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Inbound Real Estate Investment Taxation (United States, Australia, Canada, Brazil, United Kingdom)

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Inbound Real Estate Investment Taxation (United States, Australia, Canada, Brazil, United Kingdom)

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Inbound Real Estate Investment Taxation (United States, Australia, Canada, Brazil, United Kingdom)

  1. 1. Basics of U.S. Inbound Real Estate Investment Taxation TIAG International Conference May 4, 2017 Fuad S. Saba and Charles F. Schultz III FGMK, LLC Chicago, Illinois
  2. 2. Basic Definitions • Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980, treats income and capital gains from U.S. real estate investments as “effectively connected” with a U.S. trade or business • United States Real Property Interest (USRPI) – broad definition • United States Real Property Holding Corporation ▫ FMV of USRPIs > 50% of (USRPI + foreign RPI + other assets) ▫ Look through partnerships to underlying assets ▫ Look through from controlling corporations (50% or more)
  3. 3. Applicable U.S. Taxes • Corporate income tax – 35% • Personal income tax – up to 39.6% • Net Investment Income tax – 3.8% • Withholding tax on interest or dividends -- 30% unless reduced / eliminated by treaty or law • Branch Profits tax – 30% unless reduced / eliminated by treaty • Capital gains tax – 35% for corporations, up to 20% for individuals (plus NII where applicable.)
  4. 4. Typical Structuring Concerns • Maximize leverage / minimize interest withholding tax • Minimize tax on profit distributions • Avoid double taxation of income or capital gains • Achieve legal liability protection • Minimize IRS view of overall tax posture • Avoid adverse estate / inheritance tax aspects • Manage cash flows from investments
  5. 5. Non-Treaty Investor Considerations • Avoid high (30%) withholding taxes ▫ Interest – use of “portfolio interest” exception ▫ Dividends – shelter U.S. Blocker earnings with accelerated depreciation and interest deductions to minimize “earnings & profits” of the Blocker • After-tax earnings – use a liquidating distribution of the U.S. Blocker to avoid dividend withholding tax, branch profits tax and double taxation of capital gains
  6. 6. “Earnings Stripping” Limitation • Applies if debt-equity ratio at EOY > 1.5 to 1, and interest expense > 50% of “Adjusted Taxable Income,” and interest is not fully subject to U.S. tax ▫ Defers the deduction of interest until the limitation does not apply – interest carries forward ▫ Typically applies to most leveraged U.S. real estate in the early years unless debt is very low ▫ Interest expense can be used to offset gain on disposition of the real estate
  7. 7. Portfolio Interest Exception • Interest not subject to U.S. withholding tax • Debt must be in “registered form” to prevent U.S. ownership ▫ Not available to 10% voting shareholders of the borrower ▫ Look-through to determine indirect owners • Typically used in non-treaty lending context • Caveat “straw man” voting shareholder / manager structures
  8. 8. “Standard Blocker” (Foreign Corporation) Real Estate Investment Fund U.S. Real Estate Investments General PartnerCarried Interest Equity “Standard Blocker” Arrangement Debt & Equity Non-U.S. Investors U.S. Investors
  9. 9. “Standard Blocker” • “Standard Blocker” pays effective rate of tax at 54.5% (up to 35% on realized gains, plus “branch profits” tax of 30%), unless the blocker resides within a treaty jurisdiction that overrides or reduces the BPT • Standard Blocker files U.S. income tax return (as a non-U.S. corporation.) Non-U.S. owners are thus not subject to tax return filing requirements, or investigatory and subpoena powers of the IRS • Structure is less complex than Leveraged Blocker structure, but less tax efficient for non-treaty investors • Blocker corporation can be formed in low-tax offshore jurisdiction to avoid local tax on dividends, but exposes Blocker to higher U.S. withholding taxes.
