What are the issues i should be aware of when using an offshore company for UK property purchases
A number of issues- some of them listed below:
Central management & control
The initial issue would be the management and control of the company. If this is carried on abroad then the company would be non resident, otherwise it would be UK resident. A UK resident company would be subject to UK tax on its rental income and capital gains.
This may not however have an immediate impact if the company is receiving no income and is just used to hold overseas property. If there was no rental income the main practical impact if the company was UK resident would be that it would be subject to UK corporation tax if a gain is realised on a subsequent disposal of the property. The corporate ownership means that the private residence exemption is not available.
By contrast if the company is non resident it would be exempt from UK corporation tax on a disposal of the property.
If the company was non resident it would be important that the shareholder remained non resident when any property was sold. If the shareholder was UK resident any capital gain realised in the offshore company would be apportioned to him for UK tax purposes based on his shareholding in the offshore company.
Therefore if the shareholder was to become UK resident this could lead to a potential CGT charge on a disposal of the property.
Financing the offshore company
One issue that is often of key importance is in relation to funding the purchase of the UK properties.
If financing is obtained from overseas the risk is that the tax deduction at source rules could apply. These can require tax to be deducted by the payer where the interest is from a UK source but the payment is made overseas.
The key issue is where the ‘source’ of the interest is. Revenue and Customs would look at a number of factors to determine whether the interest has a UK source:
- The residence of the debtor (this is usually taken to be the place where the debt will be enforced),
- The source from which interest is paid,
- Where the interest is paid, and
- The nature and location of any security for the debt.
If the loan was made from overseas and in respect of UK property there is a risk that the interest would have a UK source and as such be subject to the deduction of tax at source rules. Therefore whilst it would be deductible for the company when calculating it’s taxable profits there could be a 20% income tax liability on the interest.