Companies

Property Ownership Structures

Introduction

For clients wishing to purchase real estate in the United Kingdom or elsewhere for investment purposes or for those seeking to purchase a secondary property for leisure or retirement purposes, there are substantial benefits to be derived through the establishment of a corporate, trust or foundation structure to address capital gains tax issues, inheritance tax and forced heirship rules.
Many people who own or intend to own property abroad do not fully understand or recognise the implications of Capital Gains Tax, Inheritance Tax and the peculiar rules relating to Forced Heirship.

Capital Gains Tax
Capital Gains Tax, which is essentially a profits tax, varies greatly between countries and ranges from zero % in countries like the Netherlands, to 40% in the United Kingdom, 35% in Spain and 16% in France. Countries which impose Capital Gains Tax also have different rules relating to relief so careful consideration has to be given to the nature of the investment, the term of the investment and the specific rules that apply for each country. It should also be noted that certain countries e.g. France may apply a withholding tax on the disposal of property unless a tax agent satisfies the notary that the Capital Gains taxes if any have been accounted for.

Inheritance Tax

Inheritance Tax and Succession Taxes are taxes that relate to the transfer, upon death, of assets from spouse to spouse and to children. These taxes are often complicated, onerous and particularly high in Continental Europe where they can exceed 60%. In addition, most Continental European countries have Forced Heirship rules where the laws prescribe that children cannot be disinherited from parent’s estates and therefore are entitled by law to a share of the estate.

Wealth Taxes

Many European centres notably Spain, Portugal and France impose an annual wealth tax based on the Market value of the property. This type of tax may exceed 3%. There are certain structures available to mitigate this so therefore serious consideration has to be given to the method of ownership.

France

Ownership through a French Company

If a property is brought by a sociéte civile immobilière and the shareholders are the married couple, the couple do not own the property directly, but only the share in the company. Upon death, it is the ownership of the share that will change, not the ownership of the property. As shares are considered to be personal property rather than real property, it is the law of succession in the country of domicile that will be applied, therefore allowing the property to pass according to a foreign will.

Use of sociéte civile immobilière for property ownership is fairly common practise in France, and because it is fiscally transparent it is not subject to corporation and capital gains tax in the way that a normal incorporated company would be. However this is a relatively complicated and expensive way in which to own property, and Inheritance tax is still chargeable upon death of a shareholder.

Foreign Nationals purchasing through a UK company

There are advantages to this method, most notably the fact that the higher rate of 3% annual wealth tax would not apply although the British tax authority may impose a “benefits in kind” tax if the owners are UK resident.

Foreign Nationals purchasing through an offshore company

Generally, this avoids French succession law rules but does not avoid the 3% annual wealth tax.

The laws relating to the ownership of French property are extremely complex and it is therefore recommended that individuals seeking to purchase French property should obtain the advice of an expert. Fidelitas has access to such expertise and for further information please contact us.

United Kingdom

The United Kingdom has long been considered a “tax haven” for non-resident individuals, companies and trusts investing into the UK property market. The favourable tax treatment for non-resident landlords has long been believed to be one of the major reasons for the long term continuing rise in property values in the UK. Rental income has traditionally exceeded both inflation and the normal rates of interest for cash investments and as a long term investment United Kingdom situated property has usually proved to be a valuable source of capital gains.

For UK citizens (those who are domiciled, ordinarily resident and resident) the only exemption to the charge to capital gains is where that individual sells his principal private residence. The exemption is lost for second or holiday homes and there are also significant problems which arise where even in the case of an individual’s principal private residence he also uses that property in connection with his business. This position is not, fortunately, reflected in the case of those who are not UK domiciled or ordinarily resident.

In its simplest form a non-UK taxpayer can significantly reduce the liability to UK taxation by establishing a structure based largely upon the following:
A company is created in a country of low or zero taxation which is used to purchase property in the UK.

That company is financed by loans made from third parties be they trusts or non-UK resident individuals. It is an important consideration that interest, charged at market value, is paid on such loans.

The company acquires the UK property and the third party lender takes a legal charge over the property which is registered at the UK Land Registry.

The company approaches the Inland Revenue as a non-resident landlord and confirms, in so doing, that it will file accounts and annual returns with the non-resident landlord unit at the Inland Revenue. If such an application is successful the tenant of the UK property is entitled to pay any rent he is charged gross and directly to the non-resident landlord. In other cases a tenant paying rent to a foreign landlord in respect of the tenant’s occupation in the UK of foreign owned property must be subject to a charge to withholding tax.

The annual accounts of the company show the rental income against which interest is an allowable deduction together with all other usual business expenses which might be incurred by the company (managing agent’s charges, accountants and legal fees).

Properly structured the company will make little or no profit which will be chargeable to UK corporation tax.

A further and significant advantage of those present UK rules affecting UK based property owned by non-UK tax payers or companies is that the UK does not seek to charge capital gains tax on the income received from the sale of UK based property where the seller is not is otherwise UK tax resident.

Stamp duty is, however, a consideration in any UK property transaction where the name of the registered proprietor (owner) is changed at the UK Land Registry. UK properties sold for a consideration in excess of £250,000 but less than £500,000 are charged at the rate of 3%. Sales for a value in excess of £500,000 are charged a stamp duty at the rate of 4%.

