| Using UK Companies |
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As I understand the position you are “inheriting” a number of companies used in the Portuguese market. You have discovered that Bachmanns have been using UK companies in order to own Portuguese property.
As I understand the position Portugal has recently introduced, or is about to introduce, legislation similar to that which exists in Spain which leads to an additional charge to tax if real estate in Portugal is owned by a “non-resident company”. The definition of a non-resident company being any company which is not situated in either Portugal or a country which has a double tax treaty with Portugal. I am not an expert in Portuguese tax and am not familiar with their rates of tax but we shall take it as given that it is not desirable to incur this new Portuguese tax.
If it is understood that the Portuguese real estate is being owned by UK companies then there are two possible scenarios. The first scenario is that the UK company in question owns the Portuguese property beneficially and the second scenario is that the UK company owns as a bare nominee for the ultimate owner. In the next part of the letter I will set out the difference between these two options, but focusing on the UK tax consequences.
If the UK company owns as beneficial owner then any income arising from the Portuguese property will be taxable to UK corporation tax and any capital gain arising from the sale of that property will be liable also to corporation tax. As it is highly likely that the shares in the UK company will be owned by five or fewer individuals then such a company would be a close investment company (“CIC”). CIC’s are liable to the top rate of corporation tax of 30% on all income and gains, with no lower rates or marginal relief.
It should also be noted that UK companies do not have the benefit of CGT taper relief, although indexation allowance continues to apply (which is generally not an attractive or taper relief).
It should be noted however under the UK/Portugal double tax treaty any income from immovable property in Portugal will be taxed first in Portugal. Likewise any gains arising from immovable property in Portugal will also be taxed in Portugal. If the rates of income tax/CGT in Portugal are lower than the charge to corporation tax (30%) then the Portuguese tax would be paid first and would be used as a tax credit against the ultimate UK corporation tax liability. If the Portuguese tax exceeds the rate of tax in the UK then there will be no repayment of UK corporation tax as the Portuguese will have effectively “franked” corporation tax liability and no more.
This option would appear to make far more sense than using the UK company as beneficial owner. Obviously I do not have access to the Portuguese legislation giving rise to the taxes but I am assuming that the fact that the UK company owns only as nominee will not preclude usual advantages for using a “treaty country” company.
But what is the UK tax position on using a nominee company? If the UK company only owns as nominee then the Portuguese property would not appear in the company’s balance sheet as it is not an asset of the company. Therefore any income arising from the Portuguese property will be taxable not within the company but in the hands of the ultimate owner. This is not necessarily the owner of the shares in the company but the beneficial owner under the nominee agreement. There is no specific income tax legislation on this point but it is accepted income tax law that the taxation of a bare trust depends entirely on the beneficiary’s circumstances rather than the trustees. There is specific legislation on bare trusts in the anti-avoidance measure created in 1999 dealing with bare trusts created by parents in favour of their children. This particular provision is not relevant to this discussion.
Thus my conclusion for income tax purposes is that any income arising to the UK company will not be taxable to corporation tax but will be taxable as if that income had arisen directly to the beneficial owner. Once again, one must bear in mind that Portugal has a primary taxing rights over any income arising from immovable property in that country. Section 60 Taxation of Chargeable Gains Act 1992 provides that where an asset is held by trustees or nominees for another person then CGT is chargeable as if it was held by that other person. This also means that there is no liability if the asset is transferred from the individual to the nominee or vice versa.
Thus, as and when the Portuguese property is sold any gain arising could not be taxable to corporation tax but will be taxed in the hands of the ultimate beneficial owner. If the ultimate owner is an individual then that individual’s annual exemption and marginal rates will be taken into account and in addition to this the taper relief provision will apply.
My conclusion is that it would make little sense to use a UK company as a beneficial owner, bearing in mind the inflexibility of the arrangement and the unavoidable liability to corporation tax. There is far more flexibility and scope for tax planning through the use of a UK company as nominee and also far less compliance in that there will be no corporation tax to pay and therefore no payments on account.
