UK property tax changes affect GCC nationals
PROPERTY in the UK, particularly London, has always been popular with GCC investors for many years. It has remained a safe haven and an attractive destination for investors and their families from the GCC region perhaps more than any other major city. Depending on the level of investment, well advised foreign investors would use structures to reduce their exposure to taxes. Typically, it would be purchased using various structures such as Trusts, Special Purpose Vehicles (SPV), Private Investment Companies (PIC), or similar offshore corporate structures. For many years, this was the standard method to buy UK property but recent tax changes means this is no longer the case.
After the global financial crisis and some would say the advent of Brexit, the UK government sought to increase the taxes on UK property held through structures by introducing a raft of anti-avoidance measures aimed at UK property that is held indirectly. So all the recent structures typically used by GCC investors are now no longer suitable which means on death, the investor is liable for 40% charge. This fee is based on the value at time of death and must be paid before the asset can be passed on to their family/estate.
The Prime Minister of the UK, Theresa May, must raise in excess of £50 billion as part of the exit negotiations with the EU. Her fragile position with UK voters means that she needs to look to other areas, non-voters for example, in order to raise the monies needed. That said, this legislation has been raised in the past so some experts would say it was merely a matter of time before this was enforced.
A recent report showed that close to half (44%) of all UK properties owned by overseas structures are located in London. More than one in ten (11,500) properties owned by overseas companies are located in the City of Westminster and more than 6,000 properties owned by offshore structures are in the London borough of Kensington and Chelsea.
In essence, 1 in 4 UK properties owned by an offshore structure are registered in the British Virgin Islands (BVI). This jurisdiction has traditionally been the most popular due to ease of establishment and moderate costs. Most legal advisors and fiduciary agents prefer the BVI for this reason.
London remains the clear favorite for the UK property sector as one would expect and has been for many years. It continues to grab headlines with many high-profile purchases from GCC investors and is destined to continue. The concentration of property in London (Zone 1) owned by offshore structures is evident from the aerial view.
The new anti-avoidance rules have severely limited tax planning options for non-UK domiciled individuals, whether UK resident or non-resident, in respect of UK residential property. GCC investors need to be aware of this new legislation and the impact on their residential property portfolio.
From 6th April 2017, changes to tax rules would mean that non-UK domiciles owning UK property indirectly through corporate structures (purchased either before or after this date) would be liable for UK Death Tax at 40%; this is 40% of the value of the property(s) on death.
Working with your lawyers, family office, and/or financial advisers, collectively they can create a solution whereby the property is placed into an insurance contract with a sum assured, which would cover the potential UK Death Tax liability in the event of death. The solution is relatively straight forward and the insurance is low cost and more than mitigates the cost of the potential tax bill.
The recent tax changes have far reaching considerations for GCC nationals owning UK property. The current structuring of your UK property assets will need review since it is likely that it no longer provides the protection from the recent death tax legislation changes. It is recommended, if you have not done so already, you contact your lawyers, family office and/or financial advisors to ensure the best solution is achieved to protect the UK property assets effectively and efficiently from this 40% death tax.