  10. 10. “Leveraged Blocker” (U.S. Corporation) Real Estate Investment Fund U.S. Real Estate Investments General PartnerCarried Interest “Leveraged Blocker” Arrangement Equity Co. Finance Co. Equity Debt Non-U.S. Investors U.S. Investors
  11. 11. “Leveraged Blocker” • Leveraged Blocker pays U.S. tax on realized gains • NRA investors capitalize blocker with debt and equity • Interest repayment on debt reduces net taxable income of leveraged blocker • Interest payments may escape withholding tax, depending on treaty and / or portfolio interest exception • Dividend payment on profit may have low withholding tax, depending on treaty terms • Typical strategy is to liquidate Blocker after sale of real property • Liquidation distribution is not a dividend
  12. 12. “Domestically Controlled” REIT Real Estate Investment Fund U.S. Real Estate Investments General PartnerCarried Interest > 50% Equity < 50% Equity Domestically Controlled REIT Structure Non-U.S. Investors U.S. Investors
  13. 13. Domestically Controlled REIT • REIT must be more than 50% held by U.S. persons in order to be “domestically controlled” • Sales of underlying real estate can still trigger FIRPTA tax and U.S. tax return filing requirement to non- U.S. investors • Benefit to non-U.S. investors may be limited to reduced U.S. tax withholding rates on dividends paid by REIT • REIT structure may also be favorable for funds that invest in non-capital gain producing assets, or public or other domestically-controlled REITs
  14. 14. Investment Fund A “Series” Partnership General Partner Carried Interest Debt and Equity “Series Partnership with Leveraged Blocker” Blocker 1 Blocker 2 Blocker 3 Real Estate 1 Real Estate 2 Real Estate 3 Investment Fund B Normal Partnership Carried Interest Series 1 Series 2 Series 3 Non-U.S. Investors U.S. Investors
  15. 15. Series Partnership • Investment Fund A requires a separate “series” for every real estate investment • Each real estate investment has a corresponding “leveraged blocker” • With respect to each real estate investment, NRA investors receive repayment of debt, and proceeds from the liquidation of the corresponding “leveraged blocker” • Involves many entities and can be costly to implement and manage • Some uncertainty regarding IRS’ level of comfort with proposed carried interest arrangement
  16. 16. Transfer Tax Planning – 1 • Issue 1: What are the estate, inheritance, gift, and income tax implications of non-resident aliens holding inbound U.S. real property? ▫ Treaty protection (there are only 17 U.S. transfer tax treaties)  Pre 1966 treaties (old) versus post 1966 treaties (new)  Overview of treaty protections ▫ Absent treaty protection, the U.S. will tax certain U.S.- situs assets, such as real property, without regard to the investor’s citizenship or domicile (Treas. Reg.§ 20.2104-1(a){1})
  17. 17. Transfer Tax Planning - 2 • Issue 2: What can be done to eliminate the U.S. tax nexus? ▫ Treaty protection can afford taxpayers considerable benefits ▫ Absent treaty protection, the key is to re-characterize assets as intangibles, specifically a foreign entity, such as a corporation  Place U.S. real property interest into a foreign corporation  Foreign corporation needs a bona fide business purpose  Establish a rebuttal to the possible “form over substance” argument  A generic business purpose can undermine the above  Best planning would include co-mingling the U.S. situs real property with other assets that help establish the “business purpose” related to the entity
  18. 18. Transfer Tax Planning - 3 • Issue 3: The adverse repercussion of the failure to plan ▫ Absent treaty protection, the U.S. transfer tax repercussions can be very problematic  Modest $60,000 estate tax exclusion  No marital deduction without special planning  Possible death tax double taxation  Possible offshore capital gain recognition ▫ Some treaties offer better protection versus other treaties  The U.S. lifetime exclusion is offered to some but not all treaty countries  Marital transfers and Qualified Domestic Trusts (QDOTs)
  19. 19. Transfer Tax Planning - 4 • Issue 4: Other important planning issues of note ▫ Can we have a U.S. trust that is not a U.S. taxpayer?  Grantors may look to the safety of the U.S. while looking to avoid the underlying tax  “Form over substance” challenge ▫ U.S. Trust beneficiaries and trust planning, and throwback rules ▫ Civil law regimes and the adverse implications of trusts  The use of family foundations  U.S. recognition of family foundations as trust entities  Must evaluate the income tax ramifications of family foundations under BOTH income tax regimes
  20. 20. Conclusion • Continuing heavy investment in U.S. real estate • Funds entering the U.S. from many non-treaty countries ▫ Middle East, Latin America, South-East Asia • Critical importance of advance tax planning to avoid significant income and inheritance tax costs • Need to monitor U.S. tax reform developments: new laws  new structures may be needed
  21. 21. Basics of Canadian Inbound Real Estate Investment Taxation TIAG International Conference May 4, 2017 Isabelle Martin, CPA, CA Mallette LLP Québec, Canada
  22. 22. Trends Observed Foreign Direct Investment in Canada by Country
  23. 23. Trends Observed Foreign Direct Investment in Canada from Europe • This data clearly suggests that Luxembourg, the Netherlands and Switzerland are being used as intermediary holding companies for investors in jurisdictions not only in Europe but potentially in other countries as well.
