Offshore trusts were once the darlings of the UK jet-set as the jurisdictions, such as the Channel Islands, grew in stature for tax purposes. However, there have been some worrying signals from the powers that be regarding the use of offshore trusts and, on the tax front, plenty of changes have occurred since 2015. However, I’m still regularly asked whether you can have an Offshore Trust Owning UK Property.
In this guide, I will jump into the subject of foreign trusts and whether they can still hold UK-based property, and the more important question of…why you would want to.
What Are the Current Rules
Let’s get to the heart of it and actually answer the question that you came here for. In short, it is still perfectly legal to Have an Offshore Trust Owning UK Property. Nothing has changed in this regard and, unlike jurisdictions like New Zealand, foreign ownership of UK property is still an easy avenue to pursue.
However, do note that new rules passed recently (March 2022) largely erode some of the privacy aspects of placing property into a foreign entity. David Cameron’s government first mooted the idea of having a publicly searchable beneficial owner register and it would appear that, due to the Ukraine war, recent legislation introduced in the House of Commons is likely to bring this to fruition.
Subsequently, this means that one of the key reasons for settling UK property into an offshore trust, privacy, is being rapidly eroded. In fact, given the tax changes that I will talk about shortly, it appears that the UK government has shifted its policies away from attracting external property investment and is now taking a more insular approach.
The primary reason given seems to be all about discouraging or penalizing Russian oligarchs, but it also smacks of the global move towards cracking down on the offshore sector. However, this is likely to disincentive the wealthy from continuing their private, and tax-efficient, property investments in the UK.
What is the Tax Position for an Offshore Trust Owning UK Property
Public registers aside, this is probably where there have been the most significant changes to the treatment of offshore trusts. In previous years, offshore trusts were able to sidestep both the Capital Gains Tax (CGT) and Inheritance Tax (IHT) regimes in the case of non-UK domiciled trustees. It was a well-used, and abused structure and led to significant numbers of foreign trusts being established in the various Channel Island jurisdictions.
However, this started to change in 2015 when new rules were imposed on the UK property sector and the scope of CGT was widened. This saw the introduction of capital gains tax for UK property owned by offshore trusts, or indeed, any non-UK entity.
Almost overnight, there was a sound of air escaping from the Channel Islands as many service providers fretted over the loss of their client base. However, the trusts still retained some benefits around UK inheritance taxes, but this was to rapidly change.
Come 2017, the politicians were at it again and took direct aim at the offshore trust sector with a raft of new rules targeting the incidence of inheritance tax. In the way of background, offshore trustees often used holding companies in-between the trust, and the UK-owned property, as a way to limit CGT on their operations. However, this workaround was not to last as the House of Commons rapidly plugged the hole.
Subsequently, from April 2017, major changes came into effect which now meant that offshore holding company shares would not be considered “excluded” if they related to UK residential property holdings. Effectively, the whole lot was then subject to UK Inheritance Tax (IHT) and this proved to be the final nail in the coffin for the veritable offshore trust structure.
As it stands today, if your offshore trust owns UK property, it will be subject to UK capital gains and inheritance tax. Obviously, foreign-based trusts are no longer an effective structure for owning UK residential property given the tax liabilities and the assault on privacy. However, they still retain some benefits for those seeking to own property.
Does it Still Make Sense to Settle Assets into a Foreign Trust
In short, the answer is…it depends. Offshore trusts still retain their asset protection benefits and this is unlikely to change over the long term given the role that the ubiquitous trust plays in English common law. Using the structure to settle and hold UK-based property now seemingly provides little benefits and I would strongly counsel you to consider your broader tax and asset protection strategy in that case.
Unfortunately, 2019 also saw the same punitive regime applied to commercial property. Currently, even foreign ownership of commercial property could see the trust falling under both income tax and CGT regimes.
Subsequently, despite rebasing the trust properties, there should be little appetite moving forward to settle property-based assets into these sorts of offshore trust structures. The UK has made it relatively clear that the domestic property market is effectively now out of reach of foreign trusts and companies. Sure, you can still play in the market but you are going to bear a significant tax burden for the privilege of doing so.
Future Directions on an Offshore Trust Owning UK Property
Like many western nations, the UK has used both the Pandemic and various international ructions, to stamp its foot down on offshore structuring. Unfortunately, 2022 seems to be the year of an all-out assault on capitalism as countries’ debts rise inexorably towards unsustainable levels. Subsequently, it is no surprise that they are now looking abroad to squeeze the last drops of tax revenues out of anywhere they can find them.
This trend, and assault on the offshore sector, are likely to continue over the medium term given that it is an easy whipping boy to blame for the egregious failures of government to rein in their own bad spending. Subsequently, I think the public beneficial owners’ register will likely be implemented as will additional punitive treatments on any UK citizens holding offshore structures, whether legal or not.
Ultimately, the time has come for people based in the UK, with wealth, to consider whether their interests are now best served by their own country. It is one thing to be a loyal constituent but, when the nation takes a toxic tone to your private financial affairs, it might be time to get out.
Based on the queries that I’ve answered over the past few years, it is evident that the trend of re-domiciling yourself to a better location is increasing rapidly. Most people are happy to pay taxes to support their country and government but not when it becomes a case of pitchforks coming for hard-earned assets and erosion of your rights as an entrepreneur.
However, rest assured that the continual assault on the offshore community cannot go on forever and the Western governments are now nearing a point where capital flight could indeed impact their economies. Eventually, all the spending and bad policies which have led to rampant inflation will need to be addressed and national competition for entrepreneurs, and by extension their wealth, will return.
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