A tax-neutral platform for international investment into UK commercial property

Wednesday 18 May 2016

By Kevin Renshaw, Director - Tax, Equiom Solutions

Introduction

Equiom recently attended the annual MIPIM (le marché international des professionnels de l'immobilier) property event held in Cannes, which over five days attracted in excess of 21,000 attendees.

MIPIM is mainly focused on commercial property and this was a timely reminder of the international interest in UK commercial property projects.

For those acquiring an existing building to create added value or those constructing from scratch, the market offers competitive yields, and for international investors the UK commercial property sector continues to exist within an attractive fiscal environment.

There has been much commentary over the past few years on the relentless march of UK residential property taxes and to a large extent the ‘bad news’ on this front has created negative perceptions for the entire UK property market. This has, unfortunately, largely overshadowed what is the benign tax regime that can still be found within the commercial property sector.

Opportunity platform

From its Isle of Man, Jersey and Guernsey offices, Equiom can form, manage and administer a number of investment vehicles that suit the individual needs of the underlying investor.

Property is a core asset for Equiom and over the years a wealth of experience and specialist skills have been built up to allow the Group to grow the value of its property book to more than £5 billion. This significant asset class embraces a broad range of commercial property including offices, warehouses, hotels, care homes, shopping centres and student accommodation.

The investment vehicle of choice may be a simple special purpose vehicle, or a more sophisticated partnership or unit trust. It may be closed ended or open ended but framed in such a way that it falls outside of onerous Collective Investment Scheme rules.

Those who have used offshore vehicles for TOGC (transfer of business as going concerns) transactions will know that obtaining a VAT registration can be time consuming and in the worst case scenario clients awaiting a VAT registration number have had to place an additional 20% of the acquisition price into an escrow account. However, this dilemma is easily resolved by using an IOM structure and registering for VAT via the IOM VAT office, a process that can be completed within a one week timeframe.

Equiom’s ability to straddle the Isle of Man (IoM) and the Channel Islands (CI) also allows it to form a Jersey or Guernsey company and create sufficient nexus to the IOM to allow for the same fast track VAT registration process to be secured.

UK tax characteristics of investment via an IoM/CI vehicle

Each vehicle has its own individual UK tax characteristics, and the headline tax analysis for a non-UK domiciled international investor accessing the market in this way is as follows:

Special Purpose Vehicle Company

  • Stamp Duty Land Tax maximum of 5%
  • Income Tax on net rent 20%
  • No Capital Gains Tax on disposal of investment property
  • Outside of UK Inheritance Tax on the passing of the shareholder.
  • Outside of the Annual Tax on Enveloped Dwellings

Limited partnership (with corporate limited partners)

  • Stamp Duty Land Tax maximum of 5%
  • Income Tax on net rent 20%
  • No Capital Gains Tax on disposal of investment property or partnership interest
  • Outside of UK Inheritance Tax on the passing of the shareholder of the limited partner.
  • Outside of the Annual Tax on Enveloped Dwellings

Unit Trust (with corporate unit holders)

  • Stamp Duty Land Tax maximum of 5%
  • Income Tax on net rent 20%
  • No Capital Gains Tax on disposal of investment property or units
  • Outside of UK Inheritance Tax on the passing of the shareholder of the unit holder.
  • Outside of the Annual Tax on Enveloped Dwellings

In all the above scenarios it is currently possible to self-fund the investment opportunity and structure an internal finance arrangement in such a way that the effective rate of income tax on rents can be reduced to approximately 5%.

Conclusion

As can be seen above, and irrespective of the choice of investment vehicle used, the IOM and Channel Islands provide a tax neutral platform for international investors to gain access to the UK commercial property sector and enjoy the benefits of what remains a benign tax regime.

Equiom can facilitate this by forming and managing the property acquisition vehicle and can also incorporate and administer any corporate vehicle used as part of the overall structure.


Contact

For more information about this topic, please contact Kevin Renshaw.