Offshore companies have been used for many years as Special Purpose Vehicles to hold UK Property.
Typically one IBC per property purchased is usually incorporated otherwise, (if the same IBC were to own multiple UK properties) the IBC might be classified as a property trading company and subject to tax on its profits/capital gains in the UK).
Such a strategy would be of most benefit to a non UK resident purchaser of UK property.
There are 3 key reasons why discerning property investors set up IBCs to own UK Property:
- To Avoid Capital Gains Tax
- To Minimise Stamp Duty
- To Avoid Inheritance Tax
The first reason why discerning UK Property investors set up IBCs to hold their UK properties is because of a specific exemption which provides in effect that (non-UK resident) companies are exempt from CGT on the sale of investment property provided the company is not managed and controlled in, or seen to be trading in, the UK.
Similarly a non UK resident individual would be at risk of CGT on sale where he or she owns a number of UK properties as such activity may be considered “Trading” in the UK. This is another reason why savvy UK property investors set up a new IBC every time they buy a new piece of UK property.
It should be noted however that profits made on renting UK property will be subject to UK income tax regardless of whether the owner of the property is UK resident or not. (Subject to the restrictions set out in section 787 ICTA 1988 of the UK tax law) this tax may be avoided however if/where the purchase of the property is funded at arm’s length (particularly by a financier based outside of the UK – “back to back” loans are commonly used for this purpose).
The second reason why people use IBCs to own UK property is to avoid the imposition of stamp duty on the buyer when the property sells.
UK stamp duty rates on property transfers range from 1 per cent (where the sale consideration is from £125,001 to £250,000) to as high as 4 per cent (where the sale consideration is £500,001 or over). On a big figure sale this can add up to a lot of money.
Instead of the buyer purchasing the property in his or his company’s name what he or she can do instead is buy the shares of the IBC. Most IBC centres do not levy tax on the sale of IBC shares! The net result would be that the buyer gets the property for a lot less than what he would otherwise – which can enable the seller to negotiate a higher sale price than he would otherwise achieve!
(The share sale contract will however need to be carefully worded otherwise the UK authorities may attempt to argue that the sale profit was generated by an agreement made onshore and thus subject to UK taxes and/or duties).
The third reason why people use IBCs to own UK property is to avoid UK Inheritance tax.
UK Inheritance tax only applies to individuals. Hence by having a company buy the property (rather than the individual behind the property) one can lawfully avoid the imposition of UK inheritance tax when the company owner dies.
It should also be noted that when an individual (natural person) owner of UK property dies the full rate of inheritance tax applies regardless of whether the owner of the property is UK resident or not at the time of his or her passing (although spouse exemption may apply).
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This is a generic example of how an offshore corporate entity can or might be used. Local laws may impact on your situation. Hence we would recommend that you seek local legal and/or tax advice before establishing such an entity
