When it comes to structuring property ownership for international clients, a tailor-made service is required. Julian Hayden, Client Director at Hawksford takes a closer look.
Our approach as trustees, directors, fund managers or general partners reflects an international client base with diverse family and business circumstances, objectives and asset classes across jurisdictions and generations.
Recurrent themes of property ownership for international clients:
- Property is a key asset class as an investment or a business, a store of capital or for occupation or enjoyment.
- Structuring property requires a range of solutions to fit family or business needs. Tax is usually not the main driver but it must be taken into account. Often there are wider objectives – asset protection or planning for an orderly succession without need for probate in multiple jurisdictions, or simply respect for family values.
- Where centralised control is needed a key advantage of trusts is the flexibility to separate ownership from enjoyment, for example when parents want their children to have an eventual economic benefit in the future.
- Structuring property enables asset protection through anchoring legal ownership in a stable well-regulated jurisdiction where the rule of law applies.
Key factors involved in planning for structured ownership include:
- The overall plan, such as asset protection or succession.
- If commercial, is the property a long-term hold or for trading or development?
- If residential, is it for occupation or letting?
- How will the property be funded, what is the most effective structure for borrowing?
- What are the tax implications and/or local ownership restrictions or Sharia Law considerations and other family or business issues where tax is not the driver?
- How can matters be kept as simple as possible with clear objectives?
The best solution from the tax perspective is not necessarily the best for a particular family. Specialist advice is needed, taking account of all relevant factors.
Applying some of the principles in the context of the UK:
Recent tax changes have encouraged simplification and the removal of offshore companies in some cases involving UK residential property. There are still examples of clients wishing to own such property through offshore trusts or other entities for long-term succession planning. This is often supported by third party debt as a means of leveraging wealth and reducing values for Inheritance Tax purposes (IHT).
Existing structures should be reviewed but even where adjustment is needed, complete wind up is not usually the best answer.
Commercial property has attracted interest from overseas investors for its lower rates of stamp duty on acquisition, (compared to residential property) and the continuing ability to shelter it from IHT.
A key point of UK estate planning for non-domiciliaries (including UK residents who are not deemed domiciled) is that all asset classes, apart from UK residential property and non-arms-length debts relating to it, can be kept completely outside IHT and CGT by an overseas structure, though the recent Budget proposes that overseas investors will from April 2019, be subject to UK tax on gains realised on disposals of UK commercial property, rebased to that date.
If residential property is to be rented out on an arms-length basis, an overseas company will often be a suitable holding entity for an international client in terms of interest relief and CGT protection.
Special tax protection for non-domiciliaries is not available for UK residential property. However, the appropriate use of wills, coupled with life assurance written in trust, will help mitigate IHT.
As an incentive to attract inward investment and to encourage non-domiciliaries to live in the UK, the government has created the concept of Protected Settlements, enabling non-domiciliaries to enjoy tax-deferred or tax-free roll up of gains and offshore income, as well as freedom from IHT.
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