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"When the time comes - Your Heirs WILL be hit with up to 40%, and maybe more inheritance tax bill, unless you act now to protect them"

 

 

 

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The Wincham Investments Tax Planning Strategy
for people that own property in Spain

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Introduction by Charles Deacon, M.A.(Cantab). 

Charles is a qualified Lawyer with over 40 years experience specialising in UK corporate and commercial law and related taxation issues.

Now aged 65 and retired from general legal practice, Charles is the Managing Director of Veritatis Consultancy Limited, legal and corporate business advisers.

 

 

A UK Lawyer’s View

 

Many UK residents are attracted to the prospect of purchasing a property in Spain for a variety of reasons: a holiday home, a retirement home or an overseas investment similar to ‘buy to let’ investment in the UK.
 
Those who sell up everything in the UK and decide to emigrate to their home in Spain permanently may well be considered as domiciled, as well as resident, in Spain for taxation purposes.

 

However, residence should not be confused with domicile – domicile is in effect a person’s choice of ‘home’ country permanently. 
 
Many who retire to Spain may not adopt Spanish domicile, only residence.
 
The Company ownership scheme is principally of interest to those who are domiciled in the UK, irrespective of where they may be resident at the time of their death.
 
UK Inheritance Tax may affect any individual of UK domicile wherever they may be living and will catch all the property they own wherever it may be located.
 
Individuals owning Spanish Property
 
To die owning property in Spain may prove costly, both in terms of taxation and legal and administrative costs.

However, at the very least, an individual who owns property is Spain is advised to make a Spanish Will, which will have to proved in Spain, and all the ensuing formalities (which are time consuming and expensive) will have to be observed in Spain.

Any Spanish tax and all the legal and administrative costs will have to be paid, and could mean that the property itself has to be sold, irrespective of whether it is a good or bad time to sell.
 
Trying to apply the provisions of a UK Will in Spain is fraught with difficulty, and may be unsuccessful. Spanish intestacy (dying without a Will) law differs from that in the UK significantly, and, even where an English Will makes gifts of property in Spain, ensuring the will maker’s wishes are carried out is not straightforward, and, successful or not, will be expensive in terms of costs and time.

 
With or without a Spanish Will, the Spanish property will be ‘aggregated’ with (i.e. added to) any UK property for Inheritance Tax purposes, and may even have the effect of bringing the whole estate into a taxation situation, where the UK property alone might have been under the taxation limit.
 
Even if an individual decides to sell the Spanish property, the conveyancing procedures are hugely complex and expensive. Many believe the legal transfer of property in the UK is complex and expensive – if this is the case, then, in Spain, it is doubly so, with the added potential disadvantage for UK residents of not understanding the language anyway.

 

 

 

An example

Jack and Jill Brown decide to buy a property in Spain for £200,000 in their joint names as a holiday home for themselves and their 3 children, and possibly as a home for their retirement in due course.

 

They remain resident in the UK, and use the Spanish home for holidays, and letting it out to others when they are not using it themselves.

 

At the time of purchase, they will pay approximately £20000 for property tax, legal and acquisition costs. Thereafter, they will pay annual taxes on the property in Spain.

 

Later, Jack dies, leaving his share in the property to Jill.

 

Although no UK tax will be involved, as spouses can gift property to each other free of Inheritance Tax under present legislation, Jill will be faced with paying a Spanish tax of around 15% on Jack’s half share (now worth £300,000 as the property value has increased by 50%).

 

Later still, Jill dies gifting the property to her 3 children (still in the UK). This will attract further tax on each child on the total value of the property (which is now £500,000) so there will be a further tax bill of at least £75,000 in Spain, and it will take at least a year for all the formalities to be dealt with before her children can consider the property theirs (always assuming they have found the money to pay the tax and the costs in the meantime).

 

If they haven’t the money, and the property has to be sold, a further 5% sales tax will come out of the proceeds, plus estate agents costs, legal fees for the sale of the property and other incidentals like preparing the property for sale, travel to Spain to prepare the sale, adding as much as two thousand pounds to the bill for these expenses

 

Jack and Jill also owned their property in England, which was worth £600,000 when Jill died. They had gifted this to their children, which, on its own, would have been free from UK Inheritance Tax under the recently announced new legislation (allowing one spouse’s unused exempt limit of £300,000 to be transferred to the surviving spouse), but the value of the Spanish property has to be brought into account.

