Generally speaking, it is not advisable to buy property for personal enjoyment through a company. This will usually trigger hefty benefit in kind tax charges on the shareholders who use the property. However, in many jurisdictions (e.g. Spain) it is necessary to use a company to acquire a property for various legal reasons. It was for this reason that FA 2008 introduced legislation to exempt benefits in kind from arising in certain circumstances.
The rules state that overseas living accommodation will not give rise to a benefit in kind if the following conditions apply:
1. The property is provided for a director or other officer of the company, or members of their family.
2. The company is wholly owned by individuals, of which the above individuals are part, or sole shareholders.
3. It holds an interest in the property and its main or only asset is that interest.
4. The only activities undertaken by it are ones that are incidental to its ownership of that interest, i.e. letting of the property is OK.
There are also various exceptions which will prevent these rules from applying:
1. If the company’s property interest was acquired directly, or indirectly, from a connected company at undervalue.
2. If expenditure has been incurred in respect of the property by a connected company.
3. If there is any outstanding borrowing from a connected company on uncommercial terms.
4. The living accommodation is provided as part of a tax avoidance arrangement.
Using trading company funds
It is clear from the above, that the exemption will not apply if an active trading company acquires the property – because holding the property must be the only activity. But what is the position for a company whose trade has ceased and is sitting on cash?
Jim operates a consultancy business through a company which ceases when he retires. The company holds £1m of cash which it then uses to buy a Spanish property. Prima facie this should not give rise to a benefit in kind because there is no obvious reason why the above conditions are not met.
Forbes Dawson view
There seems to be something of a myth doing the rounds that “overseas property is not taxable as a benefit in kind”. Hopefully, I have dispelled this myth by showing that the rules are quite strict in this area. They are primarily aimed at individuals who use their own funds and/or third-party borrowings to acquire a property through a company. Although the example above shows how it may be possible to use company reserves to acquire an exempt benefit, I do not think that this is ‘bullet-proof’. HMRC may seek to claim that this is part of a tax-avoidance arrangement on the basis that funds are being used which have not been taxed in the shareholder’s hands. Whatever the answer is here, a decision should only be made when it is backed up by detailed understanding of this legislation.
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