Overseas Company Services
Written by Ray Coman
Overseas companies and other structures have historically been used for holding UK property because of tax benefits that accrued at the time. Stamp duty and capital gains tax avoidance were the main motivations. However, the tax benefits of owning property via a non-UK company have significantly reduced. With corporation tax rising in April 2023 and many management companies in the low tax jurisdictions continuing to charge a high premium for their services, UK property owner should consider the merits of de-enveloping. The Companies House and HMRC implication of owning property through an overseas entity are laid out in this report.
Corporation tax on gains by a non-resident company
Will the beneficial owner be subject to income tax?
Annual Tax on Enveloped Dwellings
Removal from the UK compliance requirement
Companies House registration
Since February 2022, it has been a requirement for an overseas entity to register with Companies House. An entity is usually a company, but the term includes any structure that is not an individual person, such as a Trust. An overseas company will need to register by 31 January 2023 for any UK residential, non-residential or mixed-use property which it owned on 28 February 2022. This applies even if the company disposed of the property between February 2022 and January 2023. In this context disposal includes transfer of ownership to the individual beneficial owner or shareholder of the company. This is a process sometimes referred to as ‘de-enveloping.’
Coman&Co is a UK-regulated agent and can complete verification checks on beneficial owners of an overseas entity. Our listing can be found via the alphabetical register published on the gov.uk website. We typically charge £170 plus VAT for the registration plus a £100 Companies House filing fee.
If the company has not owned property since 28 February 2022, it will not need to register with Companies House.
HMRC reporting for landlords
A non-UK resident company needs to report any rental income via a Company Tax Return. In this case, it has been necessary to report profits via a Company Tax return since April 2019. Prior to 2019/20, a company would report and pay tax via a form SA700 Tax Return. This is because prior to April 2019, a non-resident landlord company was subject to income tax.
HMRC reporting on disposals
Regardless of if the company is a landlord, it must also report any disposals to HMRC via a Company Tax Return. A disposal includes transfer of the property to the owner of the company. Individuals are not companies and are subject to capital gains tax. Individuals are required to report disposals within 60 days of completion. However, a company is liable to corporation tax and reports disposals via a Company Tax Return. It is necessary to register for corporation tax within three months of exchange of contracts. The date of exchange determines the tax year in which the disposal occurs.
A company Tax Return is due within 12 months of the year end. The year end is determined by the date of exchange. Corporation tax is due nine months and one day after the year end. Therefore, even if the three-month registration deadline has been missed, provided the company has filed a Company Tax Return within a year of exchange, there would not be any penalties payable. Interest is charged on late paid corporation tax.
Individuals are required to report disposals within 60 days of completion. However, this rule does not apply to non-resident companies, because these are assessed via a different system.
Each disposal by a non-UK resident company creates a new year end. By concession, if the company makes four or more disposals within a year, HMRC will allow reporting one a single Tax Return based on an accounting period of twelve months. The start of the accounting year would be determined by the date of the first exchange of contracts.
Corporation tax on gains by a non-resident company
Consideration is the term used to determine the values used to assess liability to corporation tax. In the case of a sale consideration is proceeds. This is unless the disposal is to a connected party (such as a family member) at less than market value. In the case of a gift, which includes a disposal to the beneficial owner of the property, market value establishes consideration.
The base cost is April 2015 value for residential property and April 2019 for non-residential or mixed use property. The market value of UK residential property on 5 April 2015 is used regardless of if the property was a direct disposal- by a non-UK resident individual- or an indirect disposal, through an overseas entity.
In many de-enveloping cases, taxable gain is calculated by comparing April 2015 value to value at the date of disposal.
Corporation tax payable by overseas entity on disposal of UK property. At the time of writing corporation tax is 19%. However, this is scheduled to increase on profits over £50,000 from April 2023. The rate increases incrementally until it reaches 25% on profits over £250,000.
Will the beneficial owner be subject to income tax?
A UK resident will be liable to tax on dividends from a foreign company. The gain element of the property if paid to the beneficial owner will be taxable, as dividend income or more likely as a capital distribution on winding up of the company. Capital gains treatment is likely to be more beneficial. Basic rate tax on dividends is lower than equivalent higher rate capital gains tax. The reverse is the case for higher rate tax on dividends.
It is likely that a non-resident will be liable to UK tax on dividends. Investment income, which includes dividends, is usually not taxed on a non-UK resident. However, HMRC make an exception for income from a UK permanent establishment. The focus of the description about a permanent establishment is on a branch, office or workshop. However, the legislation makes specific reference to income derived from property being taxable.
The disposal of a share in a UK company by a non-resident is not taxable in the UK. Therefore, if the profits are allocated to non-UK owners via capital distribution, liability to UK tax would be limited to corporation tax. A non-resident is liable to income tax on investment income which derives from UK property. There remains a possibility that dividends deriving from a company holding UK property would be caught by general anti-avoidance provision.
Inheritance tax implications
An individual is liable to inheritance tax on UK property regardless of residence. An overseas company is not a UK resident for this purpose and therefore companies are formed for the purpose of inheritance tax mitigation. This is especially effective if the beneficial owner of the property is not subject to equivalent death tax in the jurisdiction in which that person dies. While it is not clear that this type of planning falls foul of any regulation at the time of writing, there is a possibility that HMRC could successfully challenge the arrangement under the UK's General Anti-Abuse Rule.
Annual Tax on Enveloped Dwellings
The Annual Tax on Enveloped Dwellings, or ATED, applies to properties that are occupied by persons connected to the owner. Connected persons are usually family members. If the property is let on a commercial basis it will not be caught by the rules. Property being developed will also be exempt from the annual charge to tax.
ATED therefore tends to apply where the property is empty or occupied by a family member, even if that tenant pays rent. Provided steps are being taken to rent (or develop the property), it would not be treated as empty under this definition. If the property is repeatedly uncoupled, it might no longer be regarded by HMRC as let on a commercial basis and therefore will lose its exemption.
ATED applies to non-natural persons (e.g., companies) that are not UK resident. It does not apply to non-residential property. A hotel or guest house is not classed as a dwelling by this definition.
Annual filing requirement
The company will need to file a report on the anniversary of its registration and within 14 days of that date. The contents of the annual report will be similar to a confirmation statement.
Removal from the UK compliance requirement
An entity can apply to be removed from the register when it no longer owns land. This will usually be from the date the company exchanges contracts to dispose of its property. Sometimes the ownership structure will be multi-layered, for instance involving a Trust and other holding company. The principle is the same and effectively the legislative system will ‘see through’ these structures to the underlying nature of ownership. This is the reason for the register being of overseas entities rather than merely of overseas companies.
Once the company has disposed of the property, HMRC should both be notified that the company is no longer liable to corporation tax and will be removed from the system of self-assessment.
The overseas company will need to be dissolved according to the procedure applicable in its country of origin. Coman&Co do not carry out compliance in jurisdictions outside the UK and cannot therefore assist with this process.
VAT on accounting services
There is no VAT on our fees to overseas landlords. This includes landlords operating via limited company. Our VAT policy is in keeping with VATPOSS07700 published by HMRC. Advisory services are outside the scope as per section 7.5 of VAT Notice 741A.
Comments
I can assist with the reporting both to Companies House for the company, and to HMRC for both the company and personally owned flat. My fees are published on this website (under pricing) but I have also emailed you separately regarding a free, initial meeting.