 

As the UK based property has used up the whole of the exempt portion of Jill’s estate, UK inheritance tax at 40% will be payable on the £500,000 value of the Spanish property less the Spanish Tax and the sale costs (if sold).

 

On the assumption that a total of £100,000 in Spanish tax and sale costs comes off the value of the property for the purpose of calculating UK Inheritance Tax, there would be tax of 40% on approximately £400,000 to pay, which amounts to £160,000.

 

Assuming all the costs incurred in administering the estates of Jack and Jill in Spain came to £25,000, the total cost in tax of owning and administering the Spanish property (ignoring the initial purchase costs and the annual charges) and their estates would be at least £150,000 in Spain and a further £160,000 in the UK, more than £310,000.

 

This means that, although the property value has increased by £300,000, the whole of that increase has been paid to the Spanish and UK tax authorities and the Spanish lawyers and agents, not to mention additional legal fees in the UK where lawyers dealing with the probate arrangements would need to liase with those in Spain, which all adds to the costs.

 

There is another way!

 

Owning a Spanish property through the medium of a UK limited liability company can avoid all the headaches and most of the inheritance tax liabilities which arise from personal ownership, and can transform passing on your Spanish home to your children from a costly and complex nightmare to a simple and inexpensive pleasure.

 

Ownership of Spanish property through a UK limited company

 

In the above example, let us assume that Jack and Jill Brown decided, when they first purchased their Spanish holiday property, that they would form a company in England as the vehicle for them to do so. 

 

• Jack and Jill Limited was formed and 100 shares in the Company were issued. Jack and Jill each owned 50 shares.

 

• Jack and Jill were both directors of the Company and a professional corporate company secretary was appointed to take care of the company formalities at a modest fixed cost each year.

 

Because Jack and Jill own and control their Company, which in turn owns the Spanish property, effectively they enjoy the property as if it was their own.

 

An added advantage is that, if they want to let the property out when they are not using it, their Company will be able to do this as a business venture, and they can claim the expenses associated with the property as a business expense.

 

 

Their own visits to their property might also be considered as part of the cost of running the business.

 

Jack and Jill Limited is, of course, an English registered company, and, as such, is at all times an English based asset, irrespective of where the owning shareholders of the Company are resident.

 

This means the shares in the Company can be transferred by means of a simple transfer form whilst Jack and/or Jill are alive, and can be left by them to their children through an English will. 

 

Although, therefore, the property is in Spain, because the owner of the property is an English company, the shares in the company are an English asset for all purposes.

 

Effectively, then, Jack and Jill can dispose of their interest in the property by gifting or selling the shares in the Company without ownership of the property itself changing, so avoiding all the consequent rigmarole this entails with Spanish taxation and Spanish lawyers.

 

In our example, when Jack and Jill decided to purchase their Spanish property using an English company they owned, they issued 100 shares at £1 per share which placed £100 in the Company’s Bank.

 

They then loaned the Company £199,900 plus any costs incurred in the purchase.

 

This loan remains owing to them until the Company repays it, but Jack and Jill can, for example, gift (or assign as it is called) part of the loan each year to their children to take advantage of UK annual inheritance tax allowances.

 

In the same way, they can gift shares in the Company to their children.

 

It is possible to create different classes of shares, some voting, others carrying no voting rights, enabling Jack and Jill as time goes on to gift a large proportion of the value of the Company to their children but without losing control of the Company (and thus the property).

 

Although individual circumstances and the law can change, there is really nothing at present to prevent Jack and Jill passing on their ownership of the Company, or at least sufficient of it to reduce the value in their own estates to a minimum, without incurring any UK inheritance tax at all on their Spanish property and hugely reducing the tax payable overall on their English and Spanish estates.

 

 If the activities of the Company are such as to enable it to attract business relief for inheritance tax valuation purposes, this could be an added bonus.

 

Any running costs incurred in maintaining the property which Jack or Jill provide the funds for (as they would have to do just the same if they owned the property in their own names) would be lent to the Company.

 

If Jack and Jill decided that they wanted the property sold by the Company to buy a different property in Spain or elsewhere, either in England, or another part of the world, they might avoid or defer UK Capital Gains Tax through what is called ‘roll over’ relief.

 

In any event, any loan which the Company might owe to them (or their children if they had passed on the benefit of the loan) could be repaid with no tax liability, so any funds which may have had to be lent by them to the Company over the years would contribute to reducing any Capital Gains Tax liability.

