07 October 2016

A new approach to overseas investment in UK property

Julian Hayden discusses factors affecting the UK property market and a new approach in overseas investment in the STEP Journal

A number of recent events have unsettled the UK's residential and commercial property markets.  Brexit is the most recent but changes to UK taxation have affected the residential property market without hitting the headlines.

Sterling's fall post Brexit brings obvious opportunities for overseas investors and the core attractions of London and the UK remain, both as a cultural centre and as a secure place for investment, offering rule of law, accessibility to purchase and unimpeachable title to property.

Overseas clients who do wish to invest, or buy and occupy property, should now be reviewing how those purchases are structured to fit their needs for succession planning and asset protection.

Commercial, not residential?

Recent tax changes include higher rates of SDLT for purchases of residential property through companies and for any second-home buyers including non-residents.  Perhaps more important is the proposed exposure of residential property to inheritance tax, despite structured ownership.

Overseas investors will still be able to protect all other UK assets from IHT.  Some investors may be attracted to commercial property by its lower rates of SDLT.

Price compression caused by SDLT changes may be a golden opportunity to move devalued properties into different structures at low tax cost.

Offshore companies - still useful

Offshore companies remain attractive in certain circumstances.  For all asset classes other than residential, full protection from CGT and inheritance tax is still available.  A company can be used to manage the rates of tax on rental income and to enjoy relief for interest payments, whereas personal ownership rules are changing.  Company ownership allows the sale and purchase of shares outside CGT and mitigates SDLT.  A company-owned residential property can be let exclusively to a third party on commercial terms and be outside ATED. 

Offshore companies can still be used for the acquisition of commercial or mixed-use properties or where residential property is commercially let, or for UK land trading.

Mind-set changes - Lend to buy

An overseas purchaser might consider lending to buy, not simply buying.

  •  Trustees, instead of buying a property for a UK beneficiary and allowing rent-free occupation, might instead form an offshore company which lends to the beneficiary who buys personally; or
  • A non-domiciled, non resident individual might form an offshore company which lends to a UK family member who in turn buys a property. 

Debts involve issues of deductibility, situs/benefit and anti-avoidance. Care and specific advice are needed but there could be IHT and CGT advantages.

Multiple investors and partnerships
Recent changes may encourage a shift towards multiple investors.   Rather than a wealthy investor owning multiple SPVs each with its own property, he/she might form a holding company for all the properties exempt from the stamp duty hike.

Partnerships are corporates for tax purposes but not for ATED and, like trusts, can last forever, avoiding probate issues.  Both are efficient structures for long-term ownership and flexible for clients needs.  There should be no reservation of benefit and the general partner can keep voting control, leaving the other partners with economic interests, but no vote. 

Property funds
Investment funds offer tax benefits not available to individual investors, being exempt from non-resident CGT and from "look through" inheritance tax.  They are unaffected by current reductions in mortgage interest relief and benefit from low non-residential rates of SDLT for buildings of six or more properties.  Closed-end vehicles should have few liquidity issues currently affecting some open-end funds.

Some investors may come to prefer to hold property-backed units, with borrowing facilities, rather than direct ownership of bricks and mortar.

A possible new asset class?  - Rent and occupy rather than own and occupy

Prospective owner-occupiers may now prefer to rent.  They could hold property investments in the form of shares or units or they might ask a fund to buy their chosen property, having invested into the fund in exchange for units - then renting the property from the fund.  The individual pays rent but receives indirect rental income from the units.

A widely marketed Jersey Property Unit Trust could hold such properties through a Jersey subsidiary.  This structure would offer the pooling of properties and a rental income and an eventual capital return, compared with the traditional model in which an
investor buys a property, improves it and sells on at a gain, but with minimal rental yield.

Investors wanting a residential portfolio could unitise it without an ATED charge and avoid IHT, the fear of which might otherwise precipitate fire sales by direct owners.  Funds might also appeal to occupiers currently paying ATED who will be exposed under the new IHT rules and who could transfer in their property in exchange for a commercial lease and income-producing units possibly carrying premium value.

After Brexit, despite uncertainties and tax changes, the attractions of London remain.  There are new opportunities for owning, investing or renting, especially for overseas investors with strong currencies.  The need for good succession planning and proper asset protection remain, but the game has changed. 

This briefing is intended to provide a general overview of the matters to which it relates. It is not intended as advice and should not be relied on as such. Property investment always carries investment risk and investments may fluctuate. Tax legislation is subject to change and you should obtain your own tax advice. Please seek professional advice appropriate to your particular circumstances or requirements.

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Originally published in STEP Journal, Vol 24, Issue 6.

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