Off-shore Mortgages

Off-shore mortgages can be very tax-effective for a certain category of borrower seeking to purchase property in the UK, specifically on the interest payable on the mortgage. People who can apply for offshore mortgages include UK resident non-domiciled individuals and non-UK residents.

As offshore mortgages, and offshore tax planning generally, can be very complex, below we have answered some of the more common questions and have provided a couple of sample planning ideas.

If you would like to speak to a consultant specialising in this area, and we would recommend this, please call 0845 330 0809.

1. Who can benefit from offshore tax planning?
UK resident UK-domiciled individuals cannot benefit from offshore tax planning when acquiring UK property. The following individuals very likely can

1. UK residents and non UK-domiciled individuals (‘domicile’ is a general law concept and broadly speaking, you are ‘domiciled’ in the country that you regard as your permanent home.
2. Individuals resident but not ordinarily resident in the UK. This status is likely to apply to you if your period of residence in the UK will be less than three years.
3. Non-UK residents. You are likely to be non-UK resident if you spend less than 183 days in the UK in a tax year or less than 90 days in the UK over an average of four tax years.

2. What’s the difference between ‘domicile’ and ‘deemed domicile’?
As a rule, people are ‘domiciled’ in the country in which they intend to reside permanently, or indefinitely. However, many foreign individuals staying for substantial periods in the UK are not usually considered to be domiciled in the UK.

For example, a German working or living in the UK will not normally become domiciled here if he or she intends to return to Germany.

Care needs to be taken if you spend more than 15 years in the UK, as special ‘deemed domiciled’ rules may apply — but only for inheritance tax purposes. Generally, if you have been UK resident for tax purposes for 17 out of the previous 20 fiscal years, you will be deemed to be domiciled in the UK even if you intend to return to your home country.

Until this time, however, you are only subject to inheritance tax on UK assets. For example, a holiday home in France would not be subject to UK inheritance tax.

3 Income tax: how can you benefit?
UK resident, non-domiciled individuals and UK resident but not ordinarily resident individuals are only taxable on their non-UK income if this is remitted to the UK.

Such individuals should consider taking out an offshore mortgage to purchase UK property as this can help reduce the need to bring funds into the UK where they may be taxed. The mortgage interest can also be set against any taxable UK rental income, thus reducing the UK tax liability for non-UK resident landlords.

4. Capital gains tax: how can you benefit?
Individuals who are resident in the UK are not normally subject to capital gains tax on the sale of their principal private residence. However, UK resident, non-domiciled individuals who own UK property that does not qualify for this exemption may benefit from holding their assets through an offshore trust or company structure.

Similarly, non-UK residents may also benefit, depending on the tax legislation in their country of residence.

5. Inheritance tax: how can you benefit?
The value of a UK property is included in an individual’s estate for UK inheritance tax purposes, regardless of whether he/she is resident or domiciled in the UK. Accordingly, if the value of the property is over the current exemption of £285,000 (2006-2007), the excess could be subject to UK inheritance tax on the individual’s death.

This potential liability can be reduced by securing an offshore mortgage on the property. Alternatively, non-UK domiciled individuals can avoid any inheritance tax liability by holding the property through an offshore trust/company structure.

Note: An individual resident in the UK for 17 out of 20 tax years is automatically deemed to be UK-domiciled for inheritance tax purposes (but not for income or capital gains tax).

Planning ideas

1. The offshore mortgage
The simplest way to acquire a UK property is for people to take out a mortgage in their own name. Even if they have sufficient resources to finance the purchase personally, using a mortgage may be sensible if it avoids the need to make remittances of taxable income or gains to the UK. However, rather than use a UK mortgage, consider an offshore mortgage.

For UK resident, non-UK domiciled individuals and resident, but not ordinarily resident individuals, the principle advantage of an offshore mortgage is that the payment of interest (but not capital) out of non-UK income is not regarded as a taxable remittance to the UK. This could represent a saving of up to 40% on the interest costs of the mortgage.

For all individuals, whether resident in the UK or not, the value of the property will be included in their estate for UK inheritance tax purposes.

If the value of the UK property is over the Nil Rate Band (£285,000 2006/07) it may be subject to UK inheritance tax on the individual’s death. This potential liability can be reduced by the amount of the mortgage secured on the property.

2. Offshore trusts and company structures
This planning is more complicated and there are both set-up costs and ongoing fees to take into account. Accordingly, the planning is likely to be restricted to property with substantial values (typically in excess of £250,000) and commercial property where the capital gains tax exemption on the sale of principal private residences is not available.

For more information on offshore mortgages, please call one of our specialist consultants on 0845 330 0809.