 

The only ‘down side’ to ownership through a company is that there would be a small annual cost involved in filing annual accounts for the Company and an annual return.

 

However, compared to the potential savings in taxation which can be achieved through the Company ownership route, these annual costs are minimal, almost incidental, and, if Jack and Jill have to provide the funds, they can be lent to the Company and repaid without tax liability in due course.

 

Summary

 

That there are tremendous advantages in owning overseas property through a UK based company vehicle is beyond doubt, and can be recommended to those who prefer to keep their money and assets out of the clutches of the Spanish and UK taxation authorities.

 

Tailor made structuring of companies to suit individual requirements can no doubt be made available on request.

 

A detailed example 

 

There are 2 accompanying tables at the end of this report

 

To provide a more detailed illustration as to the possible benefits of buying Spanish property through a UK company and using the case of Jack and Jill Brown, the following assumptions are made:

 

1.            Their Spanish property is purchased for £200,000 in 2007 in the name of Jack and Jill Limited (“the Company”). The costs of purchase in Spain for transferring the property into the Company’s name is £5,000. The Company therefore needs £205,000 to complete its purchase.

 

2.            The property thereafter increases in value at an average of 5% per annum (this, of course, is not guaranteed in practice).

 

3.            100 voting shares of £1 are issued to Jack and Jill (50 each) at par (i.e. £1 per Share) and they pay £100 to the Company for the Shares.

 

4.            Jack and Jill each gift £3,000 to their children, the exempt annual amount for UK inheritance tax purposes, a total of £6,000.

 

5.            Their children in turn use this gifted £6,000 to subscribe for 6,000 £1 Non-voting Shares of £1 each in the Company at par (i.e. £1 per Share) and the Company receives £6,000 for these shares.

 

6.            Jack and Jill each lend the Company £99,450 (a total loan of £198,900) to buy the property and cover the costs.

 

7.            At this point, the Company has issued 100 £1 Voting Shares and 6,000 £1 Non-voting Shares, and has £6,100 in cash for these shares plus the loan from Jack and Jill of £198,900. The Company therefore has a total of £205,000 in share capital or loans with which to buy the property and pay the costs of purchase, which is the amount required as at 1. above.

 

8.            Each year thereafter, taking into account rents received for letting out the holiday home to others when not in use by Jack and Jill’s family and friends (assuming they do no wish to charge friends), and the annual costs of complying with company legal requirements, the property costs the Company £2,000 which is lent by Jack and Jill to the Company

 

9.            Every year thereafter Jack and Jill gift (assign) £6,000 (£3,000 each) of the loan owing to them by the Company to their children, taking advantage of the annual UK Inheritance Tax exemption

 

10.        In 2020, Jack dies, leaving 49 of his shares and half of the loan owing to him by the Company to his children and 1 share and the rest of his estate (including the other half of the loan and all his English property) to Jill. The Spanish property is now worth £378,000.

 

11.        Jill continues to gift £3,000 of the loan to her children, until she dies in 2030, leaving her estate to her children, including the 49 shares in the Company.

 

12.       The voting shares in the Company are worth 5 times the value of non-voting shares.

 

 

How, then, does the transfer of their estates by Jack and Jill work out tax and cost wise?

 

The position, year by year from 2007 to 2030 is shown in Table 1 (Loan to the Company) and Table 2 (Share Value)

 

 

Table 1 shows that, in 2020, when Jack dies, the total loan to the Company has risen (because of the annual costs subsidised by Jack and Jill) to £224,900, but they have by then passed on the benefit of £78,000 worth of the loan to their children free of any inheritance tax.

 

Table 2 shows that, in 2020, when Jack dies, his 50 shares are worth (on the basis of the assumptions made) half of £11,315, namely, £5,657.50.

 

He has gifted 49 of them to his children, worth £5,544.35. Total passed to children for inheritance tax is £5,544.35 + £36,725 (half of £73,450) = £42,269.35, well under the exempt limit of £300,000 for UK Inheritance Tax.

 

At this point, the shares and loan values owned by the children are worth £135,785 + £5,544.35 + £36,725 = £178,054.35 on which no tax is payable either in Spain or the UK.

 

Assuming Jack leaves the whole of the remainder of his estate to Jill, he has £257,730.65 unused exemption value for UK inheritance tax purposes which can be claimed on Jill’s death, and no UK Inheritance Tax is payable on Jack’s death as anything gifted to Jill is exempt from Inheritance Tax.

