Sherrelle Scott, Associate Director at Leonard Curtis Legal unwraps the legal complexities of an increasingly popular course of action
De-enveloping is the process of removing UK property out of an offshore corporate structure. It has become more popular in recent years due to regulatory changes within the UK which target offshore companies holding property in the UK.
The UK Government introduced a new register of overseas entities holding UK land or property on 1 August 2022 via the Economic Crime (Transparency and Enforcement) Act 2022 which discloses beneficial owners and officers of the overseas company (including where a beneficial owner is a trustee).
Overseas entities must also register if they do not currently own property in the UK but have done in the past (or intend to in the future).
The new regime has made offshore structures less advantageous to property owners who preferred the identity protection afforded by an offshore veil.
Why do UK based individuals use offshore companies to hold UK property?
Property owners have historically used offshore companies to hold UK assets for several reasons:
Tax advantages: Offshore companies holding UK property used to provide tax benefits, such as lower corporate tax rates and less exposure to inheritance or capital gains tax.
Simplified regulations: Legal and regulatory requirements offshore can be significantly less than their equivalent in the UK.
Privacy and security: Holding assets through offshore companies can offer a higher level of privacy for shareholders as ownership details are not always publicly accessible.
Asset protection: In some instances, offshore structures can provide protection against legal claims and creditors.
Estate planning: Offshore companies are often used as part of estate planning strategies to manage and transfer wealth efficiently.
Why consider de-enveloping?
Tax efficiency: De-enveloping can help align with current tax regulations and reduce tax liabilities. For example, the Annual Tax on Enveloped Dwellings (ATED) imposed an annual tax on companies owning UK properties valued at more than £500,000 and the scope of corporation tax and inheritance tax has increased to capture offshore companies subject to ATED.
Simplified ownership: Direct ownership or simpler corporate structures can reduce the complexity and administrative burden associated with offshore corporate ownership.
Ongoing regulatory compliance: As tax laws and regulations evolve, de-enveloping allows property owners to adapt more effectively and ensure compliance.
How does the de-enveloping process work?
Assessment: The first step is to assess whether de-enveloping is the right choice for your situation and whether your goal is to maintain a corporate structure or transfer the property to individual ownership. This usually involves a tax specialist reviewing your current ownership structure, tax planning, and long-term goals.
Planning: If de-enveloping is the best option for you and your long-term objectives, the next step is for your tax specialist to produce a detailed steps plan. This includes identifying the assets to be transferred and understanding the legal and taxation requirements (which may include submitting a tax clearance to HMRC).
What is involved in the legal process of de-enveloping to maintain a corporate structure?
Creating a new holding company: To streamline the proposed structure, a new holding company is created in the UK.
Transfer of shares in the overseas company by share for share exchange: The offshore trading company is then placed underneath the new holding company by way of a share-for-share exchange. This means the shareholders of the offshore company exchange their shares for shares in the new UK holding company, effectively transferring ownership and resulting in the offshore trading company becoming a wholly-owned subsidiary of the new UK holding company. Providing the share for share process is completed in accordance with tax regulations and documented correctly from a legal perspective, there should be no stamp duty payable on the share transfers.
Asset transfer by way of distribution/dividend in specie: This involves distributing the property in specie to the shareholder of the offshore company (being the new UK holding company) following which the offshore subsidiary can then be wound down (if no longer required within the structure). A distribution in specie will usually be exempt from stamp duty land tax (SDLT) provided that the property has transferred for no chargeable consideration and there is no third-party debt over that property.
While some straightforward de-enveloping cases can be completed within a few months, more complex situations (especially involving offshore trusts and intricate company structures) can take longer. It's always best to consult with legal and offshore services professionals alongside a specialist tax advisor to get an accurate estimate for your circumstances.
Alongside Leonard Curtis Legal, our practitioners in Leonard Curtis’s Offshore Services team can also act as liquidators to structures incorporated in the United Kingdom, Channel Islands, the Isle of Man, and across the Caribbean jurisdictions to provide a simple joined up approach to the de-enveloping process.
To find out more contact Sherrelle Scott here.
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