This article gives interesting insights into tax structuring opportunities for German investors in the United Kingdom. Fladgate LLP is one of the market leaders in providing English legal advice to German companies, institutions and high net worth individuals on their investments or business interests in the UK. We have a multidisciplinary team which can advise clients in the German language in virtually all areas of business law. We cover corporate, commercial, litigation, property, construction as well as employment law. All team members are either native or fluent German speakers.
If one took an initial view of the UK tax system, it would not seem comparatively favourable to the tax payer. For a UK resident, income tax may reach 50 per cent. and capital gains tax may be taxed at 26 per cent. Corporation tax, which is applied to both income and capital gains of UK tax resident companies, is currently taxed at 28 per cent. although it is due to decrease by one per cent. each year until it reaches 23 per cent. in 2014. This is not exciting when compared with some other European jurisdictions let alone tax havens. However, the combination of the UK tax system and the UK/German double tax treaty can make UK investments tax efficient for German investors.
The chief advantages of the UK tax system are that there is no UK taxation on dividends paid to non residents. There is no capital gains tax on the disposal of UK assets (other than those connected with a UK trade), there is an exemption from UK taxation on UK source income on an amount of up to £7,475 a year to which German investors are entitled and under the UK/German double tax treaty (Treaty), UK income may be exempt from tax in Germany. As a result, there are a number of tax efficient ways for German individuals and businesses to invest in the UK. This article considers investment in UK real estate.
German property funds
It is possible for a German property fund to acquire a UK property. The property fund may be transparent for both UK and German tax purposes. If the German investors take a relatively small participation in the fund, say of up to £50,000 per person, it is unlikely that the annual income from the fund will exceed the current annual allowance of £7,475. (It should be noted that the current UK government would like to increase this figure to £10,000). Hence, a German investor would not incur a UK tax liability on income from the fund provided he has no other UK sourced income. Further, he should not be liable to tax in Germany on any UK sourced income pursuant to the Treaty. Also, the German investor will not be liable to any UK tax on any gain made on the sale of the property and it is understood that provided he has invested in the UK property through the fund for a period of at least ten years, he may not be liable to German tax when the land is sold either.
Rental profits arising from UK real estate will always be taxable in the UK, subject to any reliefs or allowances. Individuals or non-resident companies owning UK property would be liable to pay income tax on their rental profits. As stated above, for individuals, the rate of income tax may rise to 50 per cent. However, for non-UK resident companies, it is limited to 20 per cent. Hence, one would normally advise a non-resident investor to invest in UK real estate through a non-resident company. In any event, in computing UK rental profits, interest expenses and capital allowances (tax depreciation) are deductible. Hence, if the acquisition of the property is highly geared, it is likely that in the early years of ownership, the exposure to UK property tax will be small. Hence, a German investor could acquire UK real estate, pay little UK income tax on the rental income and no German tax. Any gain when the property is sold will be outside the scope of UK tax and, depending on the length of ownership, German tax. As suggested above, for UK tax reasons, it may be sensible to own the property through an offshore structure. The choice of the offshore company would be important. Whilst the use of a non-resident company will reduce the exposure to UK income tax, a German resident tax investor may be taxable on dividends by that non-UK company to him. It may be possible to seek to avoid this consequence by arranging for a vehicle which is treated as taxable in the UK but tax transparent in Germany to own the property. As such, income will be subject to UK tax at a rate of 20 per cent. and also tax exempt in Germany.
To summarise, there are a number of instances where the UK and German tax systems do not combine smoothly and this enables tax saving opportunities to arise for both corporate and individual investors and trading companies. With Sterling being relatively cheap in comparison with the Euro, the London property market offers exciting opportunities for overseas investors.
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