This article was written for and first published in ‘Property Investor News’, December 2015.
In recent years, the government has pared down the benefits of offshore structures considerably in line with growing anti-avoidance sentiment. Thomas Adcock, tax partner at accountancy firm CBW, explores whether these structures are still useful to investors when those that hold UK residential property have lost most of their UK tax benefits.
Until recently, it was standard planning for a UK resident non-dom to acquire UK property via an offshore company held by an offshore trust settled by them for the benefit of their family. The property could be enjoyed by all whilst any gain on its sale was sheltered from HMRC as well as exempted from their estate for the purposes of inheritance tax (IHT).
Whilst extensive anti-avoidance legislation attacks such structures, these measures are mostly toothless tigers when applied to UK resident non-doms who hold investment assets via such structures.
Oh, how “the times they are a-changin’”.
The government began reinforcing its attack on offshore structures in April 2012, when it introduced a punitive Stamp Duty rate of 15% for high value properties worth more than £2m when acquired by a company. This was followed 12 months later by the Annual Tax on Enveloped Dwellings (ATED), a wealth tax based on the market value of the property held by such a company as well as bringing such structures within the charge of UK Capital Gains Tax (CGT) where the property is caught by the ATED regime. In April this year, non-residents who were previously exempt from CGT were brought within the charge of UK CGT where they disposed of UK residential property that was not caught by ATED.
The government has also announced that it will be consulting on bringing offshore structures that hold UK residential property within the IHT regime.
Given these recent changes, are offshore structures still effective when those that hold UK residential property have lost most, if not all, of their UK tax benefits; especially if the IHT benefit falls away?
The short answer is yes. Purely from a tax point of view, the avoidance of tax may not be the prime motivating factor behind an offshore structure. It’s also the benefit of having a single unifying entity that brings together all of a family’s interests where tax is not a noticeable consideration.
Most global structures anticipate paying tax in the jurisdiction where the wealth is generated. The reason may be that they have established a business in the UK that is taxed on its profits or there may be a beneficiary who is located in the UK living on the family wealth. Clearly, they will want to avoid triggering a tax issue in the jurisdiction where the wealth is housed when the wealth is either used within the structure or distributed to individuals. When tax is not a consideration, it allows for a freedom that is simply not there where you have to consider the implications of every transaction.
Given the anti-avoidance sentiment and the raft of legislative measures that have been introduced recently, have offshore structures outlived their usefulness? Put simply, no. Will they need to be adapted to take account of the changing UK tax climate? The answer is yes, but this has always been the case.
Those most at risk are those who hold UK residential property as their only or main asset. However, the fact that they may have to pay the same amount of tax as anyone else – or in some cases more – does not mean that the offshore structure should be wound up. After considering all the options, the answer may be to continue to hold the asset as it is and accept that the UK tax treatment of the structure is simply less favourable.
Add in the kicker that within the government’s earlier announcement that offshore structures that hold UK residential property would be brought within the scope of IHT is the recognition of the dry tax charge of unwinding these structures. ‘Dry’ because there is generally no cash triggered by the transaction to pay the resultant tax liability. We will have to wait and see what is meant by this.
In short, offshore structures will continue to be used by large businesses to structure their global enterprise because they are simply, global. For everyone else, the tax-free nature of the ultimate holding entity will continue to be a draw even with the extension of powers by the UK and others into part of their wealth generation. Crucially, new and longstanding structures should be reviewed regularly to take account of changing tax law to ensure that they are structured in the right way and for the right reasons – not necessarily no tax, but the right amount of tax.
Thomas Adcock is a tax partner at CBW. He began his career as a corporate tax inspector for HMRC. He has extensive experience in the tax affairs of small and medium-sized owner-managed businesses as well as multinational corporations. He also advises individuals on their tax enquiries. For more guidance on offshore structures, contact Thomas on 0207 309 3856 or alternatively at firstname.lastname@example.org.