although recent legislation severally restricted this planning method ensuring that only genuine commercial loans are allowed. Finally, some might consider settling money on an offshore trust to allow the trust to purchase the UK property. While this avoids IHT liability on the former owner’s death, the trust itself is liable to IHT 10-year and exit charges at 6% on the net property value (click here), which coupled with the expenses of running the trust might not prove to be cost-effective.
In most circumstances, the cheapest method to reduce IHT exposure is to take out a whole-of-life insurance policy (click here), under whose terms the insurer will pay the tax.
For those concerned about the lack of confidentiality associated with the direct home ownership, we recommend using a non-UK company that acts as a bare trustee for the benefit of the owner. In this case the company owns the legal title with the beneficial title remaining with the individual. This ensures that the company is shown as the property owner in the UK Land Registry. Provided that HMRC is notified of this arrangement, the structure is deemed to be tax transparent and the adverse tax consequences associated with a corporate ownership as described above would not be relevant.
This brief article highlights the websites that may be visited by the reader to obtain more information on the particular issues summarised above, but of course we at IFS would be delighted to provide specific advice on property acquisitions with their own particular issues analysed and properly structured.