There is nothing worse in tax than a question to which there is no right answer. In many cases that applied to the question of ownership of non-UK property by UK residents. A solution that dealt with European succession law issues without creating UK benefit-in-kind problems was often elusive. But then Gordon Brown solved the whole problem at a stroke in his 2007 Budget - or did he?
In an ideal world, property ownership would be easy. If you or I wished to buy a property in the USA, France, Spain, Portugal or Bulgaria, we would just buy it. Indeed, according to the Daily Telegraph in November 2006, 800,000 of us have done just that. But how many of us own the properties in our own names?
There are a number of reasons why it is advisable to buy property outside the UK other than in your own name, by no means all of them to do with tax. In the USA, so litigious is the prevailing culture that individuals are advised to own properties through companies to protect against personal injury claims by visitors (invited or not) to the property. In Bulgaria it is illegal for non-residents to own land, requiring a Bulgarian company to be used. In France, Spain and Portugal the inheritance laws for property are such that it is often preferable to use a company to hold it.
The example of France is illustrative of the problem. Between 50% and 75% of the French property estate of a person dying leaving a widow(er) and child(ren) must pass to the child(ren) rather than the widow(er). This may be just about tolerable where the children are adults and get on with their parents, but what about the following situations?
1. Children and parents do not get on.
2. There are children by previous marriages.
3. The children are minors (who can, under French law, own land in their own right).
The preferred French vehicle to avoid such issues is the SCI (Societe Civile Immobiliere), which is a company transparent for French tax purposes, the shares in which are not subject to the above 'forced heirship' legislation. Unfortunately, SCI's are not transparent for UK tax purposes.
The issue here is that, in the case of a UK-resident company, property made available to a director of the company is taxable on the director as a benefit-in-kind. So, I hear you say, how is this relevant to my French-resident SCI, of which I am not a director?
The residence of a company is determined by where it is centrally managed and controlled. So if you take all decisions relating to the property and its SCI, the SCI is resident in the UK. Also, you are acting as a director of the SCI even if you are not a director in name, and will thus be taxed as a director in the UK. So this was a genuine problem for many people.
Few of us necessarily expected Gordon Brown to come riding over the hill bearing a solution to this problem, but in the 2007 Budget he appeared to do so, and indeed for many people actually did. Draft legislation intended for inclusion in the 2008 Finance Bill has been published, which will have the effect of removing the benefit in kind charge in the above circumstances where the following conditions are met:
1. The company owning the property is owned by individuals.
2. The company's only activities are incidental to its ownership of the property.
3. The property is the company's only or main asset.
4. The property is not funded directly or indirectly by a connected company.
Even better, the legislation will be retrospective for up to 20 years, allowing tax repayments to be claimed by those who have been caught for a benefit charge by the previous legislation.
So, problem solved. Or is it? What if:
1. A local management company holds some of the shares.
2. The shares are held by a family trust.
3. The company that owns the property also carries on a trade.
4. The company that owns the property is financed by another company connected to the director.
5. The company is a subsidiary of another, dormant, company (a highly typical structure for Spanish property ownership).
The answer in each case is that the legislation will not apply, and the benefit problem will thus potentially remain.
The other problem is a mismatch, as regards SCIs, between the tax systems of the UK and France as regards double tax relief under the Tax Convention between the countries. The French will subject the individual owners to capital gains tax on a property sale because the SCI is transparent for French tax purposes. However, it is not transparent for UK tax purposes, and any distribution from the SCI to its owners is taxable in the UK as dividend income. It is not possible to claim double tax relief for French CGT against UK income tax, and thus a double tax charge will arise unless it proves possible to sell the SCI rather than the property. This is unlikely if you are selling to a French resident.
Thus the change has not solved everyone's problem, and thus a review of the ownership structure of non-UK property is likely to prove essential at this point.
Mark Simpson
10 September 2007
Libertad purchase plan from PropertyInSpain.Net provides for the following and co-ownership and many tax breaks:
1. The company owning the property is owned by individuals.
[Spanish SL company]
2. The company's only activities are incidental to its ownership of the property.
[ownership and management of the property]
3. The property is the company's only or main asset.
[as is always the case with Libertad]
4. The property is not funded directly or indirectly by a connected company.
[funded by the co-owning family or family/friends & Spanish bank providing the mortgage]
Posted by: Terry Walker | Sep 10, 2007 at 07:44 PM