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In this issue, it had been intended to comment on the scope for using offshore companies such as Jersey and Cyprus companies to utilise their respective double tax treaties with the UK to exempt UK trading profits from UK tax. However, the Chancellor has, as noted in the "Budget Update" in this issue, effectively closed all opportunities in this area with effect from 16 March 2016.
However, advisors should still consider offshore companies for non-UK resident investors who wish to invest long-term in UK commercial property. Now that dealing in or developing UK land or property (i.e. trading) is going to be taxable on a source basis following the annual budget statement, the distinction between trade and investment in UK commercial property is as important as ever.
Properties that have been acquired and let as offices by a company, normally will amount to investment activity. If the intention of the board is to build up a long-term portfolio of investment properties from the outset or commencement of business, and to acquire property as an investment asset, and not as trading stock, then the sale of the asset is not a trading transaction. The retention and letting of property is always to be regarded as investment. The watchword is documentation. Board meetings (especially the first board meeting) should be documented so as accurately to describe the intentions of the board of directors, where an offshore company is acquiring non-residential property.
The gains of an offshore company on sale of an investment in commercial property will escape UK capital gains tax (or corporation tax on capital gains) provided that the offshore company is non-UK resident. This should not be difficult to achieve if the beneficial owners of the company are non-UK resident. On the other hand, trading in UK commercial property will be a UK trade and (since 16 March 2016) always taxable as a UK trade, regardless of the existence of double tax treaty provisions.
Three sets of anti-avoidance legislation impinge on the use of offshore companies to invest in or trade in UK assets such as property. Two are only relevant to UK resident individuals, whilst the third extends to non-UK residents. The two anti-avoidance rules relevant to UK residents are:
1. ss720-727 ITA 2007 These provisions will deem income arising from UK property, received by an offshore company, to be the income of the UK resident individual or individuals who have transferred the income-producing assets to the offshore company.
2. s13 TCGA 1992 This provision will deem the capital gains realised by an offshore company to be the gains of certain UK resident "participators" of the offshore company. This provision may therefore negate the benefits of investing in UK commercial property via offshore companies.
Both s720 and s13 are subject to the remittance basis but this will be of no avail to UK resident but non-UK domiciled persons concerning (respectively) income arising from UK property (e.g. rents) and gains from the sale of UK property.
The third anti-avoidance rule is less well known. Sections 752-772 ITA 2007 are collectively known as the "transactions in land" provisions. Broadly, where UK property is acquired by an offshore company with the sole or main object of generating a profit and a gain of a capital nature is realised, the gain is taxed as income (s755). This renders the profit taxable under UK source rules.
Can s755 be invoked against offshore corporate investors in UK commercial property? It is difficult to see s755 applying against genuine offshore investment companies as there is no element of trade, and, s755 is in essence an income tax anti-avoidance rule targeted at offshore trading companies.
Jordans can provide advice and assistance in the formation of UK and offshore companies for UK property trading and investment projects, including tax and accounting services.