14 November 2013

ATED and Americans

Richard Cassell
Of counsel | UK

Some of you will have read about the new Annual Tax on Enveloped Dwellings or ATED on UK residential property held through corporate ownership structures. This applies an annual sliding scale of stamp duty land tax on the ownership of any home over £2m held through a corporate structure as well as tax on certain gains. Many ‘non-doms’ had organised ownership of their home through a corporate structure to provide protection from UK inheritance tax. By shifting the ownership of the UK residential property into a non-UK corporation, the non-dom converted their UK asset into a non UK asset able to pass outside the scope of UK inheritance tax.

However, if this comes at an annual fee, then this changes the economics of the inheritance tax planning completely. We are advising people to review any corporate ownership for residential property and to consider dismantling the structure. The very recent announcement that George Osborne is considering taxing foreign investors on gains in relation to their UK properties whether or not they are held through structures moves the goal posts still further. We await the 4 December Autumn Statement when we hope there might be clarity.

For Americans, it has never made much sense to use a corporate structure to own real estate in the UK. The adverse effects of using a corporate structure to own investment property can be mitigated for US citizens by making a ‘check the box’ election so that the entity elects to be treated as a ‘pass-through’ for US tax purposes. This then neutralises the potential significant tax effect of using a corporate ownership.

However, US citizens remain subject to US estate tax on a worldwide basis and currently the highest marginal rate of US estate tax is 40%, which is the same as the UK inheritance tax rate. The US federal estate tax offers a much greater exempt amount ($5.25m currently) but for people with assets over that limit, there is unlikely to be any overall estate tax saving as a result of using a corporate structure to own UK real estate. Therefore, there is unlikely to be any benefit to paying an annual ATED charge.

With the increased risk of capital gains tax applying to an asset that would otherwise be exempt from UK capital gains tax, the arguments for dismantling any corporate ownership structure seem to be persuasive.

However, the dismantling must be done with care. If the company is owned outright, then there is a risk that any UK gain will become taxable to the shareholder on liquidation. If the company is owned by a trust, then care must be taken to ensure that the gain that will then accrue in a non-resident trust is not visited on a UK resident beneficiary for UK capital gains tax purposes.

If you have UK real estate owned by a corporate structure, we would recommend that you consult your tax adviser fairly soon.

Richard Cassell Of counsel | London

Category: Article