What are the best options?
There are numerous ways you can structure the purchase of a UK residential property, and each method has its advantages and disadvantages, depending on individual needs and circumstances. However, there are only three principal ways in which you can own UK property in your name, via a company or through a trust.
The main cost benefits of holding a property using the categories mentioned above are:
|On purchase||SDLT at rates up to 12% for UK residents or 14% for non-residents (or up to 15% and 17%, respectively, for additional properties)|| SDLT at either 15% or rates up to 15% for UK residents, or at 17% or rates up to 17% for non-residents
||SDLT at up to 15% for UK residents or 17% for non-residents|
|During ownership|| No ATED
Income tax on rental income at rates between 20% and 45%
|ATED may be charged at between £3,700 and £237,400 each year|| No ATED
Income tax on rental income at rates between 20% and 45%
|On sale|| Main residence exemption available otherwise capital gains tax at 18% or 28%
||Corporation tax at 19%||
Main residence exemption available, otherwise capital gains tax at 18% or 28%
|On death||Inheritance tax at up to 40%||Inheritance tax at up to 40%||Inheritance tax at up to 40%|
The current UK tax regime encourages direct ownership of residential properties without using trusts or corporate structures. As can be seen from the above table, it is now normally more tax-efficient and straightforward to hold a UK residential property for personal use in your name rather than through a company or trust.
However, there are circumstances where a trust or corporate structures are appropriate and offer certain advantages. For example, properties acquired for a property rental, development or trading business may benefit from being held in a company (primarily because of the difference in tax rates between corporation tax and personal income tax). Company owners can also be advantageous where limited liability is required.
There are also valid non-tax reasons to hold properties through a trust, such as increased confidentiality, estate planning and asset protection.
A trust is a legal arrangement where the settlor settles assets into the trust so that the trustees become the legal owners, whereas the settlor remains the beneficial owner. The trustee manages and administrates the property for the benefit of the beneficiaries. The settlor of the trust is the owner of the assets to be placed on trust. The settlor creates the trust and may also benefit under its terms. The trustees are the company to which the legal ownership of the property is transferred and who are authorised to manage the assets. A trust instrument is put in place which sets out the terms on which the settlor and the trustees have agreed that the trustees will hold and administer the trust fund. The trust instrument identifies those persons intended to benefit from the trust fund.
Types of Trusts
Several different trust types can be used to hold UK residential properties. One of the most popular types we offer is a discretionary trust. A Discretionary Trust is one of the most flexible types of trust structure. In this type of trust, the Trustee has complete discretion to decide on the share of the trust capital and income which each beneficiary may receive. As a result, it provides more flexibility than a Fixed Interest Trust, and the Trustees can respond to future circumstances as and when they arise. Most settlors like to give the trustees this flexibility to adapt to changing circumstances of the beneficiaries. No beneficiary is entitled to any right over the trust property and this can be a primary benefit when using this type of trust for estate and succession planning purposes.
A Jersey trust may be revocable or irrevocable. If a trust is revocable, the settlor may revoke the trust and regain ownership of the trust fund. This can mean that some tax authorities may argue that the settlor has always controlled the trust. An irrevocable trust cannot be revoked. Generally, this is the preferred form of a trust settled under Jersey law. This does not mean that the settlor cannot receive funds from the trust. If the settlor is a named beneficiary, they can receive a trust distribution. They can also still terminate the trust if they wish to, by requesting all the assets to be paid out, at which point the trust would fail due to lack of assets.
UK Trust Register – a trust must be registered on the UK Trust Register if it is liable to certain UK taxes (including CGT, Income Tax, Inheritance Tax, SDLT). We would need to provide information on the trust itself, the trustees, the settlor, the beneficiaries and assets. This information is collected to try and combat the misuse of trusts, and HMRC will use the information to cross-check against their records. This information is not currently accessible to the public except when requested by law enforcement agencies or other interested third parties.
Set up process:
Should you decide to establish a Jersey trust, you would need to arrange the following:
- Secure written tax/legal advice to confirm the rationale for the trust, what the structure will look like, any tax implications, the rationale for using Jersey, etc.
- Complete our trust application form.
- Complete our External Client Due Diligence Form for every individual connected to the trust and provide their passport and a current utility bill, certified in line with our requirements.
- Sign our Letter of Engagement.
- We would work on our onboarding steps, including carrying out various internal and open-source checks, obtaining risk/director approval, agreeing our fee proposal, liaising with a Jersey law firm to draft the trust deed, etc.
- Once we have collated all our forms and CDD from you and received internal approval, we can establish the trust the same day.
We can assist to open a bank account in the name of the trust.
There is no ‘one-size fits all’ answer when deciding how to structure ownership of a UK residential property. We would recommend you to think carefully about your options and the best way to structure your ownership. Our Tax and Private Client team are well-placed to provide you with tailored professional services.