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US Government's Attack on use of offshore vehicles

Wednesday June 27th, 2012

The government's attack on the use of offshore vehicles is set to continue following the release of a consultation paper on published by the HM Treasury on 31 May 2012.

International Investment | 25 Jun 2012: HM Treasury published its consultation on ensuring the “fair taxation of residential property transactions” follows the UK Government’s announcements in the 2012 Budget March in relation to the introduction of new Stamp Duty Land Tax (SDLT) thresholds, for those purchasing residential property worth over £2 million.

The consultation introduces two new forms of taxation which will both take effect from April 2013. First, an annual charge linked to SDLT and, secondly, an extension to capital gains tax (CGT). The changes are likely to affect offshore trusts, which are often used as vehicles to hold high value property.

‘The Treasury has argued for some time that offshore trusts have been used by wealthy individuals to avoid Stamp Duty Land Tax (SDLT) on the purchase of high value property. But Karen Marks, a partner specialising in tax and trusts at legal and wealth management firm Maitland Group says this is not necessarily the case. "While there are a number of often complex offshore trust structures still in place, they were not created to avoid SDLT, most were created to mitigate IHT and to some extent to deal with succession without the need for UK probate and potential disputes over entitlement."

Since the Budget, if an individual, trustee, partnership of individuals, or a bare nominee buys a residential property worth over £2m, the rate of SDLT is 7%. If a corporate or other non-natural entity (partnership including one corporate partner, collective investment funds) buys a residential property worth over £2m, the rate of SDLT is 15%, explains Marks. Charities, corporate trustees acting as trustee and corporate nominees are currently exempt from these charges.

However, the consultation paper proposes to add an annual charge and extend coverage of CGT. From April 2013, the government is proposing an annual charge of £15,000 on properties over £2m held in offshore trusts rising to an annual charge of £140,000 for property values over £20m.

Proposed changes to CGT introduce a number of complications. For example offshore trustees, personal representative and some charities will be subject to a CGT charge when there is a disposal of the UK residential property valued above £2m. It is also proposed that a sale of shares in an offshore company rich in UK residential property (where more than 50% of the company value is derived from UK property) or any other asset representing directly or indirectly relevant UK property will also be caught.

In future, says Marks, non-UK resident individual owners of UK residential property will be in a better position than non-resident companies, although they will be at risk of IHT if they own UK situated assets at death. CGT reliefs should continue to be available. "Main residence relief should be available for trustees where beneficiaries occupy trust property as their main home. How the new CGT charge will interface with the rules relating to gains made by non-resident close companies for example has not been explained," says Marks.

Going forward, Marks says although the consultation document leaves a great deal of questions unanswered and raises many more, it is imperative to take action now. "If you believe you may be affected as a trustee, a partner, an offshore company director, a person living in a property owned by any of these types of entities and paying less than market rent, you need to be considering whether you are in fact affected and if so, whether action needs to be taken."

In terms of actions, the value of the property, why it was purchased through an offshore trust and whether the reasons still hold should all be considered says Marks. "What is the impact of collapsing the structure now and whether a different solution can be found such as a mortgage, life assurance or shared ownership are solutions that would need to be explored,' says Marks.

The consultation period ends on 23 August 2012.

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