Redomicile’ of Offshore Companies

This article focuses on the legislative changes made over recent years with regard to offshore companies owning UK residential and commercial properties.

Whilst the term ‘redomicile’ is currently used that is not strictly what happens to the offshore company. The company’s country of incorporation ( ‘seat’) – will remain the same – whether that is Channel Islands, BVI, Isle of Man or wherever. What essentially happens is that the assets of the offshore company (usually UK property) are transferred to a new UK limited company to enable the offshore company to be dissolved.

Introduction

The taxation of offshore companies has changed significantly over recent years, so much so that there are now virtually no advantages to holding UK properties in an offshore structure. More often that not the offshore company will itself be owned by an offshore trust which makes maintaining the overall offshore structure relatively expensive.

“The taxation of offshore companies has changed significantly over recent years, so much so that there are now virtually no advantages to holding UK properties in an offshore structure.”

Tax on rental profits

Offshore companies have always been liable to UK tax on rental profits. Up until 5 April 2020 companies were liable to income tax on rental profits and from 6 April 2020 they are now liable to corporation tax. This inevitably added additional compliance costs as under the corporation tax regime accounts need to be submitted using HMRC-specific business language (known as iXBRL).

Annual Tax on Enveloped Dwellings (ATED)

ATED was introduced on 1 April 2013 and is primarily aimed at high value residential properties held within companies and occupied by non-UK domiciled individuals. In such circumstances the company is now subject to a fixed ATED charge, based on the value of the property within various bandings above £500,000.

Where property is rented out commercially there is an exemption from ATED, although an annual tax return still has to be submitted claiming the exemption. Again, this is also an additional compliance cost.

Capital gains

From 1 April 2015, offshore companies are also liable to tax on any capital gains made on disposals of UK residential properties. The company can elect to either rebase the cost to the 1 April 2015 value or use original cost, if higher.

From 6 April 2019 ‘indirect’ disposals – capital gains sale of shares in ‘property rich’ companies are also liable to tax.

From 6 April 2019, gains on disposals of UK commercial properties are also liable to tax. Again, rebasing is available so it is only the gain arising after that date that is taxed.

Inheritance Tax

In most cases the shares in the offshore company will be privately held by family members (or a family trust). Legislation effective from 6 April 2017 means that the value of the company, to the extent that it relates to UK residential property, is now liable to Inheritance Tax. There are also anti-avoidance provisions to ensure that the ‘value’ is not artificially suppressed through the provision of associated loans.

Note, however, that UK commercial property is not caught by these rules.

Are there now any advantages in using an offshore company?
The short answer is no. Some anonymity may be enjoyed and for celebrities and the like this may be important but for the vast majority it makes sense to migrate back to the UK as an offshore company owning UK residential property is now effectively in exactly the same position as its UK company counterpart. As mentioned previously, the additional administration costs of maintaining an offshore structure mean that is often desirable to relocate the property business to the UK.

How to bring the structure onshore

A typical step plan to bring the structure onshore would look something like this:

1. Change the management and control of the offshore company (“Offco”) to the UK by appointing UK directors. It is sometimes overlooked that Companies House need to be notified that there is now a UK establishment.
2. A new UK company (“Newco”) is formed with shareholdings that mirror the shareholdings in Offco. Usually the Newco will also have the same UK directors as Offco.
3. There is a share-for-share exchange so that Offco becomes a wholly owned subsidiary of Newco. It is important that the reorganisation is a ‘mirror image’ to prevent Stamp Duty being payable on the value of the shares.
4. As there is now a UK group for capital gains tax and SDLT purposes, the properties can be transferred up to Newco without any tax or SDLT charges.
5. Once the properties have been transferred up, the offshore company can be dissolved.

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Note that the above summary is a very brief overview of the step plan and there will be many other related issues to consider, such as

• It is important that all the above steps are properly documented (formal agreements, Board minutes, share certificates etc) and using lawyers fully au fait with these arrangements is money well spent;
• It will of course be necessary to liaise with lawyers in the offshore company’s jurisdiction to check whether the proposed transactions do not create any tax issues there;
• If there are any mortgages on the properties, potentially SDLT is payable and consideration should be given to as to whether the properties should be transferred outright or as a dividend in specie.

The end result

The overseas shareholders are left with a
UK company owning UK properties at their original base cost. For capital gains tax purposes, the transfer between the companies will have taken place at no gain, no loss; there is usually no tax free uplift to market value on the transfer between companies – exceptionally there might be a tax free uplift if the transfer triggers a tax liability in the offshore jurisdiction. In our experience this is unlikely to apply in most cases.

There is still a potential IHT exposure for the individual offshore shareholders based on the value of the shares they now hold in the UK holding company. Where the shares are held by an offshore trust there is also the prospect of Principal Charges (“Ten Year Charges”) being due in respect of residential property held since 6 April 2017.