  24. 24. Trends Observed Foreign Direct Investment in Canada by Industry Sector
  25. 25. Real Estate Taxation in Canada • Non-residents must pay tax in Canada on: ▫ Income from a business carried on in Canada ▫ Disposition of Taxable Canadian Property (TCP) • TCP includes: ▫ Real or immovable property situated in Canada ▫ Capital stock of a corporation if more than 50% of the FMV was derived, directly or indirectly, from one or any combination of real or immovable property situated in Canada
  26. 26. Real Estate Applicable Canadian taxes • Passive income (rent, interest, dividends, etc.) ▫ Final 25% withholding tax on gross income (treaty reduction?) or ▫ Section 216 Election – Net income subject to tax in Canada • Business income ▫ Individual income taxes: progressive tax rates from 0% to 54% ▫ Corporate income taxes: from 26% to 30%
  27. 27. Real Estate Applicable Canadian taxes • Interest deductibility: Thin capitalization rules ▫ Debt-to-equity ratio cannot exceed 1.5 to 1 ▫ Outstanding debt to specified non-resident shareholders (>25% votes or >25% FMV) ▫ Equity: PUC, Contributed Surplus and Retained Earnings • Non-deductible interest: deemed dividend subject to withholding taxes on the non-resident shareholder
  28. 28. Real Estate Applicable Canadian taxes • Capital gains (50% inclusion) • British Columbia: 15% tax on foreign homebuyers since July 2016 • Sales tax (GST/ HST / QST) • Property transfer tax • No Estate or Gift tax in Canada
  29. 29. Real Estate Objectives • Maximise ▫ Paid-up capital (PUC) – repatriation of PUC tax free ▫ Interest deduction – Reduce taxable income • Minimise ▫ Tax on repatriation of profits ▫ Overall tax cost
  30. 30. Real Estate Two categories • Rental (or passive) • Development for sale (active business income)
  31. 31. Real Estate Rental Property Direct ownership
  32. 32. Real Estate Rental Property Direct ownership • Tax consequences ▫ Rent paid to LeaseCo  avoid the requirement to withhold taxes on rents paid directly to ForeignCo 3 ▫ Since 2013, thin capitalization rules apply to a Canadian branch of a foreign corporation ▫ Disposition  ForeignCo 3 subject to Canadian tax on capital gains (50% inclusion) ▫ Canadian purchaser: Section 116 withholding taxes unless clearance certificate obtained
  33. 33. Real Estate Rental Property Indirect ownership
  34. 34. Real Estate Rental Property Indirect ownership • Tax consequences ▫ Rental income subject to Canadian tax at the combined federal and provincial tax rate (26 to 30%) ▫ Thin capitalization rules applicable (1.5:1 debt-to-equity ratio) ▫ Withholding taxes on interest and dividend payments ▫ Disposition: subject to capital gains tax (50% inclusion) ▫ Canadian purchaser: no Section 116 withholding taxes ▫ Canadian purchaser will likely prefer an asset deal to maximise CCA (depreciation deductions)
  35. 35. Real Estate Rental Property Summary of direct or indirect investment • Overall decision depends on a number of factors including: ▫ The quantum and location of third party debt financing ▫ The foreign tax rates on both net passive rental income and future dispositions of shares versus real estate ▫ The desire to repatriate cash to the foreign jurisdiction ▫ Canadian withholding tax rates on interest and dividends ▫ The ability to claim foreign tax credits for Canadian income and withholding taxes ▫ The location and nature of future purchasers of the property; the expected terminal values of land versus depreciable property ▫ The time horizon of the investment ▫ The desire for administrative simplicity
