For many years, it was common practice for a non-UK domiciled individual to create an offshore trust and company structure to purchase and hold a UK property which would be occupied by that individual and their family personally. The tax effect of this was that a trust created by a non-UK domiciled individual which only held non-UK property (being the shares in the offshore company) would be outside the scope of inheritance tax. In addition, holding the UK property in this way would also in some cases prove to be more beneficial from a capital gains tax perspective when the property was ultimately sold. Subject to some income tax issues that may arise by reason of the non-UK domiciled individual being treated as a "shadow director" of the company and thus liable to benefit in kind charges on their rent-free occupation of the UK property, this basic structure could be very tax efficient.
However, the taxation of non-resident and/or non-domiciled investors in UK property changed significantly in April 2013, with the introduction of complex legislation which effectively rendered the traditional trust and company structure no longer tax efficient where the UK property is for personal use. As such, in practice, such structures are no longer recommended except perhaps in some unique situations. But what about offshore trust and company structures that are still in existence? These structures may have been retained following the introduction of the Annual Tax on Enveloped Dwellings ("ATED") and ATED capital gains tax in April 2013 on the basis that they still provided inheritance tax advantages that outweighed the ATED charge. However, such advantages disappeared on 6 April 2017 when the inheritance tax rules changed with the effect of bringing any UK residential property held by an offshore company within the charge to inheritance tax on the offshore trustee on every ten year anniversary since the creation of the trust and also on the non-UK domiciled individual in the event of their death at a maximum rate of 40%.
It is thus unsurprising that many now wish to wind up their offshore structures and transfer UK property into personal ownership, but the question is how can this be done tax efficiently?
It may be the case that the most tax efficient route is to transfer the property to the offshore trustees on the liquidation of the company and then for the trustees to distribute the property to the beneficiary. In these circumstances, there are likely to be capital gains tax implications to consider in relation to the initial transfer of the property by the offshore company in liquidation, the liquidation of the company itself and the appointment of the property to the beneficiary.
The distribution of the UK property by the offshore trustees to the beneficiary will also be a chargeable event for inheritance tax purposes and inheritance tax forms will need to be completed and filed even where no there is no inheritance tax liability.
Stamp duty land tax may also be payable where the company has third party borrowings and the UK property must be transferred subject to that debt.
If the offshore structure contains any assets other than the UK property, or the structure has historically been in receipt of income and/or capital gains, the tax implications of winding up the structure can become even more complicated.
There are a number of matters which require careful consideration prior to winding up an offshore structure. Amongst other things, there is likely to be an immediate associated tax cost, but this can be mitigated if the process is managed correctly and long-term tax savings may make this a price worth paying. It is therefore critical to carefully review any UK property holding structures to determine if they still achieve the desired effect now and into the future and, if not, to obtain professional advice as to how winding up such structures may be achieved in the most tax efficient way.
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