Property in the UK, particularly London, has always been popular with foreign investors from the Gulf. Until recently, foreign investors enjoyed preferential tax benefits that added to the attraction of owning property there. Within the last year, however, the UK Tax authorities have changed their stance and all investors are now exposed to new taxes.
Historically, foreign investors would use structures to reduce their exposure to taxes. Typically, it would be purchased using structures such as trusts, special purpose vehicles, private investment companies, or similar offshore corporate entities. This was the preferred method to purchase UK property because of the generous tax benefits.
Even when ATED (annual tax on enveloped dwellings) taxation was introduced, it had little impact until what was introduced recently. Any foreign owner of UK residential property is now liable to 40 per cent tax on death based on the value of the property at that time and irrespective of structure.
You are probably wondering why this is now the case. After the global financial crisis and even the advent of Brexit, the UK government sought to increase the taxes on property held through structures by introducing a raft of anti-avoidance measures. The UK Government can look through these structures to the UBO (ultimate beneficial owner) and levy this tax accordingly.
So, structures typically offered through lawyers, bankers and fiduciary professionals to foreign investors are no longer effective, which means on death, the investor is liable for this 40 per cent charge. This tax is based on the value of the property at time of death and must be paid to the UK taxman before the asset can be passed on to the family/estate.
So, selling the property to pay the tax bill is not an option.
If we consider who and how many investors this will affect, the statistics are quite staggering and may give an insight as to why the market values, particularly in London, have softened of late. A recent report showed that close to half of all UK properties owned by overseas structures are in London. More than one in ten (11,500) properties owned by overseas companies are located in the City of Westminster and 6,000 plus owned by offshore structures are in Kensington and Chelsea. The BVI is the most commonly used offshore structure with nearly £35 billion invested in London property alone.
What are the options open to foreign owners of UK residential property who are now faced with this reality. In simple terms, you could do one of the following:
• Nothing — the tax problem will only get larger if we assume property prices will rise over the course of time. Moreover, trying to sort out the deceased’s estate without provision in place makes matters only worse for the family at a difficult time.
• Sell — not an attractive option at present with the softer prices. Most larger properties are legacy assets which families do not wish to sell. Even if you do sell, there is a potential two-year tail, so you could be liable even after you do.
• Plan — A detailed overview in conjunction with professional advisers can yield a cost-effective solution to protect your property.
This is a clearly a wake-up call to all foreign owners and it would appear that the tax penny is only starting to drop now. Many advisory companies in this region are either unaware or have ignored this change to the detriment of clients. Certainly, realty companies selling UK property do not highlight this point to prospective buyers that they are exposing themselves to a 40 per cent death tax for fear of losing the sale.
The current structuring of your UK property assets will need reviewing since it is likely that it no longer provides the protection it was intended.
In essence, the UK Government has introduced legislation that has long been on the cards to equalise the tax payable on death whether you are a UK citizen, foreign investor and whether or not you use a structure to mitigate your exposure to taxes. The days of confidentiality are numbered, and governments have the power to make you disclose and/or have access to information formerly you thought was private.
Similarly, law firms and fiduciary agents have been hit with similar legislation; so if they are seen to assist with avoiding these taxes, they too can be on the hook for them. Whether you like it or not, the direction of travel is disclosure, not forgetting that this situation is not dissimilar in other global realty markets.
Tim Searle is Chairman of Globaleye.