The United Kingdom has rebounded from the World Economic Crisis in 2008 far better than its mainland European counterparts primarily due to it retaining more flexibility than its neighbours (bound to the Euro) and the continued perception by the international community that London is a safe haven for wealth with continued fiscal benefits for non-domiciled but UK resident individuals. However, there is also little doubt that the UK’s tax system has undergone major changes in the last decade not least in respect to domicile and residence, overseas property investment and its anti-avoidance provisions. In précis, the historic benefits enjoyed by non-UK domiciled but ordinarily resident individuals has been tapered back to a ‘grace’ period of between 7 to 9 years from the time they first became ordinarily UK resident; foreign investment into the UK property market has been made much more difficult especially for those using ‘traditional’ offshore companies with punitive Stamp Duty Land Tax (SDLT) being demanded from anyone using a structure deemed not-suitable by Her Majesty’s Revenue & Customs (HMRC) where the value exceeds £2 million or more whilst the traditional anti-avoidance legislation has been given real teeth with the introduction of the General Anti-Avoidance Rule (GAAR) in the 2012 Budget but still (at the time of writing in mid-2014) to be fully implemented. However, notwithstanding these changes the UK is indeed still a very attractive location for the international wealthy especially where proper tax planning advice has been taken.
Recent Changes to the Tax System
Historically it was possible for many non-domiciled and/or non-resident individuals to invest in UK property using offshore companies as a legitimate method to avoid and/or mitigate exposure to UK Capital Gains Tax and Stamp Duty Land Tax (SDLT). In many cases, an offshore company could be used to totally avoid exposure to capital gains taxes upon a sale/disposition of a property whilst both potential buyers and sellers could (depending on their personal tax circumstances) avoid SDLT by simply exchanging shares in the offshore company that owned the UK investment property.
The Changes Introduced by the Budget of the 21st of March 2012 – This Budget introduced the most sweeping changes in UK tax history and aimed specifically to discourage the use of offshore companies as a means of investing in UK property. The two principal measures were the introduction of a punitive 15% SDLT tax on properties worth over £2 MILLION acquired by offshore companies together with the introduction of an Annual Property Tax again where properties are owned by offshore companies (see below):
|PROPERTY VALUE AS OF THE 1ST OF APRIL 2012||ANNUAL PROPERTY TAX|
|£2 - £5 MILLION||£15,000.00|
|£5 - £10 MILLION||£35,000.00|
|£10 - £20 MILLION||£70,000.00|
|£20 MILLION PLUS||£140,000.00|
Common Misconceptions & Clarifications
- What is the Definition of an ‘Offshore’ Company? The exact definition used under the 21st of March Budget was that the higher 15% SDLT rate and Annual Property Tax would be payable by “CERTAIN TYPES OF NON-NATURAL PERSONS” which were then defined as companies, partnerships with a company member and collective investment schemes. The key words here are of course “certain types” of non-natural persons, which whilst not elaborated upon at the time of the Budget are accepted by legal and accountancy TAX PLANNING specialists as meaning in the case of offshore COMPANIES, those that are not protected by international tax treaties and/or European Union non-discriminatory directives and regulations. In other words, those using what the industry calls tax planning rather than offshore companies based in the EU or (but to a lesser extent) with a suitably strong tax treaty SHOULD NOT LEGALLY BE PENALISED ANY MORE THAN A DOMESTIC UK COMPANY. Without doubt the two strongest tax-planning jurisdictions within the EU and long recommended by the SCF Group are properly managed and controlled domestic Republic of Ireland and Cypriot companies both enjoying a corporate tax of only 12.5%.
