Our client, a UK resident non-domiciled individual, wanted to buy a luxury property in London worth £20 million. During a conversation with her banker, she mentioned that she planned to use money in a Spanish bank account to buy the property. She hadn’t considered UK real estate funding for the purchase as she thought it would be easier to just buy the property without borrowing. The banker suggested it might be helpful to call our Wealth Advisory team before she moved forward with the purchase.
How did we help?
During the conversation, our Wealth Advisory team discovered that the Spanish funds intended for the purchase were an accumulation of Spanish rental income. We pointed out that the client could potentially incur UK income tax of up to 45% on the money brought to the UK for funding the purchase. As a result she might have to pay up to £9,000,000 in UK tax.
We discussed alternative sources the client could use for funding real estate, including the clean capital funds she held with J.P. Morgan or UK funds that she hadn’t considered. Using either of these options would mean that she would avoid triggering a taxable remittance to the UK.
Additionally, we pointed out the UK Inheritance Tax (IHT) implications of owning UK property. We explained to the client that the value of the property would form part of her taxable estate when she died and potentially be subject to 40% IHT. So if the property was worth £30 million at the time of her death, £12 million could be payable in UK tax.
If our client took out a mortgage on the luxury property at the time of purchase (and not later), this would be deductible from the value of the property in her estate. So if the property was worth £30 million with a £20 million mortgage remaining, only £10 million would be included in her taxable estate and be subject to IHT at 40%. This means the tax liability would be £4 million instead of £12 million.
We pointed out that as J.P. Morgan does not provide tax advice, and that the client should have a conversation with her tax adviser to determine the best real estate financing option to use for the property purchase.
What happened next?
Following advice from her tax adviser, the client decided to buy the property using UK funds and a mortgage from J.P. Morgan of £15 million. She was thankful that our Wealth Advisory team had highlighted the possible downsides of using her Spanish funds for the purchase, as well as the advantages of having a mortgage on the property for IHT purposes.
If you are looking to invest in luxury real estate, refinance an existing arrangement or gift a first property to the next generation, discussing real estate funding with your J.P. Morgan Private Bank team might be prudent to ensure you are aware of all options.