  36. 36. Real Estate – Development Property for Sale Basic structure
  37. 37. Real Estate – Development Property for Sale Basic structure • Tax consequences ▫ Constitutes carrying on business in Canada through a PE ▫ Business income subject to standard corporate tax rates ▫ Use of a Canadian corporation recommended ▫ No deduction for interest and property taxes related to the ownership of vacant land  capitalized to the cost of property ▫ No deduction for interest and other soft costs with respect to land and building during the period of construction, renovation, or alteration of a building ▫ Thin capitalization rules applicable (1.5:1 debt-to-equity ratio) ▫ Canadian purchaser: No Section 116 withholding taxes
  38. 38. Real Estate – Development Property for Sale Structuring with third parties
  39. 39. Real Estate – Development Property for Sale Structuring with third parties • Tax consequences ▫ Application of thin capitalization rules: CanCo is deemed to owe its "specified proportion" of the debt of the partnership
  40. 40. Use of a Canadian Acquisition Company Benefits • The maximization of tax paid-in-capital ("PUC"), which permits the repatriation of this PUC free from withholding tax • The maximization of Adjusted Cost Base ("ACB"), which lower the tax on disposition of shares of a Canadian corporation which meets the definition of TCP • The maximization of related party debt financing (thin capitalization rules) • Facilitates the increase in cost amount (bump) upon winding-up of a subsidiary
  41. 41. A Two-tier Acquisition Structure Benefits • Extract and hold surplus funds from the Target's operations (in the form of dividends) without paying Canadian income or withholding tax • Flexibility for ForeignCo to acquire other Canadian companies by making such acquisitions through CanHoldco, which can remain legally distinct from the operations of the Target and of the other companies
  42. 42. Intermediary Holding Jurisdictions United States • Considerations ▫ LOB provisions in the Canada-US tax treaty - Active Trade or Business Exception  Active trade or business in the United States  Derives income from Canada that is “derived in connection with” or “incidental” to that trade or business  The active trade or business in the US is substantial in relation to the activity carried on in Canada ▫ Treaty benefits are only available to the source of income that satisfies the test
  43. 43. Intermediary Holding Jurisdictions United States • New 2016 US Model Treaty ▫ Introduces the concept that income must “emanate from” or “be incidental to” the trade or business conducted in the residence country
  44. 44. Intermediary Holding Jurisdictions Luxembourg, Netherlands • Considerations ▫ Carve-out in the "immovable property" definition for property in which the business of the company was carried on  Treaty provision overrides the domestic tax law with respect to TCP  Disposition of TCP non-taxable in Canada ▫ Substance is key
  45. 45. Intermediary Holding Jurisdictions Luxembourg, Netherlands • Canada 2016 budget ▫ Canada will consider either minimum standard approach  Principal purpose test  Limitation on benefits rule ▫ Implementation through either  Bilateral negotiations,  The multilateral instrument, or  A combination of the two
  46. 46. Thank you!
