Commentary - 12 June 2017

Life after April 2017: Jersey's role in UK property investment

Jersey’s longstanding reputation and experience in property investments, commercial and residential, through trusts, companies and funds under previous regimes, means we are well placed to examine the revisions to UK tax obligations and the impact upon property investment structures.

Author of article:

Julian Hayden

Client Director, Private Client

Jersey’s longstanding reputation and experience in property investments, commercial and residential, through trusts, companies and funds under previous regimes, means we are well placed to examine the revisions to UK tax obligations and the impact upon property investment structures. In the same way, we can provide sound and sensible ways forward in the face of change. This is part and parcel of the professional culture of client care which has come to be expected of Jersey and our work in international markets.

Many professionals in the Island are currently focusing their efforts on the coming inability to shelter UK residential property from inheritance tax, de-enveloping existing structures and the UK’s coming tax changes for non doms. There is also great uncertainty in the property market, affected by numerous influences including taxation changes, particularly stamp duty land tax (SDLT). Normality is likely to return. Albeit with some changes. The ability to shelter from inheritance tax (IHT) all other asset classes, including UK commercial property, will continue. Jersey has a major role to play in this.

London is still an enormous draw for property investors seeking a safe home for their money, stability and the rule of law. For people simply wanting to live there, visit, and/or to do business from London, it remains a world leading base. A weakened pound offers opportunities for overseas investors – often covering the costs of SDLT – and there are some SDLT exemptions at the highest rates for commercial investors.

In London there are already some signs of growing international interest in the residential sector after a very quiet period. In London and beyond there is growing interest in commercial property offering commercial advantages of yield and capital growth with lower rates of SDLT, no annual tax on enveloped dwellings (ATED) and an ability to protect against IHT.

So, there may be good opportunities for overseas investors into UK property taking a medium or longer term view. All the traditional reasons for structuring UK residential property – asset protection, succession planning without probate, retention of control and protection from political and economic instability – continue.

The Great Unbundling?

Overseas residential property structures are being reviewed. Detailed case-specific tax advice is of course necessary. In some cases a partial or full unbundling is appropriate but in other cases it is decided to retain a structure in whole or part. Usually, the outcome depends on the rationale for the structure in the first place.

Beyond April 2017

Assuming that UK residential and commercial property remain interesting asset classes for overseas investors (including for present purposes owner-occupiers and some developers), Jersey undoubtedly has an enduring role. It is an attractive jurisdiction for the provision of robust trustee and corporate services with good governance, financial and legal infrastructure, backed by technical expertise and excellent working relations with UK advisers. If an overseas structure is to be set up it needs to be managed properly.

Commercial property can continue to be held by overseas companies owned by a trust and entirely outside the scope of IHT.

The planned reduction in the corporation tax regime is welcome, though tempered by other proposals aimed at equalising the tax efficiencies between investing in offshore and UK domiciled funds.

For residential property, other techniques (many of them simple, tried and tested) will be needed to mitigate IHT. As always, advice will be needed particularly if borrowing arrangements are more complex than vanilla external bank loans which will still reduce values for IHT purposes. In some cases offshore companies will be retained to hold residential property. Where banks are unable to lend to individuals, companies may still be needed. Yet we are likely to see a trend towards trusts owning property directly, possibly with the settlor excluded but preserving flexibility, parental control, succession planning opportunities and – in many cases – the availability of main residence relief from capital gains tax (CGT).

Non-domiciled UK resident investors active in the UK property market may use overseas trusts as holding vehicles with commercial activity conducted in the UK by UK companies paying low rates of corporation tax and without any shadow directorship concerns.

Where overseas companies do own UK property it will be interesting to see the effects of bringing them within UK corporation tax. That may have some downside but is attractive in an era of reducing rates of corporation tax (17% by 2020).

We are likely to see planning in relation to the use of widely held companies where investors effectively joint venture in the purchase of investment properties. There may be growth in the use of overseas funds for residential property investment and growth in the rental sector, as individuals who might once have bought directly for their own occupation, now choose to rent and invest instead through collectives or other means.

The new thinking is already reflected in de-enveloping reviews, with holding companies being liquidated and ownership, in appropriate cases, being taken by the trust directly. The settlor may be excluded where necessary. In some cases market rents will be paid and third party borrowings taken to mitigate IHT. New purchases can be taken by the trust itself, again coupled with external borrowing. These arrangements, adjusted for specific circumstances, can work for both ‘owner occupation’ and pure unoccupied investment whilst preserving asset protection and succession planning, being reasonably tax efficient and confidential, with no ATED liability.

Each case will be fact specific. Sometimes residential property may be held as an investment through overseas companies notwithstanding the ATED liability and higher SDLT, as an acceptable alternative to the 10 year IHT charge. For succession planning purposes, the company’s shares might be separated into classes, one or more carrying the economic rights and the other class or classes carrying voting control and therefore the greatest value. As always, expert advice would be needed but such an arrangement might offer interesting opportunities for long term ownership, combined with IHT planning.

In summary, the coming UK tax changes do require immediate advice and action but not necessarily a complete close down. For the immediate future we will have some tax certainty coupled with the advantages of a weak pound. In the medium to longer term the attractions of London and the UK for investors and occupiers remain, as do planning opportunities based on well-planned and well-managed overseas ownership. One thing is for certain, we are in a state of ever present change, whether this is political, regulatory or general instability. Jersey has positioned itself to offer a comprehensive and robust business infrastructure, with its highly skilled financial service providers offering a wealth of legal, accounting and administrative experience. This is all backed by a first class legal system and local government working together with the Jersey Financial Services Commission (JFSC) and Jersey Finance, to sustain a core offering and ensure our professional culture of client care remains front and centre.

First for Finance is published by Times Group, in partnership with Jersey Finance.

Back to top