Holding overseas property with an offshore company

If you were to use an offshore, non UK resident company to buy overseas property as a general rule it would be exempt from UK tax on either capital gains or overseas income. Therefore rental income would be outside the scope of UK tax, as would any capital gains on the disposal of overseas properties.

The income / proceeds would be held within the company. In order for you to benefit from it, you would need to extract it, either as salary / bonus or dividends. The implications of this will depend on whether you are non UK resident and domicile or not.

UK resident and UK domiciliary

If you were a UK resident domiciliary any extraction of the profits from the company would be subject to UK income tax.

UK resident and Non UK domiciliary

In this case if you were a UK resident, non UK domiciliary, you could extract cash from the company and providing it was retained overseas and you claimed the remittance basis it would be exempt from UK income tax.  The cash would need to be retained overseas as if it was brought into the UK, it would be subject to UK income tax.

Non UK resident and Non UK domiciliary

If you were non resident and non domiciled in the UK you could extract cash free of UK tax.

Using a company does however involve further considerations.

Control

In order to qualify as a non UK resident company, the offshore company would need to be controlled from overseas. If you were a UK resident shareholder /director it is difficult to substantiate this and the Revenue could argue that the company was UK resident by virtue of it being controlled from the UK. This would not be beneficial as the company would then be taxed as a ‘standard’ UK company, with its worldwide income and gains being subject to UK tax. The tax payable on a disposal of any of the properties would be charged to UK corporation tax which could be substantial.

Anti avoidance rules

There are also rules that apply to UK residents and UK domiciliaries to attribute both the income and gains of the offshore company to them. Therefore using an offshore company if you’re a UK domiciliary is tightly controlled and there are only limited ways that you can use this to own an overseas property tax efficiently such  as where UK tax avoidance is not the key concern (see ‘As an income shelter where you and your wife are excluded from benefitting’ or ‘Good business or commercial reasons for the company’)

If you’re a non UK domiciliary the anti avoidance rules apply after April 2008 to tax the gain and income on you, however again the remittance basis can apply providing it is claimed.  There are therefore much more opportunities for non domicliaries to hold overseas property via an offshore company tax efficiently.

Benefit in kind charge

The other issue to consider when using a company is if the shareholders occupy the property (eg for holidays). In this case there could be a benefit in kind charge on the property owner (essentially an income tax charge due to the provision of accommodation by the company without any rent being charged).

However, there is now an exemption from the benefit in kind charge. It will apply where an overseas property is owned by a company that is owned by individuals and whose sole activity is holding that property for occupation and / or letting. Therefore it is important that no other activity is carried out by the company.

Summary

Using an offshore company can be attractive in tax terms where there is a dedicated company set up for the ownership of the foreign property. However it would be essential to ensure that the key reasons were for foreign planning to avoid the UK anti avoidance rules. Alternatively non domiciliaries can use an offshore company tax efficiently.