  47. 47. Inbound Real Estate Investment - Australian Tax Issues 4 May, 2017
  48. 48. Australia - Inbound Real Estate Investment 1. Buying property 2. Selling property 3. Renting property 4. Property development 5. Q & A
  49. 49. Buying Real Estate • Auction or fixed price / negotiation? • Structure • Foreign Investment Review Board (“FIRB”) • Goods and Services Tax (“GST”) • Stamp Duty
  50. 50. Typical Structures
  51. 51. Buying Real Estate • Foreign Investment Review Board (“FIRB”) ▫ Complex rules ▫ Generally foreign buyers require approval for residential properties ▫ Exemptions for commercial property under certain thresholds ▫ Multiple tiers of exemptions ▫ Exemptions / concessions are NOT based on DTA’s rather they are based on specific negotiated positions
  52. 52. Monetary Thresholds • Residential land – All acquisitions • FIRB approval unless: Value – Agricultural Land Less than $1,094m US, NZ & Chile Less than $50m Singapore & Thailand subject to conditions Less than $15m All Other countries
  53. 53. Monetary Thresholds • FIRB approval unless: • FTA - Chilean, Chinese, Japanese, New Zealand, South Korean and United States investors, except foreign government investors. • Low threshold land includes mines and critical infrastructure Value – Developed Land Less than $1,094m FTA Countries with a high threshold Less than $252m Non-FTA Countries or FTA countries with a low threshold Less than $55m Sensitive Land
  54. 54. Foreign Exemption - Threshold • Individuals that meet a certain criteria do not need FIRB approval before purchasing real estate property. This includes: ▫ Australian or New Zealand citizens or Australian permanent visa holders ▫ Foreign persons purchasing property as joint tenants with their spouse that meet any of the above criteria. • Foreign investors do not require FIRB approval if acquired include: ▫ From developer who holds a exception certificate; ▫ By will or devolution of law; ▫ Others
  55. 55. Buying Real Estate Goods and Services Tax (“GST”) • GST is charged at 10% of the value of the supply ▫ Residential  If acquiring from individuals then unlikely that GST will be charged.  Otherwise likely GST ▫ Commercial  Sale of commercial property is likely to attract GST unless it is sold with a business or is a going concern
  56. 56. Stamp Duty • Stamp duty is a State based tax and therefore each state has different legislation. • The rates of stamp duty vary between the states ranging from 4.5% in Tas to 5.75% in QLD. • Stamp Duty is payable on the GST Inclusive Amount. • Certain States (e.g. NSW) also apply Premium Property Duty at a rate of 7% on the value over $3m of residential property.
  57. 57. Stamp Duty – Foreign Investors • Foreign investors must pay an additional stamp duty based on the dutiable value of the property. State Foreign Investor Surcharge NSW 4% QLD 3% VIC 7%
  58. 58. Stamp Duty • Also applies to entities holding Australian property where considered to be “land rich”. • Position differs from State to State ▫ E.g. NSW - Value of land is $2m or more ; and ▫ At least 60% of the value of the entity relates to land ▫ Qualifying acquisition – broadly:  20% unit trust;  50% company
  59. 59. Estate/Inheritance Tax • In Australia, there is no Estate or Inheritance Tax. • Cost base of inherited property is based on the date of acquisition of the property by the deceased: ▫ Pre 20 September 1985 – Cost base is the market value at date of death. ▫ Post 20 September 1985 – Cost base is the deceased’s cost base on the date of death.
  60. 60. Estate / Inheritance – CGT on death • CGT on sale of property is dependent on the original acquisition date of the property and its use. ▫ Pre 20 September 1985 – If residential and used as main residence then:  no CGT if sold within 2 years of death;  CGT on excess over market value at death if sold after the two year period. ▫ Post 20 September 1985 – CGT on excess over the cost base. • CGT discount subject to complex rules for non residents after May 2012 – valuations may be required
  61. 61. Selling Property • Auction or fixed price / negotiation • Taxable Australian Property (“TAP”) • Capital or Revenue – ATO Activity ▫ Capital Gains Tax Discount – 8 May 2012 • 10% Non Final Withholding on Sales ▫ Applies to sale irrespective of Capital or Revenue ▫ Obligation on purchaser ▫ Excludes residential <$2.5m • GST – likely on sales except “old” residential or going concern
  62. 62. Selling Property - TAP • TAP is: ▫ Taxable Australian Real Property (“TARP”) such as residential / commercial buildings / land or mining rights ▫ TARP held indirectly. ▫ CGT assets used in Australian PE • Indirect sales subject to tax where associate inclusive ownership of ▫ 10% or more of a company or trust held (Non Portfolio Test); AND ▫ market value of TARP assets is greater than 50% of value of entity. ▫ Test looks through ownership chain
  63. 63. Selling Property - TAP • Test looks through the ownership chain • Staged / staggered sell down of indirect ownership interests caught under certain circumstances ▫ Ownership tracing over prior 24 months
  64. 64. Selling Property - TAP Direct Sale of TAP Asset: Residential or commercial land / buildings Mining rights
  65. 65. Selling Property - TAP Indirect Sale of Asset Sale of shares in Entity holding the Asset Subject to Non portfolio and MV test Residency of entity sold not relevant
  66. 66. Selling Property - TAP Indirect Sale of Asset Sale of shares in Entity holding the Asset Subject to Non portfolio and MV test Residency of entity sold not relevant
  67. 67. Renting Property • Rental income & lease incentives ▫ Lease incentives – common place for commercial property and make good provisions ▫ Lease terminations • Deductions including Capital Allowances • Negative gearing • Lodgement of Income Tax Return
  68. 68. Property Development • Separation of land holder from developer • Risks and insurances • Transactional taxes (e.g. Stamp Duty to be minimised if possible) • Timing of derivation of income and deductibility of costs • GST
  69. 69. Questions?