- Are Trusts covered by the New Legislation? Trustees directly owning a property rather than a traditional offshore company owned by a trust do not appear to be subject to the punitive 15% SDLT Tax. Further, using a direct trust would also seem to avoid exposure to the Annual Property Tax and hence should certainly be considered as a legitimate avoidance measure where appropriate. It should also be noted that in theory it may be possible to reverse a normal trust structure and have corporate structures above the trust perhaps even as beneficiaries but such will very much depend on the personal circumstances of the settlers involved
- What do I do if I already have an offshore company owning my UK Investment Companies? If an offshore company structure is already in place it is certainly recommended that an immediate review is carried out by a tax planning lawyer or chartered accountant before the 1st of April Deadline and clarifications. However, what should be stressed is that an existing structure cannot be subject to the new 15% SDLT rate as of course it is already owned within a structure but would be subject to the Annual Property Tax.
- What rate of tax will be paid on my rental income with and without an Offshore Company? The net return on a property is of course kernel to any investment and this is where maintaining (or indeed setting up a new offshore company structure or more likely a tax planning structure) could still make sense. Under the current HMRC rules the MAXIMUM TAX ON Net Rental Income (with or without tax treaty protection) FORWARDED TO A COMPANY (offshore or tax planning) is ONLY 20% WHILST IF SENT TO A NON-RESIDENT INDIVIDUAL THE RATE COULD BE AS HIGH AS 50% AND CERTAINLY NOT LESS THAN 45%. In addition, both offshore and tax planning company structures can provide protection against Inheritance Tax (IHT) where a person is not deemed to be domiciled in the UK.
In précis, the annual property tax combined with punitive stamp duty rates mean that anyone owning a valuable UK property through an existing offshore company OR anyone contemplating investing in a property worth over £2m should get professional advice particularly if they are not UK domiciled.
Domicile & Residence
Historically the United Kingdom and the Republic of Ireland are unique in Europe in making a distinction between a person’s domicile and residence for tax purposes. However, since Alistair Darling’s 2008 UK Budget the tax treatment of non-domiciled but resident individuals, whilst still potentially very beneficial, has changed significantly especially for those who have been ordinarily resident in the UK for 7 out of the previous 9 years. The current position is that the ‘traditional’ status quo still exists for those non-domiciled but UK resident individuals that have been in the UK for less than 7 out of the preceding 9 years. This means that a person deemed non-domiciled by Her Majesty’s Revenue & Customs (HMRC), is only subject to pay UK income and capital gains taxes on those sums physically remitted back to the UK and not on his/her worldwide income/capital gains as would otherwise have been deemed the case if they were UK domiciled. Further, if a distinction is made between a non-domiciled individual’s capital and income before becoming tax resident in the UK it is often possible to totally avoid exposure to UK taxes provided the individual only uses their pre-migration capital to live off and not any interest that may be accumulated post UK fiscal migration. Most importantly, despite these significant advantages all UK fiscal migrants, even those intending to stay in the UK for less than 7 years, will benefit from the UK’s extensive double taxation treaty network which can provide a higher degree of protection against 3rd party anti-avoidance provisions than would be the case if they chose to reside in a traditional tax haven such as Monaco or the Bahamas.
In the case of those who are non-UK domiciled but UK tax resident and have resided in the UK for more than 7 out of the last 9 years there are three possible results depending on the action or inaction taken, namely:
- Where a non-domiciled but UK tax resident individual does nothing he or she will become taxed on their worldwide income and capital gains in a very similar manner to UK domiciled and resident individuals. Of course, just as for UK domiciled and resident individuals they will be able to use domestic tax planning tools to mitigate their tax exposure but not to a level that otherwise might have been possible;
- Where a non-domiciled but resident individual elects to pay the annual £30-£50k duty, they can continue to benefit from the exemption on non-domiciled individuals having to pay income and capital gains tax on their worldwide assets. However, it should be noted that under Taxation of Chargeable Gains Act (TCGA), 1992, have been extended so that non-domiciled individuals, even when paying the duty, will now become subject to UK tax on all UK investments even when such investments have been made using an offshore company;
- Where a domiciled or non-domiciled UK tax resident establishes a private interest foundation (PIF) this can both avoid the need to pay the annual £30-50k duty and also maintain the ability to invest in the UK using tax efficient companies without falling foul of the TCGA extended provisions.
