Out-Law News 2 min. read

Individuals owning high value UK residential property through companies could be subject to wide ranging tax enquiries, says expert


New rules requiring companies holding residential property valued at £2m and over to file a return with HM Revenue & Customs (HMRC) and pay a new tax on them may lead to wide-ranging tax enquiries by HMRC, an expert has said.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the new Annual Tax on Enveloped Dwellings (ATED) charge could prompt the enquiries.

Companies holding residential property valued in excess of £2m must file a return with HMRC by 1 October and, if liable, pay the new ATED charge, by 31 October.  The rate of ATED ranges from £15,000 to £140,000 according to the value of the property. It applies to properties held through UK companies as well as offshore companies, but offshore companies are usually used by non-UK domiciled individuals for inheritance tax planning purposes.

The use of offshore companies has been a perfectly valid planning technique for non-UK domiciles who wish to keep UK residential property out of the UK inheritance tax net, Collins said, "but there a lot of traps and pitfalls into which the unwary can fall with such structures".

"Many offshore companies are also linked to offshore trusts, to which complicated tax avoidance rules apply, so it is likely that HMRC will assess the information they receive under ATED and decide whether to open a wide-ranging tax enquiry into the affairs of the ultimate beneficial owners in order to check whether the owners have complied with all the complex rules around offshore structures," Collins said.

Matters under examination may include the residency of the beneficial owners and wider family members, whether taxable income or gains have been "remitted" to the UK and whether any taxable distributions have been made from family trusts or foundations, according to Collins. 

He said that owners of high value property about to file the ATED return should undertake a "health check" of their UK tax record, going back at least four years.  If issues are identified, they should pro-actively report them to HMRC.  "Taxpayers always achieve a better outcome with HMRC if they use experienced professionals to identify and volunteer issues to HMRC, rather than wait for HMRC to come to them," he said. 

Where the offshore structure is located in the UK Crown Dependencies or British Overseas Territories, the need to undertake a health check is reinforced by new automatic exchange of information procedures between the UK and those jurisdictions which will come into force in 2014 and will provide HMRC with information previously unavailable to them.

Collins said that taxpayers should undertake a professional valuation of the property as HMRC are likely to scrutinise the information provided to make sure that the ATED is paid where it is due. This will be particularly the case if the property is on the cusp of a valuation threshold. 

"Issues around valuations to support the amount of the ATED may be the least of the families' worries," said Collins. "It is very easy for a structure which was set up entirely properly to fall foul of complex rules as a family's circumstances change, and HMRC has the power to look back 20 years in the most serious cases."

ATED came into force on 1 April. For properties valued at between £2,000,0001 to £5m the ATED for 2013/13 is £15,000; for properties valued at between £5,000,001 to £10m the ATED is £35,000; for properties between £10,000,001 to £20m the ATED is £70,000 and for properties valued £20,000,001 and over the ATED is £140,000.

Last month HMRC confirmed that it would go ahead with controversial "nudge" letters to non-UK domiciled remittance basis users giving examples of when remittances may occur. HMRC said that the letters were being sent because "research has shown that some of [HMRC's] customers who are taxed on the remittance basis may not understand fully what a remittance is and may therefore experience some difficulty in completing their tax return accurately". Collins said that this illustrates that HMRC sees non-doms as "fertile ground for collecting back taxes".

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