  70. 70. Thank You
  71. 71. Inbound Real Estate Investment in Brazil A review of Income and Inheritance Tax Issues for Treaty and Non-treaty Investors
  72. 72. What does USD 1 million buy you in Brazil? Rio de Janeiro 297 sq. meters / 3200 sq. ft. Within Rio, in Leblon... 138 sq. meters / 1490 sq. ft.
  73. 73. What does USD 1 million buy you in Brazil? São Paulo 360 sq. meters / 3880 sq. ft. Within São Paulo, in Vila Nova Conceição... 200 sq. meters / 2150 sq. ft.
  74. 74. Some formalities for non-resident foreign investors • CPF or CNPJ (federal tax numbers) • Local legal representative required • If seller is in Brazil, payment via wire • Requirement for a public deed via notary • Registration by specialized notaries • Due diligence for liens, encumbrances
  75. 75. Taxes on Urban Real Estate • IPTU – 1.2% to 3.5% paid once a year • ITBI – 2% on taxable transfers of property • ITD – 4.5% to 5% on gifts and inheritances (plus Laudêmio tax if applicable) • Laudêmio (Coastal States) – 5% on any transfer • Foro (Coastal States) – 0.6% once a year
  76. 76. Income Tax • Rental Income – 15% WHT (25% if Tax Haven) • Capital Gain – 15% WHT (25% if Tax Haven) • Even if buyer and seller are abroad, tax is due at the location of the real estate • All calculations in BRL (Brazilian Real) • Tax applies to the gain (FMV – cost) • Possibility of tax reduction with private company shares – valuation of company equity
  77. 77. • Higher capital gains tax (34%) • Loan repayment, dividend (post-tax), and share capital repatriation are exempt (for treaty, non treaty or tax havens) • Loan interest subject to 15% WHT (25% if tax haven) – with corresponding relief for treaty investors Investing through a Brazilian entity
  78. 78. UK IHT - BIG BITE Ahead
  79. 79. Disclaimer This does not constitute formal advice and no reliance can be placed on it by you or any third party. Formal advice should always be sought.
  80. 80. The announcement of the general election has meant that the Finance Bill is being rushed through before Parliament is dissolved. To expedite the process a considerable number of measures have been dropped from the Bill. Specifically, all the changes relating to non UK domiciles and the Inheritance Tax (IHT) charges on UK residential property owned in trusts and companies have been placed on hold. It is expected that the measures will be reintroduced at the next opportunity, possibly as early as July, although they could be delayed until the Autumn budget. Slimmed Down Finance Bill
  81. 81. • All UK residential property within scope of UK IHT wef 6/4/17 • Death tax – 40% IHT in UK • The rules apply even if you are not in the UK • UK IHT interaction with double tax treaties will need to be considered Sea Change - IHT
  82. 82. • No relief from UK IHT if rate 0% in other jurisdiction • E.g. UK/India provides NO relief as 0% IHT in India • Range of treaties • Need to review each one as needed • Who and where is tax payable DTR
  83. 83. • The individual - if UK residential property owned directly • The beneficial owner/s of a non-UK entity holding UK residential property • Includes companies and trusts • Extent of UK tax charges depend on overall arrangements Who is caught?