As noted above I am not qualified to advise on Portuguese tax but I am assuming that the use of a UK nominee company will avoid the special taxes directed at “non-resident companies” owning Portuguese property. Obviously, you will need to take local advice on this point.
There may be other Portuguese tax planning opportunities, for example the saving of death taxes – for which see paragraph 5. Below. 4.2 UK tax: - UK resident and UK domiciled beneficial owners
If a client who is UK resident and domiciled wishes to own property in Portugal then his taxation position will be as follows:-
4.2.1 Income tax
As noted in paragraph 2 above any income arising to the nominee company will be taxed as if directly received by the beneficial owner. UK resident and domiciled individuals are liable to income tax on their world wide income. Thus any income, wheresoever it arises, will be liable to UK income tax. Please note that the income concerned may have suffered Portuguese tax first, although the UK will give a credit for that tax.
Section 60 TCGA 1992 applies which means that any gains arising to the UK nominee company will be taxable in the hands of the UK resident and domiciled beneficiaries. Once again such individuals are liable to gains on a world wide basis.
It is interesting to note that if a client already owns the Portuguese property directly and wishes to transfer to a nominee then Section 60 provides that there is no disposal for CGT purposes when this occurs. In effect this is a “non-event” for CGT purposes. Thus it should be possible for clients to transfer properties into structures without a cost to CGT now (although there may be a charge to Portuguese gains tax or gift tax instead).
The nominee is simply ignored for inheritance tax purposes which means that the property owned by the company will be within the beneficiary’s estate for IHT purposes. Anyone who is UK resident and domiciled is in any event liable to IHT on their world wide estate. Thus, there will be no difference between the use of an agency company or the UK company as beneficial owner in this regard except in the latter case there would be no uplift on death of the value of the Portuguese property held by the company therefore giving rise to the potential for double taxation, first to IHT and then to corporation tax (see 4.2.5 below).
When anyone transfers any property to a company connected with them then one must consider the provision of Section 119 Finance Act 2000. This section provides for a charge to stamp duty on the value of the property passing from the individual to his connected company. However there are specific exemptions to this charge contained within Section 120 of the same act and one of these exemptions is where an interest is passed from a nominee to an individual or vice versa.
Thus I am confident that there would be no stamp duty payable on the transfer of the property from the individual to the UK agency company or vice versa. A question arises as to whether there will be stamp duty on the purchase of the Portuguese property but in my view this can be avoided if the purchase is structured in the right way.
For the UK resident and domiciled client there is little scope for UK tax planning due to the world wide nature of the taxation imposed by the Inland Revenue. At least, however, there will be no double charge to taxation which would potentially be the case when using a UK company as beneficial owner. This is because if an individual who is UK domiciled dies owning UK company shares then the value of those shares will be within his or her estate for IHT purposes. The valuation of shares of an investment company are, broadly, represented by the value of the properties owned by that company. This means that the shares will then get a CGT uplift on death, but not the property within the company. This means that on death the value of the properties owned by the company will be charged to IHT at 40% (ignoring the nil rate band) but there is no market value uplift of the properties held by the company for CGT purposes, which would be the case with a nominee arrangement. This means that should the company later sell the properties after the death of the shareholder then the gain would be taxable to corporation tax. This means that the value represented by the gain will be taxed twice, first to inheritance tax and second to corporation tax. This is clearly very inefficient and is another good reason to dismiss the first option. Thus assuming that we use a UK company as nominee then provided we can demonstrate sufficient savings in Portuguese taxes (both property taxes and death duties) then this is potentially an attractive arrangement for such clients.
These owners will only be liable to income tax on UK source income and any foreign income actually remitted to the UK. Thus, after Portuguese tax has been suffered if the income is kept abroad then there will be no income tax to pay.
