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Tax Planning | Legacy Planning | UK Property | Tax
From August 1st 2022, new UK legislation requires overseas entities holding UK property to obtain a certificate of registration from a new central register. A failure to comply with the requirements will trigger severe penalties of up to two years in jail or unlimited fines.
Whilst this is already in force, further real estate provisions relating to restrictions on dealing with UK property are due to be released on September 5th 2022.
The phased commencement is to allow overseas entities a window in which to become registered on the new Register of Overseas Entities (ROE) before the property restrictions bite.
The key reasons for the UK Government introducing these new rules are to increase transparency and tackle money laundering, corruption and tax evasion. Offshore entities have been legitimately and commonly used by non-domiciled individuals, mainly for privacy and security but also to mitigate inheritance tax (IHT). It is estimated that more than £170bn worth of UK property is held by offshore shell companies in tax havens such as the British Virgin Islands (BVI), so this legislation will make it easier for HMRC to collect their 40% IHT on the death of any beneficial owners of UK situs assets, regardless of their residence, domicile or the structure in which their property is held.
To apply, you will have to submit information about your directors and beneficial owners (as well as other details) and update this information annually on Companies House.
A beneficial owner is, broadly, a person who owns 25% or more of the shares or voting rights in that entity, or a person who has a right to appoint or remove a majority of the board of directors, or who exercises significant control or influence over the entity.
Below are some actionable steps you may need to take based on the type of “entity” you are categorised under:
1. You are acquiring UK property (urgent action may be required)
Overseas companies and individuals must register with the UK's Land Registry if they wish to obtain legal title to UK property and must do so by completing a Statutory Form of Application no later than 12 months after their acquisition.
The Land Registry will reject any application on certain grounds set out in the Land Registration Act 2002 such as inaccuracy in the information provided on the application form.
2. You already own UK land on or after January 1st 1999
In this case, you are required to become a registered overseas entity by January 31st 2023 to avoid committing a criminal offence and thereafter comply with the annual updating duty.
3. You are disposing of a UK property you currently own
We would recommend that you register quickly in order to make dispositions on or after February 1st 2023. Also, start gathering information about dispositions you have made since February 28th 2022 (and any you make up to January 31st 2023), as details of such dispositions will need to be submitted to Companies House, even if you no longer hold any UK property by the end of the transitional period on January 31st 2023.
4. You are an overseas lender taking security over UK property
If you fall under this entity as an overseas lender of a security agent, you will not have to become a registered overseas entity to take a legal charge over a qualifying estate. However, you will want to ensure that overseas borrowers are compliant with the Act.
5. You are a UK entity contracting with overseas entities
Even if you are not an overseas entity, if the counterparty to your transaction is an overseas entity you may wish to ensure that they are required to take steps to become a registered overseas entity and produce evidence of such registration.
Failure to comply results in criminal sanctions, ranging from fines of £2,500 a day (for example, for failure to update the register) to unlimited fines (for example, for making materially false statements) and prison sentences of up to 5 years.
From April 6th 2017, non-domiciled owners of UK property via offshore companies saw their protection against IHT disappear overnight. Schedule 10 of the Finance Act (No. 2), which stipulates that the value of company shares attributable to UK residential property are no longer excluded and now form part of one’s estate, slipped under the radar for the vast majority of ultimate beneficial owners (UBOs). To be clear, it now makes no difference, from an IHT perspective, whether the UK property is held directly or via an offshore entity. This change in legislation helped the UK Government collect a record £6.1bn in inheritance taxes last year.
There is no longer anything attractive or beneficial for non-domiciled individuals to hold UK residential property via an offshore company. In addition to the significant IHT liability, the following issues also need to be considered.
If you haven’t yet done so, now is a good time to review your current structures and revisit your succession planning, to ensure you are not exposed to potential offences, unnecessary costs and significant tax exposure.
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