Buying A Property Overseas: An Update

In our last newsletter, we looked at a potential tax trap when buying overseas property through a company. Now there's further legislative news that could affect property holding companies.

Many people in the UK have acquired offshore property by purchasing shares in a company or similar vehicle, which, in turn, owns the property.

Unfortunately, this type of arrangement created a potential UK tax charge on the basis that the individual was acting as a director or shadow director, and the company was making the property available to the individual by virtue of his or her 'employment'.

To rectify this, legislation will be introduced in the 2008 Finance Bill which will disapply the benefit-in-kind charge retrospectively if all the following conditions are met.

The share capital (or equivalent) is owned by the director or by the director and other individuals.

The company has been the "holding company of the property" since it was acquired. The company must own an interest in the property, which is its only or main asset, and its activities must be incidental to this.

The company did not acquire the property, directly or indirectly, from a connected company at an undervalue.

No expenditure has been incurred by a connected company.

The property holding company has not borrowed funds from a connected company, but if it did, they were immediately repaid.

There is no arrangement in place to avoid tax or NICs.

Problems Remain

The planned legislation does not solve the problem for everyone. It clearly refers to cases where the share capital is owned only by individuals. So it appears that it may not apply where the shares are held by a local management company or family trust.

In certain countries, it is reasonably common for the property holding company to...