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New Register to disclose beneficial ownership of foreign entities owning UK property

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As part of the move to improve transparency of beneficial ownership for foreign entities investing in UK property, it is proposed to introduce a new Register of People with Significant Control over Overseas Companies (the PSCOC Register). A Consultation Document on this issue was published in April 2017 and on 18 January 2018, the Business Minister, Greg Clark announced that draft legislation would be published in the Summer of 2018 and introduced into Parliament before summer 2019.

Government has confirmed that a draft bill will be published for scrutiny this summer.  A Bill will be introduced to Parliament in 2019 and it is intended that the register will become operational by 2021.  Their response to the consultation sets out current thinking about implementation of the register.

Overseas companies owning a UK property or bidding for public contracts will need to register.

Restriction on Transactions relating to UK Property by Overseas Entities

Indeed it is proposed that overseas entities will not be able to buy or sell property in the UK unless they have provided information about the beneficial owners for the PSCOC Register.
In respect of property already owned by overseas entities, it is proposed that the restriction will be reflected by a note on the Title Register for the property, prohibiting a sale, grant of lease or mortgage unless the entity is fully compliant with requirements under the PSCOC Register.
For overseas entities which wish to acquire UK property, they will first have to apply to register their beneficial ownership with Companies House. If the application to register is successful, the entity will be allocated a registration number. This number will be required in order to register title to the property at the appropriate Land Registry. Checking that an overseas entity is compliant with the new regime can be done very easily and quickly by checking the register on the Companies House website. Failure to supply a valid registration number on the form would mean that the application is cancelled and the transfer of title will not be registered and consequently the overseas entity will not become the legal owner of the property.

End to Anonymity

The proposed register will, in all likelihood, be publicly available and will contain similar information to the Persons with Significant Control Register which is now in operation for UK companies. Any overseas entity which is a leaseholder of property, where the lease is required to be registered and the original term is for more than 21 years, will be required to maintain a PSCOC Register.

The Conditions for Registration

It is important that the PSCOC Register identifies who benefits from the legal entity and who exercises control over it and the assets that it holds.
Under the PSCOC Regime it is proposed that an individual will be a person with significant control of an overseas company (a “PSCOC”) if he meets at least one of the conditions that mirror the current PSC regime

New condition brings Trusts into the PSCOC net

A new, ‘fifth condition’ catches trusts and results in some settlors, protectors, enforcers and beneficiaries of trusts being PSCOCs.
If the trustees of a trust or the members of a firm which is not a legal person have a majority stake, the fifth condition would also need to be applied to establish if there was a PSCOC with significant influence or control over that trust or firm.
A person would hold a “majority stake” in a legal entity in any of the following circumstances:
a) The person holds a majority of the voting rights in a legal entity;
b) The person is a member of the legal entity and has the right to appoint or remove a majority of the board of its directors;
c) The person is a member of the legal entity and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights of that legal entity; or
d) The person has the right to exercise, or actually exercises, dominant influence or control over the legal entity.

Transitional Arrangements

Overseas entities which own UK property when the new rules come into force will be given one year to comply with the new requirements and apply for a registration number. This will give overseas entities sufficient time to dispose of their property interests if they choose to do this rather than disclose the required information. During this period entities will be unable to register title to new purchases of property without a registration number.

All overseas entities that own UK property will be contacted before the law comes into force, setting out the requirements and the consequences of non-compliance. A reminder will be sent three months before the end of the first twelve month period.

After the end of the one year transitional period, all overseas entities that own property in the UK, regardless of when they bought the property, will be prohibited from selling the property or creating a long lease or legal charge over it unless they have complied with the PSCOC Register requirements. As stated above, a restriction will be noted on the title Register which will be visible to prospective buyers when they carry out a title search. A transfer of the property will be void if the overseas entity is not compliant with the PSCOC Register requirements at the time the contract to acquire the property completes.
Once the overseas entity has bought property in the UK, a note will be put on the title register that will reflect the statutory prohibition on sale, grant of a lease or mortgage unless the entity is fully compliant with the register’s requirements.

Information to be provided for the Register

The Department for Business, Energy & Industrial Strategy are currently reviewing the feedback on this proposal so details of what is required are not yet confirmed. However, in addition to personal details, name, date of birth, nationality, country or state where beneficial owner usually resides, the register will likely include information about the nature of the beneficial owners’ control over the entity.
It is proposed that the information on the PSCOC Register should be updated at least once every two years and the overseas entity should have the option to update the information more often.