Spain

Real estate owned by non-resident individuals

If the owner is a non-resident individual, both wealth tax and personal income tax are levied on the real estate. Wealth tax is levied on the value of assets situated in Spain, the tax rate is progressive and varies from 0.2% up to 2.5%. If the real estate is privately used by an individual owner, a tax of 25% of 2% of the cadastral value of the real estate is payable on the owner’s deemed income.

Real estate owned by companies

If the real estate is owned by a foreign company, a special tax may apply. Foreign companies owning Spanish real estate, or otherwise having an interest or benefit from Spanish real estate, are charged an annual 3% tax on the cadastral value. This special tax does not apply to companies domiciled in countries which have a tax treaty with Spain containing an exchange of information clause, so long as the ultimate owners of the shares of such companies are individuals resident in Spain or in a country that has such a tax treaty with Spain. This exemption is available upon submission of proof of domicile of the company and proof of residence of the ultimate owners issued by the competent tax authorities, or to companies carrying out business activities on a regular basis other than the lease of real estate, or companies quoted on officially recognised stock exchanges, apart from certain other special cases.

When real estate is owned by a Spanish company, the company will be liable only to pay the normal real estate tax in the same way as outlined for foreign companies, but the special real estate tax for non-resident companies does not apply.

As in other countries, real estate is sometimes transferred indirectly by transferring shares of a real-estate holding company. Spanish laws aim specifically at preventing the avoidance of tax on capital gains from the transfer of real estate by means of the sale of the shares of a real-estate holding company. They do this by expressly determining that the capital gains derived from the sale of shares of a Spanish or foreign company will be subject to tax in Spain if its main assets consist of real estate located in Spain or if they give the owner the right to use the real estate in Spain. A non-resident shareholder of such a company will be liable to tax on capital gains, unless he is resident in a country that has concluded a tax treaty with Spain. As a general rule, tax treaties provide for capital gains from the sale of shares to be subject to tax exclusively in the country of which the shareholder is a resident. However, in some tax treaties, Spain has made a reservation regarding capital gains realised in the sale of shares in real-estate companies.

In order to secure the payment of tax on capital gains obtained by non residents who are not permanently established in Spain, the buyer is obliged to withhold 5% of the purchase price and remit it to the Spanish tax authorities. If the buyer fails to retain the withholding tax, the tax claim remains on the real estate. The withholding tax is a pre-payment on the actual tax payable by the seller upon filing his tax return. A refund is made to the seller in the event that the actual tax liability proves to be lower than the withholding tax.

A transfer of shares is generally not subject to any indirect taxation (for example real estate transfer tax), but Spanish anti-avoidance provisions make the sale of shares liable to real estate transfer tax at the rate of 6% to 7% if the transfer of shares allows the buyer to gain control of the company and over 50% of the assets of the company consists of Spanish real estate.

United Estates

Capital Gains Tax

In the United States individuals and corporations pay income tax on the net total of all their capital gains. The tax rate for “long term capital gains” i.e. assets that had been held for more than one year prior to sale was reduced in 2003 to 15% and to 5% for individuals in the lower income tax brackets. Short term capital gains are taxed at a higher rate, the ordinary tax rate. In 2013 the reduced long term tax rates will be governed by a “sunset” clause and will revert back to the rates in effect in 2003, which were 20%.

Assessment for capital gains is calculated on a “cost basis” to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for improvements, fees and depreciation.

Exemptions

Every two years, an individual can exclude up to $250,000 ($500,000 for married couples) of gains on the sale of their primary residence.
If an individual or corporation realises both capital gains and capital loss in the same year, the losses cancel out the gains in the calculation of taxable gains.
Real estate transactions are entirely governed by state law. Unlike many other foreign countries, the United States does not impose significant restrictions on the ownership of real estate by foreigners. One main difference however is in the manner in which capital gains tax is collected. U.S. citizens and residents ordinarily report capital gains in their tax returns. Non-resident aliens, however, pay a percentage of the sale proceeds to the U.S. Internal Revenue Service and then subsequently file accounts relating to the property in order to claim any refund that may be due.

Succession Laws and Inheritance Tax

A non resident alien person of the United States is potentially subject to U.S. estate tax if he dies whilst directly owning U.S property including real estate, equities and bonds etc. The concern for foreigners is that whilst resident owners of U.S. property enjoy an exemption of between US$ 1 000 000 and US$ 3 500 000 (2009) non resident alien persons can only benefit from an exemption of US$ 60 000. The current rates of Federal estate tax range from between 18% and 55%. Therefore secondary homes owned by non resident aliens can often be subject to estate tax. In addition to this, relief between spouses is only granted if the surviving spouse is a United States citizen. For example, where a U.S. property is owned directly by a married couple who are non U.S. citizens and are ordinarily resident in a European Country and where one of the spouses dies, there would be a liability to federal estate tax based on the property’s market value. In the case of a property worth US$ 500 000 the liability would be approximately US$ 150 000.

Many foreigners of the United States are not familiar with the various laws relating to estate taxes and should be aware that if ownership is structured properly through a non U.S. corporation, trust of foundation, the liability to U.S. estate taxes can be legally avoided.