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March 30, 2007 3:54 pm

Tax rain can still fall on owners in the sun

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Tens of thousands of Britons who put in place arrangements to sidestep income tax on the use of their foreign homes could still face a hefty tax sting.

The warning by tax experts is directed at the more than 30,000 individuals who were advised to set up a bare trust arrangement when they bought an overseas property via an offshore company.

The arrangement was seen as a way to work around a quirk in the UK, which saw individuals who bought their foreign properties through a company subject to a benefit-in-kind tax for private use of their own homes. The quirk had come about as the Revenue had regarded the individuals who own foreign homes via companies as shadow directors and classed the use of their property as a benefit-in-kind, which attracted income tax.

The use of a bare trust lifted the spectre of UK income tax as the individual, and not the company, was the recognised owner of the property, therefore averting any benefit in kind liability.

But while the use of a trust may have solved the “UK sword of Damocles” it had created a lingering capital gains headache for those individuals when they sold their offshore properties.

“Many countries popular with UK investors, including Spain and France, don’t recognise the bare trust as owners of the property, they only recognise the company and therefore a CGT charge would be made to it if the property is sold,” explains Richard Mannion, national tax director with Smith & Williamson and a spokesman for the Chartered Institute of Taxation.

“However, in the UK bare trust arrangements are normally taxed on the beneficial owner and there are concerns that, due to the different recognition of ownership that the individual could be charged CGT in both countries.”

The Revenue did appear this week to set out its position in favour of those using trusts. It said: “For CGT purposes, the chargeable gain arises to the beneficial owner of the asset in question.

“Provided it is the same gain that is being taxed in both countries then it does not matter that a different person (or company) has paid the tax, we will allow relief.”

The statement, which came late this week, took the tax community by surprise. Experts are seeking official clarification before setting out advice to clients.

“The Revenue has been asked point blank to clarify its position on tax relief under the double taxation agreement and we haven’t yet had an answer. Ultimately we need good clear guidance,” says Mannion.

He estimates 40 per cent of the 90,000 individuals who own offshore properties via companies could have a bare trust arrangement and therefore potentially not receive credit for tax paid in their holiday home’s host country, even if it was a signatory to a double taxation agreement.

Continuing doubts over whether the UK will credit CGT paid in a foreign country by those with trust arrangements has placed a cloud over the government’s recent decision to remove the source of many woes – the benefit in kind charge.

After years of lobbying from professional bodies, the government pledged in the Budget to withdraw the charge for the private use of offshore holiday homes held by companies, as a proportionate response to an “unintended tax”. The move was seen as a “victory for common sense” for many Britons who had no choice but to buy their foreign bolt-holes through offshore companies to ease red tape or avert local forced inheritance laws.

Tax experts now expect a revival in interest in the use of company structures to buy property abroad. Amendments – due to be enacted in next year’s Finance Bill – should ease ownership options for UK investors branching into booming regions, such as Bulgaria, where foreigners can only buy property through a company set up locally.

It will also help those looking further afield, such as the US, where companies are used to shelter foreign owners from compensation claims.

“People will have the freedom now to put appropriate structures in place, bearing in mind local taxes and policies, without worrying about a quirk in the UK,” says Leonie Kerswill, tax partner with PricewaterhouseCoopers. “It is a shame it has taken so many years to come about.”

Tax experts say individuals looking at ownership options should get local tax and legal advice before they act.

Meanwhile, the Revenue clarified this week that it will not seek to tax any individuals with offshore properties genuinely caught in the benefit in kind tax net in the period until the legislation is enacted.

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