INTM579060 - Thin capitalisation: lending against asset values: Offshore property companies
Looking into the financial structure of a property rental company is no different from any other thin cap case. Obtaining the facts is important and checking their reliability using normal investigative techniques is vital.
It is important to understand the nature of the company being dealt with: what properties does it own; when were they bought and how much did they cost; who is behind the company; what experience do they have of property?
As can be seen from the overview at INTM579030, a lot of UK commercial property is owned offshore, and where this is so it adds other risks which may need to be considered. It is often found that the person behind the company has UK connections and if this is so the offshore structures will need to be considered in that light. This is a specialised area and help can be sought from the non-resident specialists at Charity, Assets & Residence in Bootle.
Transfer pricing where there is an offshore structure is an everyday risk. Lending institutions will want the owners of a company to put in their own money and this will be typically between 15 and 25%. They do not usually mind whether that is done by share capital or by a loan. However, particularly if a loan can be sourced from a low tax jurisdiction, it is advantageous from the point of view of limiting the company’s liability to UK tax to use that debt rather than share capital. If the owner opts for a loan to provide their stake in the transactions, a prudent lender would seek to ensure that:
- The owner’s loan is not secured on the property
- The owner’s loan is repaid after the senior loan is repaid
- The cash flow of the borrower is used firstly to service the senior debt, and only surplus cash flow after all other liabilities have been met diverted to service the owner’s loan.
Two of the major problems are discussed below:
- Loan To Value
Other points to consider regarding offshore structures include the relevance of the Controlled Foreign Company (CFC) legislation where there is an overseas (subsidiary) group company controlled from the UK. If the overseas company is paying income tax rather than corporation tax in the UK, the CFC regulations may be in point and it may be appropriate to impute additional profits on the controlling (UK) company. Detailed technical discussion on this point is outside the scope of this module of the manual but advice will be available in the CFC material.
Similarly, where there is a UK individual behind the structure, ICTA88/S739 (transfer of assets abroad) may be relevant and it may be possible to attribute the income arising offshore to a UK individual. Again, detailed technical discussion on this point is outside the scope of this manual, but advice is available from CAR Residency.
UK property let out by offshore owners falls within the Non-Resident Landlords provisions. Generally income tax should be deducted from rental payments made unless the recipient is entitled to receive gross payments following registration with CAR Residency. Further information on the Non-Resident Landlords Scheme can be found at INTM370000.