  84. 84. Company ownership • Death of Mr X • Third party bank debt and shareholder debt reduces value of company • Company value £2m (£5m - £3m) • IHT at 40% after nil rate band (£2m - £325,000) x 40% = £670,000 • Shareholder loan reduces company but is an asset in the IHT Estate of Mr X Mr X Non UK Company loan £1m 100% owner bank loan £2m UK Residential Property £5m OMV
  85. 85. Trust structure • Mr X is settlor and entitled to benefit • Value of company attributed to UK residential property in Mr X UK estate = £2m • IHT charge is again £670k assuming nil rate band is available • Loan from trust to the company of £1m = relevant loan. Mr X Non UK Company 1m bank loan £2m UK Residential Property £5m OMV Trust settlor & beneficiary Loan 1m
  86. 86. • Shareholder’s loan will reduce value of company • BUT Shareholder’s loan is also UK asset for IHT • Debt rules punitive Loans
  87. 87. Illustration – Shareholder loan • Co-value on death of Mr X is £1m (5m – 3m) = £2m • Shareholder loan also in IHT estate = £1m • IHT on loan at 40% = £400k • Total IHT £670k plus £400k = 1,070k • Check how loaned funds have been used? Key question! Mr X loan £1m Company Residential UK Property £5m Asset £5m Bank loan £2m Shareholder loan £1m Company value £2m bank loan £2m
  88. 88. Trustees charges • Ten year charges – on ten year anniversary – 6% • Exit charges – when relevant property leaves the trust • Transfers to trust by individual chargeable – chargeable lifetime trusts • Two year tail in some circumstances Trust Non UK Company UK residential property
  89. 89. ATED • Enveloped dwellings • Personal use = ATED • Annual ATED charge • Banding system Property value Annual charge More than £500,000 but not more than £1 million £3,500 More than £1 million but not more than £2 million £7,050 More than £2 million but not more than £5 million £23,550 More than £5 million but not more than £10 million £54,950 More than £10 million but not more than £20 million £110,100 More than £20 million £220,350 Chargeable amounts for 1 April 2017 to 31 March 2018
  90. 90. What Should Client Do? • No single solution • De-envelope? • Sell properties? • What about governance?
  91. 91. • If trust, scope to remove personal IHT exposure • Keep structure • Irrevocable exclusion of settlor and spouse • Widow can benefit The Way Ahead
  92. 92. • More radical but • Sell UK properties • Proceeds can be reinvested into non UK situs assets or UK assets that are non UK residential properties under an underlying company. • Investment decision at stake The Way Ahead (2)
  93. 93. The Way Ahead (3) • Consider de-enveloping of property from company • Stops ATED charge or • Consider if property can be let out on commercial terms to unconnected parties • Assess UK tax at stake under various options before taking action
  94. 94. • Do nothing • Insure the tax risk if you can • Conventional UK IHT planning over time The Way Ahead (4)
  95. 95. • Consider need for a UK Will • Consider need for Wills in other jurisdictions • Brussels IV UK Wills
  96. 96. IHT and UK Reporting • Reporting for Trustees and individuals • Trustees ten year charges • Trustees exit charges • Death estate on death of individual • Lifetime transfers if not free of IHT
  97. 97. Enforcement • Still unclear • Open registers • Duty to notify
  98. 98. Summary • UK tax rules are VERY complex • The rules apply even if client is not coming to the UK • Avoid unexpected UK liabilities • Be aware of reporting requirements • GET ADVICE
  99. 99. Thank you Liz Cuthbertson Partner Direct Line: 0207 002 5703 Email: lizcuthbertson@mercerhole.co.uk www.mercerhole.co.uk Follow us on Twitter @mercerhole Follow us on LinkedIn Mercer & Hole

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