Technical Centre 2018-04-03T14:16:51+00:00

Technical Centre

A few resources that we hope you’ll find useful

The general position for non-UK domiciled individuals

A UK resident AND domiciled individual will pay UK IHT on his worldwide assets.

However, a non-UK domiciled individual will start from the position that he is only subject to tax on his UK assets only. There is one important proviso to this. If the individual has been resident in the UK for 17 out of the last 20 tax years then he is ‘deemed domiciled’ for IHT purposes only. The result is that he is subject to tax on his worldwide assets.

The relevance of Indian domicile for UK IHT purposes

If one is domiciled in India then one should only subject to IHT on UK based assets. Foreign assets are outside the scope of UK IHT for an Indian domiciliary with the correct will in place.
This is by virtue of the UK / India capital taxes treaty which will give taxing rights, on foreign assets passing under a foreign will on death, to India.

This does not seem particularly helpful where the relevant assets are UK property and UK shares. However, the ‘magic’ comes from the ability to transform UK assets in to foreign ones.

This can be done by incorporating the property portfolio in to a non-UK registered Company. In other words, selling the assets to a non-UK registered Company in exchange for an issue of new shares by that Company (rather than a cash consideration).

It is not necessary to engage professional directors of any non-UK company as it is only required that the Company is registered overseas rather than being tax resident outside of the UK.

Regardless of whether the Company is registered or resident overseas then it is likely to pay tax on net rental income in the UK at 20%. Of course, any dividends or salary extracted from the Company would be subject to personal tax.

Do I have to pay the ‘remittance basis charge’ to be considered a non-dom?

No. One is a non-dom as a matter of fact under general law.

The payment of the remittance basis charge, alluded to above, allows one to take advantage of the remittance basis for income and capital gains tax. One can decide not to pay it without any change to your non-domicile status.

There is no similar change to benefit from the IHT advantages highlighted in this note.

Transferring assets to a non-UK Company – tax analysis

The properties could be transferred, at market value, to the new non-UK Company in a tax neutral fashion. This is due to the availability of statutory tax reliefs. Rather than the Company paying cash for the properties, it will issue shares in itself.

The tax benefits of the transfer are as follows:

  • IHT. On the basis that you are Indian domiciled, the value of the Properties will be immediately removed from your estate for IHT purposes. This is a 40% tax saving.
  • CGT. The properties are deemed to be acquired by the Company at the market value at the date of the transfer. This essentially ‘washes out’ the historic gains. The base cost of the properties is rolled in to the cost of the shares in the Company.
  • Rental income. The Company would pay corporation tax at a maximum rate of 20%. This compares to direct ownership where you would pay tax at your marginal rate of tax. This might be at a rate of up to 45%.

The use of the Company allows you to leave cash in the Company having paid just 20% tax. You can then decide how much you wish to take from the Company on an annual basis. This income would be subject to further personal tax.

A note on Stamp Duty Land Tax (SDLT)

The transfer of the properties to the new Company would potentially create an SDLT charge. This is because the newly issued shares would constitute chargeable consideration.

However, this can be addressed (and removed) by formalizing the property business firstly as a partnership before transferring the properties to the new Company.

Agreement of the banks

When transferring properties in this manner, and there are outstanding mortgages on the properties, the Bank can sometimes be a stumbling block.

However, it should be noted that we have implemented this planning without obtaining the Bank’s consent. Generally, this is possible where the legal ownership is not transferred (instead just the beneficial ownership is transferred).

This can be discussed further. Contact us!

Restructuring an existing UK Property Business – Incorporation

Background

Landlords who own their property portfolio’s in personal names may be currently considering transferring the portfolio to a limited company. The incorporation of the portfolio would be advantageous for the following reasons:

  • Any rental profit generated would be subject to corporation tax at 20% rather than income tax at 40% (or 45%);
  • Once established as a company, further IHT planning is possible. There are a number of strategies (see below) available which will depend on client’s circumstances;
  • On the transfer to the company, all properties would be treated for tax purposes as being acquired by the new company for the current market value, meaning that on any potential future disposal by the company of any of its properties, the gain chargeable would be limited to the growth in value from the date of acquisition by the company, to the date of disposal, in other words, the gain already accrued/enjoyed will be washed out;
  • The new loan interest restriction rules, being phased in from April 2016, that reduce the tax relief available for buy to lets owned personally, from 40%/45% down to 20% DO NOT APPLY to companies.

The Problems 

Established property portfolios are likely to have significant capital gains attached to each of the properties. If these properties are disposed of to the new company, this could trigger a capital gains tax liability at 28% of the gain.

Also, on the transfer of the properties, Stamp Duty Land Tax (SDLT) at the prevailing rate could be charged.

The incorporation planning techniques employed by Ensign Taxation mean that no taxes will be triggered on the transfer of the properties to the new company.

Inheritance Tax (“IHT”) 

Whilst incorporating the property portfolio brings with it many advantages (see above), it can also been seen as a stepping stone to being able to secure large IHT savings. As mentioned above the IHT strategies to be considered include:

  • Freezer Share Planning;
  • Discretionary Trust Planning;
  • Planning using Employer Trusts;
  • Debt Creation (“IOU”) planning

All of the above, which is bespoke to our client’s circumstances, is advised upon by our team of in-house Chartered Tax Advisers and Lawyers with many years of experience of advising owner managed businesses and property entrepreneurs.

Case Studies 

Our clients who are property entrepreneurs usually face the same problems:

  • They would like to sell some of their portfolio to reinvest in better property or development      deals, but the capital gains tax bill is large and prevents this;
  • They have built up property portfolio’s and now face a 40% Inheritance Tax bill;
  • They would like to transfer property to the next generation (children and/or grandchildren), but the capital gains tax charge on the gift is significant

So in the worst case scenario they do nothing and the Government take 40% of the family’s wealth.

Whilst each individual’s circumstances are different, Enterprise Tax have developed a number of bespoke planning techniques that can help and save considerable amounts of tax.

Two examples are:

Client A held a portfolio of properties (7properties) worth approx. £1.1m

  • The capital gain tax if transferred to children was approx. £240,000
  • The Inheritance Tax exposure was £440,000

So a very difficult choice transfer now and pay £240k OR hold onto the properties but pay £440k in the long run.

Ensign Taxation were able to transfer the entire portfolio to a limited company WITHOUT triggering the £240k tax liability AND WITHOUT triggering the 4% stamp duty land tax charge of £44,000.

The company then sold 4 of the 7 properties for £560k “tax free” as when the properties are transferred to the company, base cost is uplifted to the current market value.

The £560k tax free proceeds were then used to buy, develop and sell properties. The IHT of £440k will be completely gone in 2 years.

Client B held shares in a property investment company worth £600,000

He wanted to transfer these shares to his daughter but the capital gains tax bill on transfer was £168,000 (£600k x 28%). The potential IHT bill was £240,000

Ensign Taxation were able to put planning in place that allowed the client to transfer the shares to his daughter WITHOUT paying the £168k. The IHT of £240k will be saved within 7 years.

Client C also held shares in a property investment company worth £10m. Ensign Taxation were able to transfer the shares in this Company to a specific type of trust such that there was no immediate Capital Gain or IHT charge crystallising. In addition, the value of the assets were outside of ANY person’s estate.

This immediately saved £4.4m in IHT.

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