Government considering crackdown on offshore property transfers
The funds industry in the Channel Islands and Isle of Man will be hit if the UK Government makes an expected change to the taxation of offshore property funds in its Pre-Budget Report in November or December.
The Government is considering whether to crack down on a loophole that enables property to be transferred from a limited partnership in the UK to an offshore unit trust without triggering a 4% Stamp Duty Land Tax (SDLT) charge.
When an investor sells their units in the offshore property fund, this is not subject to SDLT either. The Government has been concerned that property dealers have been using offshore unit trusts purely for the tax advantage of transferring buildings into these vehicles and then selling shares free of SDLT.
Law firms in the Channel Islands and Isle of Man have reported a substantial growth in the establishment of property unit trusts over the past year to 18 months. Guernsey, for example, currently has 15 open-ended property funds and 54 closed-ended funds. But it has attributed this mainly to the growing demand for property funds generally following the rapid growth in the asset class.
Ben Simpson, corporate partner at law firm Withers, said: "It has been known for some time that the UK Treasury and HM Customs & Revenue were looking into SDLT avoidance using offshore unit trusts. An equitable solution would seem to be to delay the introduction of any anti-avoidance legislation until the new rules for real estate investment trusts (Reits) are also introduced.
"Given the high rate of SDLT, it is not surprising that the property industry has sought to find ways to avoid it."
Lawyers in the Channel Islands admitted that a change in the tax rules would have a material effect on the number of offshore property funds being launched. But they added that there are other attractions for launching these funds.
Steve Coe at Investec Trust said: "Jersey and Guernsey have had a wonderful windfall from the tax situation but there are other attractions of offshore funds. The gearing rules in the Channel Islands are more relaxed than in London and Dublin. This is very important in generating returns for property funds.
"The Channel Islands offer flexibility over the type of structures that can be used - unit trusts, closed-ended and limited partnerships. There is also more expertise in establishing and administering property funds in the Channel Islands than in the UK."
Even if the UK introduces Reits, this is unlikely to detrimentally affect the attraction of offshore property funds, said Nick Kershaw, partner at Ogier. He added the proposed Reits are not as flexible as offshore funds, particularly in the use of gearing.
If structured correctly, investors can avoid 4% SDLT by using offshore property funds.
The UK government, however, may change the tax rules in the autumn.
Channel Islands stress other advantages of using offshore property funds including flexibility and gearing.
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