Should I Incorporate my Buy-to-Let Business?

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The introduction of three specifically targeted rule changes aimed at cooling the buy-to-let market have led many landlords to ask whether they should be incorporating their buy-to-let businesses. But have the goal posts really moved in favour of incorporation for rental businesses?

My own view is that for most people the pendulum has swung against incorporation due to the new dividend rules and the changes to the taxation of rental income do not alter this. There is no doubt that incorporation could be beneficial in some circumstances but there is no “one size fits all” answer and for some, incorporation could make them significantly worse off.

The changes particularly aimed at the buy-to-let market are in connection with:

  1. A restriction on the tax relief for interest payments
  2. The availability of wear and tear allowances on furnished lettings
  3. Stamp duty land tax increase for second properties

Interest relief

Commencing in April 2017, interest relief will be restricted to 20% basic rate only. This restriction is being phased in gradually over 4 years so that by the 2020/21 tax year all interest relief will be at 20% only.  There are important implications arising from this change that are examined in a previous blog.

Wear and tear allowance

With effect from April 2016, the 10% wear and tear allowance for furnished lettings is abolished. This is replaced with an allowance for renewals instead. This essentially means that the first purchase of an item of furniture or furnishings is not an allowable expense, but the subsequent replacement of such items will be an allowable expense against the property income. This wear and tear allowance has however been available to both individuals and corporates letting residential accommodation and hence its abolition affects both. Landlords have previously been able to claim renewals but it is generally accepted that the old 10% wear and tear allowance was beneficial in many cases.

Stamp duty land tax increase

The Autumn Statement announced a new additional 3% rate of stamp duty land tax (SDLT) to be applied to all purchase of second properties. We have yet to see draft legislation on this but it is going to apply to both individuals and corporates but with an exception proposed for corporates owning 16 or more properties.

Of the above three rules changes only the first does not apply to companies and it is this which is largely the reason why people are questioning whether a corporate structure would be appropriate. However, it should be noted that companies only pay corporation tax at 20% (soon to reduce to 18%) so this exclusion is of little consequence to a company.

I conclude from the above that the announced changes are not going to make a significant change to the decision that we already face over whether it is beneficial to run a letting business as an individual or company. The major factors that it is necessary to consider therefore remain largely the same as they have always been and there is no one size fits all solution:

Some people will find it advantageous to incorporate, but the reasons for this have largely not been affected by the above rule changes. The questions to consider include:

  1. Will you be able to borrow on similar terms through a corporate or as an individual?
  2. Will you need to extract profits from the company? If you do then you will be exposed to the higher rates of income tax on extraction, whereas if you are able to retain profits in the company they will suffer tax at the lower corporate rates only.
  3. Selling a property within a company gives rise to a potential double tax charge as the company will pay corporation tax on the gain on sale and the individual will suffer further tax on profit extraction.
  4. For existing buy-to-let businesses there is also the issue of capital gains tax and SDLT charges to consider on transferring property into the company on incorporation. Don’t forget that whilst there is no SDLT on gifts for no consideration, if there are loans outstanding that will be transferred to the company with the property then they will treated as consideration for SDLT purposes.
  5. The additional compliance costs of running a company also need to be factored in as they will in some instances outweigh any tax benefit.

A further point to consider is interest relief which is available on borrowing personally to lend to a company. Under current proposals the restrictions to interest relief on buy-to-lets does not apply on loans taken out by individuals to lend on to their buy-to-let companies. This would at first sight appear to be loophole. However, in most circumstances it would be necessary to fund the interest payments by charging interest to the company and hence for the individual the interest paid and received would be self-cancelling leading to no benefit. There is also a question-mark over whether banks would be prepared to lend to the individual when the property was in a company.

So, incorporation is most likely to suit a business which has low borrowing requirements, low turnover of properties and can afford to roll up profits within the company to take advantage of the low corporation tax rate. This is not your typical buy-to-let Landlord

The above gives only a brief overview of some of the issues involving the incorporation of a buy-to-let business. Each person’s circumstances will be different and you should take proper advice before taking any action.

 

 

CGT for Non-Residents – to Value or not to Value

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For as long as I have been working in the tax profession, arguably the two best pieces of basic CGT planning have been death and becoming non-resident.  I remember in my formative years as a Tax Adviser being somewhat shocked and, admittedly, envious of a client who had emigrated to Australia.  In the following tax year they managed to sell a number of properties free of capital gains tax.  The simple reason – they became non-resident in the previous tax year and would remain outside the UK for at least five tax years.

