The rates of tax in the UK are now significantly lower than in some overseas countries. The UK property market is generally made up of residential, commercial and industrial property. In some parts of the UK the property market has been buoyant e.g. in London, Edinburgh and Cardiff and has attracted significant overseas investment e.g. from Hong Kong and Ireland.
The interposition of an offshore company between the overseas investor and the UK could save UK tax. Favoured jurisdictions for offshore companies include the Channel Islands and theIsle of Mann as they have low tax rates. UK resident directors are not usually appointed to the offshore company as the Inland Revenue could argue that corporate management decisions are being made in the UK thus making the offshore company resident in the UK.
A non-resident with substantial UK rental income would be liable to income tax mostly at 40%. An offshore company would pay only basic rate income tax at 23% under Schedule A.
An investor who is resident in the UK but domiciled overseas would be liable to capital gains tax mostly at 40% on a substantial gain on the sale of a UK property if held personally. An offshore company would not be liable. The company could pay a dividend before being liquidated. If the timing of these two events is planned any subsequent remittance could be made free of tax as the source would have ceased and the remittance could be made in a subsequent tax year.
A non-resident individual is outside the scope of capital gains tax. Similarly an offshore company is outside the scope of corporation tax on capital gains. If the property was acquired with a view to realising a profit on disposal the Inland Revenue could tax the profit under Schedule D Case I.
A non-resident individual could become resident while remaining non-domiciled. He could avoid or defer any tax liability by retaining the profit in an offshore company. The profit could be taxable if it is remitted to the UK either in an income or capital form.
If a resident is non-domiciled in the UK an offshore company and the UK property it owns will be excluded property. If the company has bearer shares, the share certificates should be kept outside the UK as they are situated where the share certificates are located. If the shares of an offshore company were held by an offshore settlement the shares would remain excluded property if the settlor subsequently became resident in the UK.
The transfer of property in the UK is liable to stamp duty as follows:
£60,000 – £250,000 at 1%
£250,000 – £500,000 at 2.5%
over £500,000 at 3.5%
All share transfers are stamped at a flat rate of 0.5%. A transfer of shares in an offshore company is free of stamp duty unless the transfer document is executed in, or brought to, the UK.
It would be tax efficient to transfer shares rather than the property to a purchaser.
There will be occasions when the investor wishes to be liable to UK taxation. For example, an investor resident in Germany may wish to pay UK income tax on rental income as this rental income will then be exempt from income tax in Germany under the UK and German Double Taxation Convention.