How proposed changes in United Kingdom property tax law may affect Cayman Islands companies
It has long been popular for high net-worth people who are not domiciled in the United Kingdom to form an offshore company, often in the Cayman Islands, for the purposes of holding property in the United Kingdom. Using an offshore vehicle historically had two principal advantages:- (1) preservation of the confidentiality of the beneficial owner and (2) insulation of the property from potential UK inheritance tax on the owner’s death. Additionally, using an offshore company could also sometimes mitigate against potential charges to UK stamp duty land tax on a subsequent transfer of the property.
The Potential Problem
However, the UK government has published new draft legislation which is intended to be included in the 2013 Finance Bill which would bring in an annual charge called the “Annual Residential Property Tax” on certain foreign non-natural persons (including an offshore company) which own a residential property in the UK worth more than £2 million. The annual charge will be up to £140,000 depending on the value of the property. Furthermore, from the 6th April 2013 UK capital gains tax will be imposed on any sale of such a property by a foreign non-natural person, such as an offshore company, on the increase in value of the property between the 6th April 2013 and the date of sale. Lastly, any purchase of a UK residential property valued over £2 million by an offshore company from the 21st March 2012 will be charged to UK stamp duty land tax at a punitive rate of 15% (rather than the conventional rate of 7%).
This clearly creates a serious issue for non UK domiciled beneficial owners who have UK property holdings in offshore companies. Most are likely to take one of two courses of action.
The first course would be to divest (remove) the property from the ownership of the company and move it into personal ownership.
In most cases, the divesting process will be carried out by (i) placing the Cayman (or other offshore) company into voluntary liquidation and then (ii) distributing in specie the affected property holdings. This avoids the new punitive tax regime, but it clearly exposes the ultimate beneficial owner (if not UK domiciled) to UK inheritance tax and results in the loss of confidentiality which they previously enjoyed. UK capital gains tax may also be a determining factor in whether this is a viable option. There might also be other issues if the beneficial owner is resident in the UK.
2. The Offshore Trust Solution
Accordingly for many non UK domiciled beneficial owners a preferable approach may be to convert their offshore company holding structure to an offshore trust holding structure. Corporate trustees are exempt from the foregoing taxes (a non-natural person is a company (except when acting as a trustee of a trust or as bare trustee), a partnership where one of more of the members is a company or a collective investment scheme) and, for many people, transferring property already owned by an offshore company to an offshore trust may be the most cost effective way forward.
Where an offshore trust structure is already in place, with trustees holding a Cayman company which in turn holds UK property, it might be advantageous to divest the UK property (by liquidating the Cayman company) so that the property is then held directly by the trustees.
Alternatively, if the Cayman company is held directly by a non UK domiciled beneficial owner, he or she may consider transferring the shares into an offshore trust now shortly before the Cayman company is liquidated, with the same end result of the property then being held directly by trustees.
If the trustees are individuals, they should retire in favour of corporate trustees so that the tax exemptions can be enjoyed.
Trustees who hold UK property will be subject to a 10-year anniversary charge to UK inheritance tax, which may be as much as 6% of the value of the property, although the charge is only assessed on the value of the property less any debt secured by the property. Accordingly, it seems likely that most properties will be heavily leveraged with debt to minimise exposure to such UK inheritance tax charge, although UK stamp duty land tax may be payable on the transfer of the debt.
For non UK domiciled persons purchasing new properties, it seems likely that offshore trusts might be considered the most attractive structure of choice. In addition to the potential tax benefits, the trust structure would maintain the confidentiality of the ultimate beneficial owner.
The interaction of the various UK taxes involved is very complicated (especially because the new capital gains tax legislation is yet to be published) and will vary according to each situation. Obtaining expert UK legal and tax advice is the key to formulating the offshore structure (potentially involving a Cayman trust) which is most effective in terms of tax mitigation, whilst hopefully allowing individuals to maintain confidentiality.
What to do
Non UK domiciled beneficial owners who have Cayman or other offshore companies holding affected UK property should (i) start reviewing their position, (ii) take appropriate UK tax advice (Stuarts Walker Hersant Humphries can recommend suitable UK tax experts), and (iii) if necessary, take the necessary steps to either divest the property or instigate the establishment of an offshore trust structure before April 2013. Each of these processes involves a certain amount of lead time, so persons who are potentially affected should consider their position sooner rather than later.
Disclaimer – we are Cayman Islands attorneys and, as such, advise only on Cayman Islands law. This update does not purport to advise in relation to anything other than Cayman Islands law. In particular, nothing herein is intended to comprise advice on United Kingdom law. For United Kingdom legal and/or tax advice, please contact your United Kingdom attorneys-at-law and/or tax advisors.