De-enveloping an apartment

It is quite extraordinary to my mind that in the UK we are doing everything we can to keep the wealthy from buying homes in our country whereas in Italy and Portugal they are doing everything they can to make buying homes by foreigners ever more attractive.

I was talking recently about this to a friend of mine who is well placed in the Conservative party, and she said that politicians want to discourage wealthy foreigners buying in the UK to keep the cost of our homes down!

In the good old days, some thirty years ago it was standard practice for homes bought by wealthy foreigners in the UK to be structured through a company and trust structure – but now it is very expensive to unravel but if you don’t, your home attracts a hefty an annual charge - ATED.

ATED is a tax levied on homeowners whose home is owned through a company. It is designed to compensate the Treasury for lost stamp duty land tax because a home can be transferred to a purchaser by transferring the company shares rather than the property and thereby avoid the tax.

But this annual charge isn’t cheap. Homeowners with properties worth £1-2 million will be charged £7,500 per annum and homeowners with homes worth from £2 – 5 millions a whopping £25,300 per annum.

My client came to see me last week, his father died recently, and he is now a beneficiary of a trust which owns a property through a company set up in the 1990’s. The property in Kensington is worth £2 million He simply wants to stop this annual charge – which the trust cannot afford but is perplexed as to how best to go about it and how much it will cost.

To unravel this structure, it is necessary first to transfer the shares to my client out of trust, and then to liquidate the company thereby transferring the property into his personal ownership.

Inheritance tax is payable on transfers out of or into a trust, on death and on gifts. For people who have been brought up by a family who have never treated the UK as their home, inheritance tax is not payable on non-UK assets. Shares in a foreign company are non-UK assets and therefore outside the scope of this tax – or it was until April 2017 when company shares could for inheritance tax be ‘looked through’ to the underlying assets and to the extent that a foreign company owns UK property that value is then considered for IHT purposes.

Inheritance tax payable when assets are taken out of trust are charged on a complicated basis depending on the time since the last tenth anniversary, or April 2017 for these purposes, whichever is the later at a rate of 6% – so in this case it is five out of ten years which comes out at 3% or £60,000

As a rule of thumb, people who are not resident in the UK do not pay UK capital gains tax which is the tax on the gain made over the period of ownership. However, in April 2019 disposals of shares in a company which are ‘property rich’ are subject to capital gains tax or CGT.

Clearly given that the company’s only asset is this home it is ‘property rich’ and therefore is within the charge to CGT. It is good tax legislation not to introduce tax retrospectively, and so the only part of the gain to be taxed will be on any gain made since April 2019. Given that the market has been flat over the last five years this should not be too onerous.

When a transfer is made on which inheritance tax is charged any gain realised can be ‘held over’ to such date as the company is liquidated or the shares sold or given away. However given the exercise is to ‘de-envelope’ the property – to take it out of the company, - this ‘hold-over’ relief is not really worth bothering with, since either you claim hold over and then liquidate at which point the gain becomes payable or you don’t claim hold over in which case the gain becomes payable on the transfer of the shares, but then when the company is liquidated the base cost of the shares is the value of the property and so the same tax is payable either way.

Finally, the company owning the property also must pay corporation tax on any gain made on the property. This dates to April 2019 when ATED related CGT was repealed and replaced with new legislation for disposals arising after 6th April 2019.

For disposals made prior to 1 April 2023 the rate of Corporation Tax on the gain is 19%. However, from 1st April 2023 the rate of corporation tax will range from 19% to 25% so this exercise should be done before April of next year.

And although the ATED tax may stop there, other taxes will continue. If my client were to die, inheritance tax is charged at 40% - (although there are ways to circumvent this) and on a sale capital gains tax is payable on any future gain. What the UK politicians don’t seem to realise but those in Italy and Portugal do, is that a wealthy family who buys a home in our country will come here and when here will spend in our shops, restaurants and with our tradesmen. If we put them off, they will simply go and spend elsewhere.

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