 

So far as Spain is concerned, there is no Spanish property passing on Jack’s death, so the question of tax and costs in Spain doesn’t even arise.

 

 Table 2 shows that, in 2030, when Jill dies (on the assumptions made) that her shares are now worth £13,303.35 (£26,085/100 x 51).

 

Table 1 shows that the total loan to the Company has risen to £244,900, of which £143,675 has already been passed on to her children, with the loan still owing to Jill being £101,225. Jill is therefore gifting £13,033.35 (her shares) along with the loan of £101,225, making a total of £114,258.35 being gifted by Jill for UK Inheritance Tax purposes, again well under her exempt limit.

 

This  would, based on the proposed new legislation, be £557,730.65 (this is £300,000 to which Jill is entitled in her own right plus £257,730.65 unused of Jacks entitlement).

 

 On these figures, Jill would still have over £440,000 available within the exempt inheritance tax band for other property she may have to pass to her children.

 

If the English property is worth £600,000 as assumed in the case where the Spanish property was owned by Jack and Jill personally. There would be some UK Inheritance Tax on the total estate, assuming of course that the exempt limit still remained the same in 2030 as it is in 2007, which is, perhaps, unduly pessimistic!

 

Ignoring any other assets, the children will have inherited from Jack and Jill £244,900 of loans and £339,100 worth of shares, a total of £584,000, upon which no inheritance tax is payable.

 

In relation to their overall estates, leaving £443,472.30 available for other assets to be passed on without incurring inheritance tax liability under the recently announced proposals.

 

This assumes that the first of Jack and Jill to die do not leave any other gifts of their estate except of the loan and shares to the children and the remainder to the survivor of them.

 

The tax payable in the UK therefore would be £600,000 (i.e. the value of the English property) minus £443,472.30 =  £156,527.70 @ 40% = £62,611.08.

 

Thus, by utilising the Company ownership vehicle, Jack and Jill will have passed on estates worth £1,184,000 (The Spanish asset of £584,000 plus the English asset of £600,000) with a total inheritance tax liability of £62,611.08.

 

This compares to the figure of some £300,000 they would pay if they purchase the Spanish property in their own names.

 

Through the limited company ownership route, they would save nearly quarter of a million pounds.

 

The position would, of course, be the same if Jill dies first leaving her shares and loan as described in the case of Jack.

 

Should the children then decide to sell their shares, their first requirement would be for the buyer of the Company to replace the loan owing to them by the Company, which would provide the children with a repayment of £250,900 free of any tax.

 

There would be Capital Gains Tax on the sale of shares. Although this calculation is complex and the Capital Gains Tax legislation is due to change from April 2008, their ‘gain’ would be £313,015 less their initial cost of £6,000 and the ‘deemed’ cost of the shares received from Jack and Jill (5657.50 + £26, 085), a total of £37742.50. If the new legislation is as expected, the gain of £275,272.50 would attract a tax rate of 18%, making a tax charge of £49,549.05. 

 

 

This would leave the children with some £514,365 after capital gains tax from the Spanish property and £450,000 (in round figures) after capital gains tax and inheritance tax as calculated above, which, if added to the English property of £600,000 (net) would leave the children with over £1,050,000 after all taxes.

 

This represents a huge saving (around £210,000 in fact) compared to the position described where the property is not owned through a company. As stated, the annual 5% increase in value of the property is for illustration, and there is no guarantee that this would be achieved.

 

More importantly, in some respects, is that, at no time during their lives, do Jack and Jill lose control of their company as they own the voting shares. This means they are able to block any sale of the property in their lifetime, which is relevant if they have it as a retirement home!

 

Conclusion

The detailed example given is intended as an indication of what benefits might be gained from choosing the company ownership method.

 

Individual circumstances and requirements differ. What is undoubtedly the case, irrespective of circumstances, is that:  

• The Company ownership method provides enormous flexibility in estate tax planning and can be made to respond to changes in fortune and circumstance on a tailor made basis.
• It avoids any problems with overseas tax on death, and is geared to an English based system which is familiar and understandable.
• It also avoids any need to involve lawyers in any actual transfers of share ownership, although it is recommended that professional advisers are consulted to ensure there are no unforeseen consequences in transferring share ownership.
• The formalities of share transfer in a company, compared to the formalities of property transfer, however, are rather like learning to ride a child’s scooter compared to learning to drive a tank!

