April is set to be the cruellest month for anyone who's bought a luxury home in the UK using an offshore company. The government is cracking down on what it perceives as tax avoidance by launching a three-pronged attack on the wealthy foreigners who've been buying up large swathes of central London.
First of all last April it introduced a 15 per cent stamp duty for anyone buying a £2m-plus property through an offshore company. Previously, you could avoid stamp duty altogether if the property was sold by transferring the shares of the company to the new owner. In April this year, a new Annual Residential Property Tax (ARPT) comes into force. Properties worth over £2m that are owned by "non-natural persons" — a label for offshore companies, partnerships and similar — will be liable for an annual tax ranging from £15,000 to £140,000 for the most expensive £20m-plus properties. And the government also has plans to make those offshore companies pay capital gains tax of 28 per cent when a property is sold.
All this has come about because so many of those who have invested during the last few years have managed to avoid paying stamp duty, capital gains tax and inheritance tax on their multi-million pound London bolt holes. Savills recently estimated that in just two London boroughs, Kensington & Chelsea and Westminster, some 1,400 properties worth £7.3bn had been bought by offshore companies in the five years to 2011.
Camilla Wallace, a partner at City lawyers Wedlake Bell, says most of the high net worth individuals directly affected by these tax changes will be forced, where possible, to unscramble their complex and costly offshore structures. "Old fashioned tax and estate planning techniques, such as the use of life insurance, debt, tax efficient wills and in some instances trusts, will be more important than ever to counter any subsequent inheritance tax exposure," says Wallace.
Property owners who are affected have a number of options, each with its own pros and cons: they can stick with their offshore company and cough up the annual property tax; or liquidate the company and transfer the property into their own name, which might entail paying higher tax on any income derived. Or alternatively, it may be possible to transfer the property to an offshore trust — which isn't covered by the annual property tax, but could create an inheritance tax liability.
It's also important to make sure you don't inadvertently fall foul of the new rules. A property purchased for rental purposes mustn't be used by any of the offshore company's owners or directors, or exemption will be lost. Perhaps the simplest way to avoid getting in George Osborne's radar is to keep your budget below £2m.
Alexander Garrett is a freelance journalist whose interests span the worlds of business and property.
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