A similar remittance basis of assessment applies for CGT purposes. Thus if the gain on the sale of the Portuguese property is kept abroad then there will be no charge to CGT.
4.3.3 Inheritance Tax Non-UK domiciled individuals are only liable to IHT on their UK situated assets. If a UK company is simply acting as a nominee then it is not an asset for IHT purposes, the underlying asset is that which is counted. If the underlying asset in this case would be a Portuguese property it would not be subject to IHT on the death of the beneficial owner if at the time of death the owner was non-UK domiciled.
Of course one of the problems with long term residents in the UK is that after 17 years of being UK resident the individual will become deemed domiciled for IHT purposes. It is also likely that their common law domicile will change around about that time.
One way of protecting foreign assets from IHT in the event of the client becoming deemed domiciled is to make sure that they are transferred into a “excluded property settlement” at a time when the client is non-UK domiciled. Thus the UK agency company can hold the Portuguese property as nominee for, say, Guernsey discretionary trustees. If at the time that this arrangement is set up the settlor is non-UK domiciled then this will be an excluded property settlement and forever outside the scope of IHT. Paragraph 4.3.5 below details the CGT benefits of such an arrangement.
Exactly the same stamp duty considerations apply as in paragraph 4.2.3 above.
As noted in 4.3.3 above there are significant IHT advantages to be had by using a Guernsey Discretionary Trust to act as beneficial owner of the Portuguese property. There is also a significant CGT advantage. As noted in 4.3.2 UK resident but non-UK domiciled individuals are liable to CGT on foreign gains only to the extent that they are remitted to the UK. This is all well and good if the proceeds of the sale are not required in the UK for some other purpose. If the funds are required in the UK then inevitably there will be CGT to pay.
However, if the property is ultimately owned by the Guernsey Trustees and they realise the gain then it would be possible for the trustees to subsequently remit the proceeds of the sale to the settlor/beneficiary in the UK, provided that he is non-UK domiciled. This means that by using an offshore trust it would be possible to remit foreign gains to the UK without a charge to CGT. This treatment only subsists as long as the settlor/beneficiary is non-UK domiciled under common law.
We are proceeding on the basis that the use of a UK company would be beneficial for Portuguese tax purposes. In particular I believe that the arrangement would avoid the special taxes imposed on foreign owners of Portuguese property. In addition to this if Portuguese property is owned by a company, albeit as nominee, then I believe that it is possible for Portuguese death taxes to be avoided. I have given this matter some thought and it seems to me that in the scenario where the beneficial owner is non-Portuguese resident but owns the property through a UK nominee company then there will be no requirement for Portuguese probate on the death of the beneficial owner. This is because for Portuguese purposes the owner is the company and they will probably not recognise a nominee arrangement in any event. This means the ownership of the Portuguese property can change hands simply by there being a transfer of the beneficial interest under the nominee arrangement, which could be taken care of by way of the deceased’s Will. In other words, I think it is entirely possible that this arrangement would avoid Portuguese death tax as there will be no need for probate in that country. Whether there is still a technical liability to death duties in Portugal I do not know, but it seems that without the need for probate there will be no mechanism by which the Portuguese authorities will either know of the death or be able to collect the tax. Furthermore, if the UK company held as nominee for a Guernsey Trust and this makes the position even more secure as there is no death of a beneficial owner.
One would need to check to see if there is any disadvantage for Portuguese property taxes or CGT by owning Portuguese property through a UK company, whether it is nominee or not. As I say above, I suspect that the Portuguese will not recognise nominee arrangements but I do not know this.
For the non-UK domiciled owner of Portuguese property it is clear that there are many interesting tax planning opportunities, particularly where beneficial ownership rests in an offshore company or an offshore trust. The latter is more attractive as it means that one can create an excluded property settlement which remains safe for UK IHT. As noted above there are also significant CGT advantages to such an arrangement. |
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