How do I own UK properties using an offshore company
Non-residents looking to purchase UK property often look to use an offshore company to hold the property rather than purchase in their own name.
If they buy the property in their own name the key UK tax implications will be:
They will usually be exempt from UK Capital Gains Tax on the purchase providing they are purchasing as a non resident
They will be subject to UK income tax on the rental income.
The UK property will be within their UK estate for inheritance tax purposes irrespective of their domicile status.
The income tax and potential charge to inheritance tax in particular can be a big problem – hence the reason why an offshore company can be tax efficient.
Note that there are also many non-tax reasons for using an offshore company to purchase the company (eg privacy and asset protection, overseas tax planning and to avoid forced heirship rules overseas).
Using an offshore company for UK property
The key advantage of using an offshore company for UK property is that if the shareholder is non UK domiciled (and would not be UK deemed domiciled due to having spent less than 17 years in the UK), the value of the UK property (as reflected in the shares in the offshore company) would be excluded property for inheritance tax purposes. Therefore there would be no UK Inheritance Tax charge on the value of the property. Given that Inheritance Tax could be due at 40% this is a significant benefit.
Income tax planning
Income tax is due on UK rental income at source. The default position is that basic rate income tax is deducted by the tenant or agent and paid over to HM Revenue and Customs. This applies whether the property is owned by an individual or a company.
However in all cases it is possible to apply for clearance to receive the rental income income gross (ie without UK tax deducted at source). The property owner then needs to account for the income tax due via an annual self assessment tax return. Again this applies to companies as well and there is a special tax return for a non resident company subject to income tax due to receiving UK rental income. When calculating the rental profits subject to income tax, expenses of the letting can be deducted.
Therefore maximising expenses will reduce profits and also UK income tax.
The big deduction for many property owners will be interest charged on a loan to purchase or enhance the property. Tax efficiently structuring the financing can significantly reduce the UK income tax charge. Using an offshore company to purchase the property, with the non resident individual funding the company as a loan could be an effective way to reduce UK income tax. The offshore company could then pay a market interest rate to the individual which may be tax deductible for the offshore company when calculating rental profits.
Depending on the personal circumstances of the property owner it is also possible to reduce income tax by extracting funds as a management charge.
Extraction of funds by the shareholder
As a non resident individual, the shareholder can extract funds from the company as either dividends or salary free of UK tax. The salary would be tax deductible for the company if the payment was made for the purpose of the rental business.
Therefore using an offshore company can potentially reduce income tax and avoid both capital gains tax and inheritance tax.
Where to establish the offshore company
From a UK perspective any jurisdiction is effective. Therefore BVI, Panama as well as the Isle of Man are popular.
There will be no real double tax treaty benefits in terms of either capital gains tax or income tax on rental income from establishing the offshore company in a country which has a double tax treaty with the UK.
Practically all tax treaties grant tax rights over “immovable property” (eg UK investment property) to both the country where the property is located as well as the foreign country of residence.
The main occasion when using a treaty country such as Cyprus could be useful would be where the offshore was subject to basic rate tax at source on interest payments (see below).