 

Restructuring your property now is, therefore, a legal, intelligent and very simple process to undertake in order to save a small fortune in future taxes for your heirs.

 

C. J. Deacon
November 2007

 

(Charles Deacon, aged 65, is a qualified Lawyer, having had some 40 years experience specialising in company and commercial law, and related corporate and inheritance tax planning. Now retired from general legal practice, Mr Deacon is Managing Director of his own legal and corporate consultancy company, Veritatis Consultancy Limited, which provides a comprehensive legal department facility, particularly for small and medium sized companies)

 

 

Links

TABLE 1. (link)

This Table demonstrates how the initial loan to Jack and Jill Limited would increase where net running costs of £2,000 per annum are loaned to the Company by Jack and Jill, but they gift/assign the permitted maximum for exempt annual gifts to their children for UK Inheritance Tax (currently £3,000 per annum each, total £6,000).

 

Year      Loan Total        Jack’s Share      Jill ‘s Share       Children’s Share           

2007     198900              99450               99450                           0

2008     200900              97450               97450                           6000

2009     202900              95450               95450                           12000

2010     204900              93450               93450                           18000

2011     206900              91450               91450                           24000

2012     208900              89450               89450                           30000

2013     210900              87450               87450                           36000

2014     212900              85450               85450                           42000

2015     214900              83450               83450                           48000

2016     216900              81450               81450                           54000

2017     218900              79450               79450                           60000

2018     220900              77450               77450                           66000

2019     222900              75450               75450                           72000

2020     224900              73450               73450                           78000

(Jack dies)

2020     224900              -.                      110175*                                    114725*

2021     226900              -.                      109175                          117725

2022     228900              -.                      108175                          120725

2023     230900              -.                      107175                          123725

2024     232900              -.                      106175                          126725

2025     234900              -.                      105175                          129725

2026     236900              -.                      104175                          132725

2027     238900              -.                      103175                          135725

2028     240900              -.                      102175                          138725

2029     242900              -.                      101175                          141725

2030     244900              -.                      100175                          144725

(Jill dies)                       -.                         -.                               244900 

* This would be the position after Jack’s death where his loan of £73,450 has been gifted by Will to his wife (half) and children (half)

TABLE  2. (link)

This table shows how the share values increase based on the assumptions set out in the example (Jack and Jill each owning 50 £1 voting shares, and their children subscribing for 6,000 £1 non-voting shares in 2008

Year      Property value    Loan      Company value         Value of Shares                                                                                              (P-L)                             Voting               Non-voting

2007     200,000             204900  4,900    -                       Nil                     Not issued

2008     210,000             206900  3,100                            239                   2861

2009     220,000             208900  11,100                          854                   10246

2010     230,000             210900  19,100                          1469                 17631

2011     242000              212900  29100                           2238                 26862

2012     254000              214900  39100                           3008                 36092

2013     267000              216900  50100                           3854                 46246

2014     280000              218900  61100                           4700                 56400

2015     294000              220900  73100                           5623                 67477

2016     309000              222900  86100                           6623                 79477

2017     325000              224900  100100                          7700                 92400

2018     342000              226900  115100                          8854                 106246

2019     360000              228900  131100                          10085               121015

2020     378000              230900  147100                          11315               135785

 

(Jack dies – his 50 shares on these figures are worth £5,657.50. He has gifted 49 of them to his children + half of the loan owed to him. Total passed to children for inheritance tax is £5,544.35 + £36,725 – half of £73,450 – totalling £42,269.35, well under the exempt limit of £300,000. At this point, the shares and loan values owned by the children are worth £135,785 + £5,544.35 + £36,725 = £178,054.35  on which no tax is payable)

 

2021     397000              232900  164100              12623               151477

2022     417000              234900  182100              14008               168092

2023     437000              236900  200100              15392               184708

2024     458000              238900  219100              16854               202246

2025     480000              240900  239100              18392               220708

2026     500000              242900  257100              19777               237323

2027     525000              244900  280100              21546               258554

2028     550000              246900  303100              23315               279785

2029     570000              248900  321100              24700               296400

2030     590000              250900  339100              26085               313015

 

(Jill dies – her 51 shares on these figures are worth £13,303.50, gifted to her children + the loan owed to her of £100,175, a total of £113,478.50 for inheritance tax purposes, again well under her exempt limit, which would, based on the proposed new legislation, be £557,730.65. This is £300,000 to which Jill is entitled in her own right plus £257,730.65 unused of Jack’s entitlement).