From 6 April 2015 the purge on non-residents continues with offshore based individuals owning UK residential property now having to fall in line with those who have not been able to negate their gains by emigrating to some exotic destination.  Simply put, non-residents will pay capital gains tax on sales of UK residential property.

Unlike the recently introduced Annual Tax on Enveloped Dwellings, there are no valuation bands determining the charge to be paid and aside from main residence relief, there is no relief available from the charge.  The rate of tax for non-resident individuals will be the same as for their UK counterparts, being 18% if the gain falls within the basic rate of tax and 28% if any part lands in the higher rate.

Fortunately, the new rules are not retroactive so the news that a non-resident can re-base the value of their property as at 5 April 2015 has been welcomed.  This may sound fairly straightforward but perhaps the biggest dilemma facing overseas UK residential property owners will be the question – ‘should I re-base’ and then having decided to do so, ‘should I obtain a valuation’.

There will be three options available to a non-resident for a future sale of their UK residential property:-

  1. The default position is that the individual’s property is revalued as at 5 April 2015 and only the increase in value from 5 April to the date of sale is charged to capital gains tax on sale. This is the basic default position and it will involve revaluing the property.  A disposal could be many years into the future when the value at 5 April 2015 has been long forgotten.
  2. An election is made so that the whole gain from purchase is calculated, as you would normally do with a UK resident, but once that gain is established, it is then apportioned on a days basis between pre and post 5 April 2015 periods, with only the post April 2015 pro-rated gain being charged to capital gains tax. No valuation would be required here.
  3. The taxpayer elects to tax the gain for the whole period of ownership with no re-basing and no splitting the gain pre and post 5 April 2015. Clearly, this would only be worthwhile if there is a loss accruing.  Again, no revaluation would be required here.

The easiest options in terms of administrative burden and cost are options 2 and 3 above but what if the non-resident taxpayer does not opt out of the default position in option 1?

Perhaps one of the most common enquiries raised by HMRC on the sale of land and buildings is where the value of a property entered within a Tax Return is disputed.  This can happen even where there has been a professional valuation undertaken.  These enquiries usually involve the District Valuation expert entering into negotiations with the professional Valuer employed by the taxpayer.  Under these circumstances the client and Tax Adviser are able to sit back and wait for the negotiations to be concluded.

But what happens where a formal valuation has not been undertaken?

The Revenue make it clear in their responses to ‘frequently asked questions’ published on 18 March 2015 that it is the ‘taxpayer’s responsibility to accurately value the property’.  Although the Revenue state that they do not necessarily expect the taxpayer to make the valuation on or around the 5 April 2015 re-basing date, they advocate making notes as to the general condition of the property for future reference.  We would go further and suggest that photographs are kept of the site and a record kept of the published sales prices of similar properties in the area.

One option alluded to by HMRC in the guidance is their post transaction valuation review process, which enables taxpayers to agree a value with the Revenue after a disposal has taken place but before a Return disclosing the transaction is submitted.  This could be an attractive proposition for those non-residents already within the Self-Assessment regime.  If a property is sold on, say, 1 May 2015, the Return declaring that disposal is not due to be filed until 31 January 2017 so a post-valuation request could realistically be made.  It should be noted that the ICAEW (the regulatory body governing accountancy practices) have recently reported significant delays in processing these requests so it may be sensible to factor in sufficient time for the process to conclude.

However, if a non-resident is not within Self-Assessment, the current proposal is that they should submit a Non-Resident CGT Return within 30 days of the completion date.  If my mathematics is correct, a post transaction valuation request would not work here because HMRC clearly state within the notes accompany the valuation request form (CG34) that it must reach them at least two months before the filing date.  This is slightly worrying!

Consequently, the non-resident property owner who is not within Self-Assessment could face some serious problems later on down the line when they come to sell.  Without a professional valuation and no detailed knowledge of the UK property market, a non-resident could be in the unenviable position of having an enquiry that extends for several years with significant professional costs and an unexpected tax bill.

It is not unusual for an enquiry on valuation matters to rumble on for several years and the outcome is not always favourable.  Our recommendation is that a contemporaneous valuation is obtained from a professional valuer.  The cost of a professional valuation now may well be a small price to pay for greater certainty in the future.

If you are affected by the new rules and would like advice, please contact one of the tax team who will only be too happy to assist. We can also introduce you to a professional valuation expert if required.

 

CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.

Property owned in Corporate Structures – the net widens following 2014 Budget announcements

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I previously wrote on this blog a post suggesting that HMRC were keen to widen the net to bring more properties into the tax rules concerning residential property owned within a Limited company, or other “non-natural person” wrapper.

