ONE of the structures used by Irish investors to buy property in Britain is being made far less attractive by a provision in the Finance Bill currently going through the Dail in connection with the taxation of offshore trusts.
Irish investors in property in the UK have been able to use the offshore route to avoid Irish taxes and those investing in residential property have also been able to get around the provisions of last year's Bacon Report, which prevent investors from offsetting their interest payments on a property against the rental income from it. The report caused a sharp drop in investment in the domestic residential market and led investors to look elsewhere, primarily to London.
The changes in the tax laws in relation to offshore trusts leave intact several methods of avoiding the Bacon strictures for investors in residential property in Britain and the North. These are not as effective as the offshore route in avoiding Irish taxes but they allow interest payments on the properties in Britain to be offset against the rents received.
The use of offshore trusts allowed Irish investors to effectively avoid Irish income and capital gains taxes on the returns from property in the UK. It involved the formation of a company in the UK to hold the property and the establishment of a discretionary trust in the Isle of Man to control the company. The changes in the law will mean that Irish investors using offshore trusts will continue to be able to defer Irish taxes but not avoid them altogether.
The device used the double taxation agreement between Ireland and the UK to avoid Irish taxes. The legislation covering this complex area is 25 years old and, although the British have long since tightened up this area for their residents, it has been allowed to continue until now for Irish residents as a method of avoiding Irish taxes.
Several Irish banks are understood to have developed a significant amount of business in setting up the arrangements for these procedures on behalf of property investors over the past year. Potential investors have been informed of this and other schemes at exhibitions of London property in Dublin.
The Minister for Finance, Mr McCreevy, noted in his speech introducing the Finance Bill to the Dail recently that there was evidence of a growing use of offshore trusts as a means of avoiding Irish tax. He said the loophole was being taken advantage of and advertised by tax advisers.
"I am happy these changes in sections 80 to 83 of the Finance Bill will close a potential avenue for tax avoidance which would have become increasingly attractive as personal wealth in Ireland continues to grow, given our rapid economic expansion in recent years," he said.
The Bill proposes to tighten up the provisions for attributing gains by trusts to Irish residents and will require more information to be given to the Revenue Commissioners about offshore trusts.
Mr McCreevy's move, however, does not appear to have been directed primarily at Irish investors in British properties. Indeed, neither the Department of Finance nor the Revenue Commissioners seemed to be aware of the widespread use of the offshore trusts for property investment. Spokespersons for both organisations said that there was nothing in the Finance Bill which had implications for Irish people investing in property in Britain.
The closure of this arrangement, however, does not affect other methods of minimising the tax on the income from investments in British residential property. "Irish investors in British property cannot return simply to a pre-Bacon situation," according to one London-based accountant. "But they can mitigate the situation."
One method used to do so is to form a British company which buys and holds the property. As the company is resident solely in the UK it is liable for tax under UK law, which allows interest payments on residential properties to be offset against rental income. The Irish investor can be the beneficial owner of the company but cannot be a director and is, therefore, not assessable under the Irish rules.
ANY surplus rent paid to the Irish investor by the company by way of dividend is subject to Irish income tax. But the main disadvantage would arise when the property is sold and the company wound up. The company would then be liable for British capital gains tax and the Irish investor would also be liable for Irish capital gains tax: thus, there is a double capital gains charge.
The post-Bacon taxation situation is only one of the factors that has made property in Britain and the North attractive to Irish investors in recent months. Prices there are subdued by current Irish standards and rental returns are higher, though not always as high as some of the yields advertised. There is also the hope of further capital gains when Britain joins the euro - more likely following last week's announcement by Prime Minister Tony Blair of preparations for the move - and there is an increase in asset values as interest rates drop.
