HM Revenue & Customs is going to write to over 5,500 international corporations it accuses of failing to pay adequate tax on their British assets.
The Revenue will issue “nudge” letters to thousands of individuals who hold UK property through offshore companies and “appear to have neglected to inform” it of tax owing as part of the tax agency’s latest effort to ensure taxpayers follow the laws.
HMRC expects to write to over 4,000 entities that it believes owe corporate income tax or annual tax on enveloped dwellings (Ated) on UK property within the next year. Between 2015 and 2019, an additional 1,500 businesses will be pursued for unpaid capital gains tax on property sales.
“These figures appear to be large, but they also appear to be realistic,” said Adam Craggs, partner at law firm RPC, adding that many non-UK domiciled persons choose to hold property through a business to maintain their anonymity on the UK’s land registers.
In November, HM Land Registry statistics revealed that about 93,000 property titles in England and Wales were owned by foreign corporations.
The tax advantages of holding UK property through an offshore company for rich non-doms have been reduced during the last decade. And was introduced in 2013 as an annual tax levied on companies that own UK homes worth more than £500,000 that are not rented commercially.
According to HMRC records, Ated collected around £100 million in tax between March 2022 and March 2023. In the current tax year, the yearly charge charged through Ated rises with the value of the home, rising from £3,800 for buildings worth between £500,000 and £1 million to £244,750 for properties worth more than £20 million.
Since 2015, foreign-owned UK estates have been subject to capital gains tax, which is levied at a rate of 28% on sales proceeds for higher and extra-rate taxpayers. Non-resident shareholders in an offshore corporation that owns UK residential property have also been subject to UK inheritance tax since 2017.
According to Jamie Mathieson, a partner at JMW Solicitors, while owning property through a business was “certainly useful years ago,” “the advise now is typically to have direct ownership.”
In recent years, HMRC has enhanced its use of nudge letters to urge taxpayers to make voluntary disclosures.
According to Tom Wallace, head of tax investigations at WTT, tax noncompliance “generally stems from a misunderstanding of the regulations and how they are enforced.”
This is a complex issue of property taxation. Companies that own UK properties as part of a rental company, for example, can qualify for full Ated relief, but it is not automatic and must be claimed, according to Wallace.
However, Ated is chargeable and no relief is available when the property is rented to a family member, even on a commercial basis at the prevailing market rate.
While there is “generally no strict legal obligation to respond” to the letters, according to Jack Prytherch, counsel at law firm CMS, it “would be inadvisable to ignore” them.
The push to reclaim revenue from offshore property owners comes as HMRC is under pressure to reduce the offshore tax gap for foreign taxpayers – the difference between the amount of tax paid and the amount of tax owing.
The Revenue revealed earlier this year that it had no clue how much tax it was losing because of money stored abroad, but claimed it will publish “a new standalone offshore tax gap” in 2023, which will estimate the amount of tax evasion and avoidance by UK taxpayers keeping assets offshore.
HMRC sent 18,260 nudge letters relating to all offshore-related concerns in the 2021-22 tax year, resulting in £29 million collected. This would have gone unpaid otherwise, it stated.
According to HMRC, its nudge letters “combine data from numerous sources to ensure we can target the right audience.”
“We urge consumers to come forward and update their tax situation or explain why they don’t owe any tax.” If consumers are unable to pay their taxes, we will work with them and give assistance,” the company stated.