Our client was keen to purchase a family home in London. He had already identified the property, and was looking at options for how to structure the purchase. The property he had his eye on was owned through a corporate entity in the Cayman Islands, so he was considering buying the shares of the Cayman company, instead of purchasing the property directly. The client had already put his current home on the market and was keen to mortgage the new property with J.P. Morgan.
How did we help?
Our Wealth Advisory team thought that it would be helpful for our client to fully understand the tax implications of his intended purchase so that he would be in a better place to make an informed decision.
We explained that the purchase of the property through a corporate entity would be likely to trigger an annual tax charge, known as the Annual Tax on Enveloped Dwellings (ATED) where the property is used as his residence. Since the property was valued at more the £20 million, this annual charge would be £236,250.
Although he would be living in the property as his main residence, it wouldn’t qualify for Principal Private Residence (PPR) Relief if and when he came to sell it. This means that Capital Gains Tax (CGT) would be payable on the property at the time of sale. Our Wealth Advisory team also mentioned that if our client wished to take the property out of the Cayman structure, or ‘de-envelope’ the property, there could be further Capital Gains Tax and potentially Stamp Duty implications of taking this step
We also discussed the option of buying the property directly in the client’s personal name. While stamp duty would be payable on the acquisition of the property at progressive rates up to 15% of the consideration (including the 3% surcharge on the acquisition of second homes), there would be no ATED charge. Additionally, the client would benefit from PPR Relief if he used the property as his main residence, and so should not be subject to CGT if he decided to sell it in the future.
As we do not provide any tax or legal advice, and since this is a complicated area of UK taxation, we suggested that the client should discuss these issues with his tax adviser before making any decisions.
What happened next?
Following advice from his tax adviser, the client decided to proceed with the property purchase in his personal name and secured an £18 million mortgage from J.P. Morgan. He was grateful that we had highlighted the tax implications of the different structuring options – particularly the ATED charge, which he had not been aware of.