Structuring UK Property Investments Through Luxembourg

Following a change in UK law in 2015, it has become harder for non-UK residents to make tax-efficient investments in UK property. Luxembourg offers a solution, providing opportunities to invest in UK residential property and, to a certain extent, commercial property.

Introduction of a capital gains tax on non-UK residents who dispose of UK residential properties

The UK's Finance Act 2015 (the Act) introduced a capital gains tax (CGT) on the disposal of residential property by non-resident individuals (a rate of 18% or 28%), trustees (a rate of 28%), closely held companies (a rate of 20%) and funds that are not widely marketed (a rate of 20%). Closely held companies are legal entities controlled by five or fewer persons.

Under the Act, residential property is deemed to be land and property used or suitable for use as a dwelling. It includes property in the course of construction, converted to a dwelling and off-plan. It can be owner-occupied or let to tenants.

In the past, many UK residential property acquisitions were made by offshore companies. Since gains made on the sale of such properties are now subject to CGT, investors are looking for alternatives.

No change to capital gains on the disposal of commercial property

The Act does not change the position for commercial property. Capital gains realised on the sale of commercial property remain exempt if the property is considered to be an investment asset.

The exemption does not apply if the property has been acquired as part of trading activity. This includes the material redevelopment of the property or if, at the time of purchase, the investor has the sole intention to sell the property within a year.

Luxembourg holding companies offer a solution to foreign investors

For foreign investors looking to acquire UK property, whether residential or commercial, Luxembourg offers a tax-efficient solution.

Generally, investors are after:

a straightforward flexible structure a reduction in the taxable rental profit (through deductible expenses) an interest deduction in the UK on debt financing provided by the bank a tax-free exit These objectives can be realised by using a Luxembourg holding company (Luxco). Luxco incorporates a UK subsidiary, which in turn acquires the UK residential property. In certain circumstances, this structure may also apply to UK commercial property. This results in the following benefits:

The rental income of the UK subsidiary is reduced by its operational expenses and...