I did some research at that time and concluded that with property price inflation, even if the rules were not changed, the day wouldn’t be too far away before many “modestly” priced London properties were worth over £2m and therefore liable to the full range of tax measures.

I needn’t have bothered! Whilst not completely out of the blue, one of the announcements made in yesterday’s budget was the reduction of the £2m threshold to £500k for:

– the 15% Stamp Duty Land Tax on acquisitions,
– the Annual Tax on Enveloped Dwellings (ATED) charge, and
– the liability to Capital Gains Tax at 28% on gains.

The Stamp Duty Land Tax change is effective immediately, with the other two aspects following from 1 April 2016 onwards for properties worth between £500k and £2m. An interim provision will bring properties worth between £1m and £2m into the ATED regime from 1 April 2015. Current proposals are for the ATED to be set at £7,000 per annum for properties worth £1m to £2m, and £3,500 per annum for those worth between £500k and £1m.

HMRC state that these new measures are designed to tackle tax avoidance and not damage commercial enterprises. The Chancellor also states an intention to bring back into use large numbers of property currently sitting empty, and I can’t argue that that isn’t a good idea. For these reasons I would expect reliefs will be available in the same way as the current reliefs for property businesses. We’ll know more when the Finance Bill is released.

However, even though there may not be an actual tax impact on genuine property businesses, one cannot escape the fact that for many situations a Limited company is an attractive structure in which to acquire property. The regime as it currently operates is geared so that such property owners are presumed guilty of using their company for tax avoidance and liable for the taxes until they declare their innocence by submitting the annual ATED return, and claim one of the available reliefs. So that’s yet a further piece of annual compliance for the diary (together with a requirement to make various disclosures regarding values etc) and it comes with the usual threat of penalties for non-compliance.

Now, given that one-bedroomed flats are commanding over £500k in parts of London, and according to thisismoney.co.uk, 50% of London homes are worth more than £1m, this is not simply a “widening of the net” but more akin to sending a super-trawler up the Thames – and as Eric Cantona of Manchester United fame once said – “the seagulls follow the trawler because they think sardines will be thrown into the sea”!

Growing pains – A fly in the ointment when deciding on UK property ownership structure?

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Property investors generally look for growth in the value of their assets, so how could that growth bring them into a charge to tax that they did not expect?

Well, first some context – according to the UK Land Registry, the average house price in the Royal Borough of Kensington & Chelsea increased from £490,000 in 2003 to £1,078,000 in 2013.  That’s an increase of more than double in a 10 year period.  If that rate of growth continued, it would mean that a property currently worth around £900,000 in that Borough would be worth £2m in 2023.

No doubt, this is one of the reasons why there is a well-trodden path towards UK property investment, and it would look like this trend is set to continue.  Savills, for example, have recently issued their forecast for house prices Savills 5-year house price forecast.  They forecast growth of up to 25% in the next 5 years across the UK as a whole, so parts of the country could be far in excess of that.

Now to ownership structures.  The options for the structure in which property is owned are numerous and there are a variety of tax and non-tax issues to consider.  The relative importance of each will be different to each individual investor.

It is essential to consider the ownership structure from the outset as Stamp Duty Land Tax rates of up to 15% make it costly to change afterwards.  The need to take advice is clear, but what if that advice suggests ownership in a corporate vehicle?

Much has already been written about the tax rules which apply to properties worth more than £2m, and owned in a corporate vehicle (enveloped dwellings).  In a nutshell, the rules include a headline Stamp Duty Land Tax rate of 15%, Capital Gains Tax charges for properties sold using such vehicles and an Annual Tax charge dependent upon value.

Properties costing less than £2m are currently outside of this regime, and many investors are buying such properties – so what does the “anti-avoidance” legislation hold in store for them?

Well, HMRC have launched a consultation to explore the possibility of extending the capital gains tax aspects of the “over £2m” rules, so that they apply to lower value properties held in corporate vehicles.

The outcome of this consultation cannot be predicted, but my view is that HMRC are looking to squeeze as many properties into this taxation regime as possible.  Time will tell if they do, but even if HMRC don’t pass new legislation, we can be reasonably confident that, growth in property values will at some point push many more properties into the “over £2m” rules.

Given that investors in property invariably seek capital gains, this may in time prove to be a fly in the ointment for many.  However, until then it just adds one more factor to consider when deciding upon property ownership structures; whether you are a UK taxpayer or not.