Offshore companies, particularly those incorporated in the British Virgin Islands (BVI) or the Cayman Islands, are commonly used as vehicles to purchase and hold UK real estate. According to the BVI Capital Economics Report published in June 2017 (Report), the purchases of large commercial properties in central London account for the majority of the top 10 property deals by value carried out through BVI companies. The drivers for doing so vary from client to client and this guide aims to pull together some of the common threads for both private and commercial investors in the UK real estate sector.
Flexibility: Whether an investor wishes to invest in commercial or residential property, both BVI and Cayman company law is flexible and specialised making it easy, for example, to structure and restructure the property holding, and to distribute property assets on straightforward solvency based conditions as and when needed whether as a dividend in kind during the life of the holding vehicle or on a solvent winding up when the company has come to the end of its useful life.
Confidentiality: In the residential property market in particular, the ability to protect the identity of the ultimate beneficial owner of a property for some people (particularly those in the public eye) is a priority. Knowing that their home address is not in the public domain can be legitimately of paramount importance for both privacy and security reasons. This doesn't mean that the identity of the beneficial owner is unavailable to regulatory authorities or the courts when disclosure is required. Both BVI and Cayman implement the OECD's common reporting standards and both have secure beneficial ownership search systems, which allow for the exchange of beneficial ownership information between regulatory authorities for legitimate reasons. It should also be noted that the United Kingdom is consulting on the disclosure of the beneficial ownership of properties registered in the name of non-natural persons on HM Land Registry.
Portfolio investment: UK real estate is often owned via BVI holding companies as part of a diversified investment portfolio. Assets, including real estate can be purchased and pooled via a neutral jurisdiction. Cayman and BVI mutual funds are commonly used to hold diverse asset portfolios to allow balanced investment profiles, which can protect investors from the risks associated with single asset portfolios, and increase returns.
Cross-border investments: Investors from all across the world can, collectively, invest in real estate on the same terms and with access to the same capital markets, without multiple layers of taxation, if a BVI or Cayman investment vehicle/holding company structure is used. Investors are able to enter and exit the property investment market generally, at times of their own choosing, where the investment is structured through a widely held investment vehicle (which might be listed on one or more stock exchanges). According to the Report, BVI remains a global powerhouse for cross-border investment with over 140 major businesses listed on stock exchanges in London, New York or Hong Kong choosing BVI as a domicile of choice for their international investment activities. This level of control is difficult to achieve if the investment is directly in the property.
Borrowing and security: International banks are familiar with lending to, and taking security from, BVI and Cayman companies. This makes initial funding, refinancing or credit extensions relatively straightforward. Both the BVI and Cayman are creditor friendly jurisdictions with enforcement procedures and priority arrangements founded on English law. Furthermore, it is common for lending and security arrangements with BVI and Cayman companies to be English law governed.
Property investment for succession planning: The opportunities for succession planning where a BVI or Cayman company has been used to hold a property asset are diverse and simple to administer. Trustees are familiar with offshore structures and arrangements can be made which suit both the settlor and the beneficiaries in a wide variety of scenarios. In particular, it may be possible to limit or even avoid limits on dispositive or testamentary freedom which exist under an investor's "home laws". Many investors in Sharia law jurisdictions or other more restrictive jurisdictions look to Cayman and BVI holding structures to allow the management of their affairs in a way that suits their requirements.
Offshore taxation of UK property assets: There are no BVI or Cayman corporation, wealth, capital gains, stamp duty, withholding or estate taxes on UK property investments or on distributions made by the BVI/Cayman holding or investment company to be considered.
UK taxation of UK property assets1:
Inheritance Tax – There has been a lot of press about the proposed changes to the inheritance rules relating to residential property in the UK. However, at the time of writing, none of the announced changes have been brought into force and shares in offshore close companies and similar entities which hold residential property in the United Kingdom continue to be excluded property for inheritance tax purposes.
ATED and SDLT – While the annual tax on enveloped dwellings (ATED) affects many residential properties held through corporate vehicles, collective investment schemes and some partnership holding structures, commercial properties and residential properties which are either held under bare nominee arrangements or which are rented out to unconnected parties on a commercial basis do not attract ATED.
Buying shares in an offshore property holding company – which does not impose a stamp duty land tax (SDLT) charge for the buyer – rather than acquiring the property itself, which would trigger such a charge, is attractive.
Income and capital gains tax – UK rental income received by a non-resident Cayman or BVI company (after deduction of allowable expenses including interest on loans to the BVI/Cayman company for the purpose of acquiring the property) is subject to UK income tax at the basic rate (currently 20 per cent). There is an obligation on the person paying the rental income to a non-UK resident landlord to withhold tax at the basic rate from such payments, unless that BVI/Cayman company is registered with HM Revenue & Customs (HMRC) as a non-resident landlord.
Generally, non-resident BVI and Cayman companies will be exempt from paying UK capital gains tax on any gains made on disposal of commercial property, but some charges may apply to disposals of residential property where the investment in the property is not widely held.
Steps will need to be taken to ensure that the BVI or Cayman company does not become UK tax resident by virtue of the location of its "mind, management and control", and specific UK tax advice in this regard and generally in relation to the issues discussed above should be sought.
1 Harneys does not advise on UK law or UK tax law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.