BVI Holding Companies with Interests in UK Residential Property
Owners of British Virgin Islands ("BVI") companies that hold high value UK residential property, valued at over £2 million on 1 April 2013, will have been following closely the changes underway to the taxation of UK residential property held by non-natural persons. These changes will affect all international holding companies, including Cayman Islands companies, but the majority of those holding UK residential property are BVI companies.
It will be recalled that it was proposed by the UK Government in the March 2012 UK budget that:
(a) Stamp Duty Land Tax (“SDLT”) would be charged at 15% on the acquisition by non-natural persons of UK residential properties costing more than £2 million.
(b) An annual charge would be levied on non-natural persons who own UK residential property worth £2 million or more.
(c) A Capital Gains Tax (“CGT”) charge would be levied on the disposal of UK residential properties worth more than £2 million by a non-resident, non-natural person or a disposal of shares or securities in a company holding such property by a non-resident person.
Limited exemptions were proposed, for example for property developers with at least two years trading history. A Treasury consultation on the majority of the proposed changes, entitled “Ensuring the fair taxation of residential property transactions”, was undertaken during summer 2012, and draft legislation was finally published in December 2012. It was thought during 2012 that many holding vehicles would be affected and would need to be restructured. However, the draft legislation published in the UK last month is likely to mean that investors have more time to properly consider the most appropriate long term strategy and holding structure for affected property.
It has been announced that CGT will be extended from 6 April 2013 to non-natural persons, including companies. Whilst the draft legislation is expected shortly, it is understood that:
(a) Genuine property development and other commercial and investment businesses will be excluded from the CGT regime. Rental arrangements must be on commercial terms and at arm's length, such that a tenant cannot be a connected individual.
(b) The chargeable gain will be “rebased” so that the CGT charged will only relate to that part of the gain that arises from 6 April 2013.
(c) Disposals of shares in a company that holds UK residential property will not be subject to CGT.
(d) CGT will be applied at the rate of 28% which is the same rate as for higher rate UK taxpayers.
(e) A form of taper relief will be applied to properties whose value is just above the £2 million threshold.
(f) CGT will not be extended to offshore trustees (including private trust companies) that hold the property directly.
It should be noted that CGT does not apply to most non-UK resident individuals but advice on inheritance tax would be required.
It has also been announced that a new Annual Residential Property Tax ("ARPT") will be introduced. The ARPT will be set in bands starting at £15,000 (for properties with a value of over £2 million) and rising to £140,000 (for properties with a value of over £20 million), and will take effect at the start of April 2013.
Companies will benefit from the same commercial activity reliefs as above with regards to ARPT and the 15% SDLT charge.
Owners of affected companies should be consulting with their UK advisers as to the appropriate steps that should be taken given their individual circumstances.
Continued benefits for international investors in holding investments through a BVI company include:
(a) Cost effective incorporation and low annual maintenance costs.
(b) Familiarity to lenders, meaning that the ease of taking and registering security and obtaining priority over subsequent creditors ensures the process of financing a BVI company is also cost effective and predictable.
(c) No corporation, wealth, capital gains, withholding or estate taxes are charged in BVI or in the UK on a sale of the company.
(d) Ownership and control are confidential.
(e) The company may be administered by the client’s preferred service providers in BVI or elsewhere.
(f) The ability to redeem shares and pay dividends/distribute assets is subject to straightforward solvency based conditions.
Where it is decided to distribute the property to the owners of the company, we can assist in advising on the requirements of the company’s constitution and BVI corporate law with regard to the making of a distribution in specie, and work with UK tax advisers to ensure that the distribution is documented correctly to ensure there are no unintended SDLT consequences.
Where there is current borrowing on the property and registered security, thought will need to be given in advance to the process for discharging this security and for the owner to take new finance and grant new security following the distribution. Care, and appropriate due diligence, should be undertaken with regard to historic debt as between the company and shareholders such as trustees, as this may impact the SDLT position.
We can also advise with regard to any liquidation of the company following the distribution of the property, and it is recommended that advice be taken following certain changes to the liquidation regime in BVI effective in October 2012. It should be noted that the commencement date of a voluntary liquidation is now the date on which the notice of the liquidator’s appointment is registered by the BVI Registrar of Corporate Affairs (and not the date of appointment). Liquidators must arrange the filing of that notice within 14 days of their appointment.
Significantly, connected persons may no longer act as voluntary liquidators, and so directors, former directors, members, family, affiliates, and trust company employees who have been involved in the management or finances of the company may no longer act as liquidator. An independent person, or a professional insolvency practitioner, will need to be identified and engaged.
The liquidator will have new statutory obligations which include taking steps to advertise his or her appointment in the company’s place of business, or the jurisdiction where the liquidation is most likely to come to the attention of potential creditors, in addition to advertising in BVI. The time frame for the publication of those notices and advertisements should be considered and managed, in order that the liquidator can be comfortable with declaring an interim distribution of the property before the completion of the liquidation. The liquidator will need to be given access to the company’s records showing a full and accurate view of its transactions, assets and liabilities.
Please note that Maples and Calder is not qualified to advise on matters of UK law and we recommend that UK law advice is sought in connection with any restructuring arising out of the proposed changes to the UK tax legislation referred to in this article.
If you have any queries please contact your usual Maples and Calder contact or any of the individuals listed above.