In précis, whilst the 2008 and subsequent Budgets have considerably restricted the historic benefits available to the non-domiciled but UK resident community there are nonetheless still significant advantages for wealthy foreign expatriates to move to the UK. For more information on these benefits please contact one of our tax planning consultants.
- Location: France lies across the English Channel to the south; the Republic of Ireland across the Irish Sea to the west; Belgium, the Netherlands, Germany, Denmark and Norway across the North Sea to the east. Most of the United Kingdom is flat or rolling lowland. Landmass, 241,930 sq. km kilometres (includes England, Scotland, Wales and Northern Ireland and claimed surrounding islands). Approximately the size of the 'old' West Germany
- Population: The combined population of the three mainland countries of the United Kingdom (England, Scotland, Wales and Northern Ireland) is 63,742,977 (July 2014 est.).
- Development: In the mid to late Eighteenth century, the British began the Industrial Revolution and made the United Kingdom the world's richest manufacturing country. The British ruled the seas and were the world's greatest traders. By 1900, although significantly threatened by the growing economic might of Germany and the United States, the UK had an empire that covered about a fourth of the world's landmass. London was the centre of the world's banking and insurance industries, together with being the greatest port in the United Kingdom. However, as a result of the two world wars, the break-up of the Empire and the inevitable realisation of the latent potential of countries such as Germany and Japan, the United Kingdom went into rapid decline. Today, the economic position of the country has stabilized and in fact is showing many positive signs, including low inflation, relatively strong economic growth and a rapidly expanding tourist industry. However, the ability of Britain to play a major role as an industrial power is severely limited by the fact that most of the great manufacturing companies are now in foreign hands/control, including Jaguar/Land Rover, now owned by TATA of India, and Rolls Royce and Bentley by Mercedes and BMW respectively. Britain no longer has any significant indigenous producers of televisions, computer hardware or motorcycles but is still a world leader in aerospace, armaments and pharmaceuticals. In the next century, the country is expected to remain a significant economic power possibly on a level with France, Italy and India.
- Capital city: London, population approximately 8,300,000 Europe's principal banking and insurance centre. The wealthiest city in the United Kingdom with more resident millionaires than Paris, Berlin and Rome combined. It is also the home to more multi-national companies than any other city in the world bar New York. World famous for its architecture, culture and theatres. The greatest threat to London as a financial centre is the growing influence of Frankfurt, combined with the continuing decline of the UK as a major manufacturing power something that has not happened to Germany or the other great European
- Currency: The British Pound. At the time of writing in mid-2014, the exchange rate was UK£1.00 = €1.20 or US$1.66. Unlike the other three major western European powers, Germany, France and Italy, the United Kingdom is not a member of the Euro Zone
- Education level: Britain has some of the world's most prestigious and accomplished centres of learning, including Oxford and Cambridge universities, the Inns of Court and many of the world's leading schools including Eton and Harrow. However, despite such excellence, the country's state school system, which educates 95% of the population, has been in turmoil since the 1960's when comprehensive schools were introduced. In fact, the general level of education in Britain is now the same as the least developed EU countries, Portugal and Greece, and considerably below that of its traditional peer group, Germany and France. Both major political parties recognise that state education must now be deemed a priority if future prosperity is to be ensured
- Language: The principal language throughout the United Kingdom is English, although native Gaelic languages are still spoken in the remoter parts of Scotland, Wales and in the English county of Cornwall. English is the world's most widely used language and certainly the dominant language in international commerce
- Legal system: England & Wales (considered one jurisdiction for legal purposes) and Northern Ireland are established common law jurisdictions. However, the Scottish system is quite separate and greatly influenced by 'Continental' civil law. Common law is one of the world's most important legal systems and is employed by all the major English speaking countries, including the United States, Canada, Australia, Ireland and New Zealand
- Trade Bloc' membership: The United Kingdom joined the European Union in 1973, with the Republic of Ireland and Denmark. It is one of the four major EU countries, but has not been able to exercise its full potential because of the Franco-German Axis and pro-American foreign policies Exchange controls: None
For more information on the UK Tax System please contact one of our tax planning consultants.