Tax efficient structuring for UK commercial property

Wednesday 01 April 2015

By Kevin Renshaw, Director - Tax, Equiom Solutions

Introduction

The London residential property market, particularly the prime market, has had to come to terms with the triple assault of significantly increased rates of stamp duty land tax of up to 15%, the introduction of the annual tax on enveloped dwellings producing an annual charge of up to £218,200 and a fundamental change in the scope of capital gains tax extending its reach to non UK resident property owners.

One may have thought that such seismic change would lead to a period of stability but, with the UK election on the near horizon and talk of a mansion tax hanging in the air, this seems no more than wishful thinking.

Commercial property structuring opportunities 

Against this backdrop, international and UK resident non domiciled investors can take comfort that the taxation landscape for UK commercial property remains stable, with better yields than its residential cousin and the readily achievable opportunity for tax efficient returns.

With the right structuring in place the following tax outcomes arise:

  • Stamp Duty Land Tax – limited to 4%
  • Income Tax on Rental Income – limited to 20%
  • Capital Gains Tax – not applicable
  • Inheritance Tax – not applicable
  • Privacy of Ownership - maintained

Equiom, via our offices in Guernsey, Hong Kong, Isle of Man, Jersey and Malta, are able to form, manage, control and administrate the most appropriate and advantageous ownership vehicle for each individual client. We have over 30 years experience of managing property structures and our in house 'Solutions' team has the necessary tax skills to 'speak the same language' as the accountancy and legal firms who will typically provide the structuring advice.

Building strong, pro-active long term relationships with our clients remains our priority. We pride ourselves on providing outstanding levels of service, delivered by staff with in-depth real estate expertise which extends to being fully versed with the key tax fundamentals that underpin each structure.

The opportunity for tax efficient structuring of commercial property applies across the spectrum of the asset class, which is fortuitous, given that over the last few years, we have seen significant interest in hotels, serviced accommodation, shopping centres, offices and retail.

Last year, the clear winner was student accommodation, which has largely survived being re- characterised as 'residential property', whilst in 2015 we are seeing that care and nursing homes are attracting serious cash inflows.

Most popular structuring vehicles

For the stand alone private investor, the offshore special purpose vehicle company remains the structure of choice and, depending on the investor’s personal circumstances, particularly where the investor is a UK resident non-domiciled person, the company will typically be owned by a trust.

For pooled investments, especially those involving friends and family arrangements, the most common ownership structures are as follows:

  • Limited Partnership
  • Unit Trust
  • Company with multiple share classes or sophisticated shareholder agreement:

Such vehicles provide great flexibility and tax efficiency and where, for instance, a structure can be established comprising no more than 50 participants of a ‘ friends and family’ nature, it would not be categorised as a Collective Investment Scheme. This example of light touch regulation demonst rates another significant benefit of creating an offshore vehicle for property ownership.

Summary

Having studied the various options for ownership structuring, it should not be forgotten that most commercial property acquisitions require the purchasing vehicle to be VAT registered. Offshore vehicles still typically suffer many weeks of delays, with VAT registration applications regular ly stalling at HMRC Aberdeen. Equiom's HQ in the IOM, however, means that we can secure a fast, one week registration turn around, so that clients can avoid potentially having to place an additional 20% of the purchase price into escrow!