U.K. residents with homes abroad

The advice frequently given to persons who buy property outside their home country is to arrange the purchase in the name of an offshore company. Such a manner of ownership is often advisable in the light of local laws in the country in which the property is located. These may be forced inheritance rules which restrict the ability to dispose of the property freely on death, or tax laws which will ultimately result in the payment of estate, inheritance or capital gains taxes. There is also the important matter of what may be time consuming and expensive legal formalities on the death of the registered owner.

In the United Kingdom the tax laws provide that where an individual is able to obtain a benefit from the enjoyment of an asset, other than cash, he is to be charged to income tax in relation to the monetary value of the benefit. These rules were intended originally to prevent directors and employees of companies avoiding income tax by receiving benefits other than in the form of cash, the ability to occupy a house for example. Unfortunately however they have had unintended consequences and an individual who owned a company which owned his home could find himself liable to pay tax on a purely artificial "benefit". This could be so whether or not he was a director of the company.

Fortunately these rules have now been amended and no liability to tax will arise provided certain conditions are met. These are:

• The property must be non-U.K. residential property
• The company must be owned by one or more individuals
• Its only activity must be owning the property and any incidental activities
• The property is not funded directly or indirectly by a connected company

The exemption from the benefit in kind rules applies retroactively and no tax will be charged for previous years where these conditions are satisfied. The requirement that the company be owned by individuals may continue to result in a tax liability if the company is owned by a trust.

U.K. individuals are accordingly now able to hold their overseas residential property in the manner which best suits the circumstances but care still needs to be taken in the management of the company. An offshore company which is managed and controlled in the United Kingdom will be subject to U.K. corporation tax on any gain realised on a sale of the property. The company should therefore be managed from outside the U.K. by non-U.K resident directors.

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