Inheritance Tax Changes for BVI Companies Holding UK Residential Property
Owners of British Virgin Islands ("BVI") companies that hold UK residential property (together with other interested parties such as settlors of trusts) will have been following closely the changes made over the last three years to the taxation of UK residential property held by companies. On 19 August 2016 the UK Government published a consultation on further reforms to the taxation of non-domiciles, from which it is clear that from April 2017 residential property in the UK held by non-UK companies will be subject to inheritance tax. This will be a significant change to the current position, where the UK real estate of many non-domiciled investors held (or 'enveloped') through non-UK companies has been excluded from UK inheritance tax.
The changes will mean that investors must now consider the most appropriate long term strategy and holding structure for their UK residential property investment. Commercial property is not affected.
Under the proposed changes, among other things:
(a) UK residential property held through non-UK companies will be subject to inheritance tax from 6 April 2017: the value of the shares in the non-UK company will be subject to inheritance tax where all or part of that value derives from UK residential property.
(b) Both individual shareholders and trustee shareholders will be affected, under different rules.
(c) Properties that are let to tenants will be caught (unlike under the current Annual Tax on Enveloped Dwellings (ATED) regime).
(d) Directors of non-UK companies will be personally liable for reporting chargeable events to HMRC and for paying any outstanding inheritance tax.
(e) Loans between connected parties will be disregarded when determining the value of the property which will be chargeable to inheritance tax.
(f) Where a property is 'de-enveloped' (taken out of the corporate holding structure), there will be no reliefs from potential UK taxes arising out of the de-enveloping, including Stamp Duty Land Tax ("SDLT").
(g) The legislation will include a targeted anti-avoidance rule, to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to inheritance tax on UK residential property.
The UK Government is also looking to "enhance the transparency of beneficial ownership for foreign companies that purchase land or property in England and Wales". The new approach the UK Government is considering would be based on requiring non-UK companies to provide information on their beneficial ownership before they are able to buy land/property in England or Wales. This information would cover the company's beneficial ownership and control, up to the ultimate individual beneficial owners, and could be made publicly available.
The UK Government is considering exempting non-UK companies incorporated in jurisdictions which already have an accessible central register of beneficial ownership information (holding adequate, accurate and current information) from providing similar information to a UK foreign company beneficial ownership register. In light of the recent Exchange of Notes between the UK and the BVI, and the UK Government's acknowledgement of the standards met by the Crown Dependencies and Overseas Territories in this regard, it may be possible for BVI companies to fall within the exemption. Further detail is awaited.
Owners of companies affected by the consultation should be consulting with their UK advisers as to the appropriate steps that should be taken given their individual circumstances. We have strong links with a number of UK tax and legal advisers and can put you in contact with appropriate advisers if required.
Given the seeming inevitability of the application of inheritance tax, and the lack of incentives to 'de-envelope', there may be no disadvantage in continuing to hold property through an 'enveloped' structure. There are of course continued benefits for international investors in holding investments through a BVI company. These advantages include:
(a) The opportunities for succession planning, for example through joint ownership of shares, bespoke class rights and providing for the transmission of shares.
(b) Assets and liabilities are, generally, ring fenced and investors benefit from the company's limited liability. Where the property held is subject to a mortgage, and/or is a long leasehold, the liabilities under the mortgage or lease will be those of the company and not the shareholder.
(c) Flexibility, including the ease of restructuring the property holding, and distributing assets on straightforward solvency based conditions.
(d) 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.
(e) No corporation, wealth, capital gains, withholding or estate taxes are charged in the BVI.
(f) The company may be administered by the client's preferred service providers in the BVI or elsewhere.
(g) Very low incorporation and annual maintenance costs.
Where it is decided to 'de-envelope' the property, for example by distributing 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 and correctly treated in the hands of the shareholders.
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.
We can also advise with regard to any liquidation of the company following the distribution of the property. Maples and Calder provides a 'one stop shop' for the liquidation of a BVI company through our legal and liquidation services.
Please note that Maples and Calder is not qualified to advise on matters of UK law or tax and we recommend that UK legal and tax advice is sought in connection with any restructuring arising out of the proposed changes to the UK legislation referred to in this update.
For further information, please liaise with your usual Maples and Calder team or any of the contacts above.