Name of Author(s)

Elizabeth Sherwood
Macfarlanes LLP

Corresponding state

United Kingdom

How is real estate property defined according to the law of the corresponding state?

Real Estate includes real chattels and land.

Under s.205 of the Law of Property Act 1925 land is defined as  including:

• land of any tenure;
• mines and minerals, whether or not held apart from the surface;
• buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way);
• other corporeal hereditaments;
• a manor;
• an advowson (a right in English ecclesiastical law to nominate a person to hold a church office in a parish);
• a rent;
• other incorporeal hereditaments; and
• easement, right, privilege, or benefit in, over, or derived from land.

“hereditament” means any real property which on an intestacy occurring before the commencement of the 1925 act might have devolved upon an heir.

Is there a public register stating the ownership of a real estate property
(land register)?

A land register is held and maintained under s.1 Land Registration Act 2002 (the “LRA“).

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

Registration provides security of title and has the effect of postponing to the registered owner any interest affecting the estate that is not protected by registration (s.29 LRA).

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

There are 3 seperate registries in the UK; one covering England and Wales, one for Scottish property and one for Northern Ireland.
Her Majesty’s Land Registry for England and Wales is in charge of the register. The Registry is a non-ministerial government department.
The Land Register is an electronic database.

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

An interest in land must be transfered by deed.

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

Anyone with legal capacity is entitled to acquire real estate (individuals, corporations or other recognised legal entities).

Non-residents can hold UK real estate.

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

An asset deal causes a change in the registered owner of the property whereas a share deal only brings about a change of control of the owning company.

Sales/purchases of individual properties are more likely to be direct transfers of real estate whereas portfolio sales may be in corporate form.

Non-UK-domiciled individual generally prefer to hold UK property indirectly, through non-UK companies.

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

No.

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

A purchaser is more likely to prefer an asset deal, however, there may be situations where a share deal is better.

Share deal:
The acquisition of shares may be attractive to a buyer if the company contains valuable tax assets, e.g.: trading losses that may be available to mitigate future tax liabilities of the target.
The target may be able to carry forward trading losses from the period before the sale and set these against its future profits.
Stamp duty at 0.5% payable on the transfer of shares. This rate compares favourably with the stamp duty land tax (“SDLT”) rates (up to 4%) charged under an asset deal.
A share sale will be VAT exempt, but an asset sale may be subject to VAT if it is not a transfer of a going concern (a “TOGC”).

Asset Deal
The buyer will entitled to industrial buildings allowances (“IBAs”) if the purchase includes industrial buildings, such as factories or workshops but not office or retail premises. (IBAs provide very little tax deductions and will be obsolete in 2011).
Where "qualifying assets" (including land) are acquired, chargeable gains on other disposals of "qualifying assets" expected in the following year or which occurred within the previous three years may be deferred by the buyer or other members of the buyer's group by way of roll-over relief until the sale of the replacement assets.
The buyer will obtain a market value base cost (unless roll over relief has been claimed) in the acquired real estate property. In contrast, on a share deal, the assets remain owned by the target and therefore retain their historic base cost which will often be low.
Under an asset deal the buyer will generally not take on any tax liabilities of the seller. In contract with a share deal, all liabilities are passed to the buyer.
SDLT payable on the transfer of land is higher than stamp duty paid on the transfer of shares (4% in contrast to 0.5%).

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

Generally property is held directly by companies.

Seperate OpCo/PropCo structures are favoured by companies who hold real estate which they use to generate income, for example hotels, bars and supermarkets. This model is used for the following reasons:

• risks and rewards of the operating company are seperated from the properties – this allows businesses with high quality real estate to borrow more; and
• Where Opco sells to Propco the money received by Opco does not have the restrictions that a loan would and can be used by Opco for operating costs. Propco can borrow against the property and use rental income to service the debt.

To the extent that these structures are used, it is normal for the Propco to be non-UK resident.

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

When real estate is transfered there is a charge to SDLT.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

In a share deal stamp duty is payable on the transfer of shares (0.5%).

Real estate capital gains tax

Capital gains tax is generally not levied or is defered upon the transfer of ownership:

• between spouses or civil partners;
• between members of a capital gains group;
• where a replacement asset is puchased in the 12-month period preceding the disposal or three years after;
• made to charities and to certain national institutions;
• of heritage property to a non-profit making body; and
• of trees, provided that the disponer is the occupier who manages the woodlands on a commercial basis.

In addition, there is a full relief from capital gains tax for individuals disposing of their pricinpal private residence,

Corporate income tax

In calculating income profits no account is taken of dividends and other distributions received by one UK company from another.

A charge on income is allowed as a deduction of the company’s total profits on qualifying charitable donations.

Real estate transfer taxes

Group relief applies in respect of SDLT and serves to exempt from SDLT transfers of property between group companies. This relief is subject to clawback for up to 3 years after the transaction.

A purchaser can apply to the Revenue Authorities to defer payment of SDLT in respect of contingent or uncertain consideration if it falls to be paid more than 6 months after the effective date of the transaction (these rules do not apply in respect of rent).

Full relief from SDLT is offered where a land transaction is in connection with a scheme of reconstruction of the target company in exchange for non-redemable shares.

Relief which reduces the rate of SDLT to 0.5% is given where the land transaction is entered into in connection with the acquisition of an undertaking of the target company in exchange for shares or shares and cash (up to 10% of the value of the shares).

Each of the group relief, reconstruction relief and acquisition relief exemptions are subject to a motive test.

There is a relief from SDLT in place for residential property valued between £125,000 and £150,000 in certain areas of the UK.

There are also SDLT reliefs available in the following situations:

• The leaseback element of a sale and leaseback;
• Part exchange transactions for house building companies;
• Some acquisitions by property traders;
• Employee relocations;
• Compulsory purchases;
• Compliance with planning obligations;
• Demutulisation of insurance companies/building societies;
• Incorporation of an LLP;
• Transfers involving public bodies;
• Transfers resulting from the reorganisation of parliamentary constituencies;
• Charities;
• Acquisitions by bodies established for national purposes;
• Right to buy transactions;
• Registered social landlords;
• Alternative property finance;
• Collective enfranchisement by leaseholders; and
• Private finance initiative transactions.

Inheritance and gift tax

Transfers not exceding £3,000 per annum are exempt. Any transfers above this value made during the donor’s lifetime are potentially exempt transfers (“PETs“). A PET is chargeable to inheritance tax if the donor dies within seven years of the transfer.

Small gifts of up to £250 per annum are exempt.

There is an exemption for lifetime and death transfers made inter-spouse/civil partners.

Business property relief exists to ensure that business are not broken up by IHT charges.

Agricultural property relief gives relief for transfers of agricultural property. This relief only covers farm houses when the property is in fact a farmhouse and is of a character appropriate to the property.

Gifts in consideration of marriage are exempt if made in satisfaction of a prior legal obligation. The limits on such gifts are £5,000 per parent, £2,500 per other family member or £1,000 per wedding guest.

Dispositions made for maintenance of a former spouse, children or a dependent relative are all exempt.

Transfers of woodland on death have a defered IHT charge until the timber is sold or gifted (with or without the land).

No IHT is chargeable on the estate of those who die on active service.

Gifts to charities and political parties are exempt from IHT without exception.

Other taxes

VAT
Unless the supplier makes an option to tax real estate property the supply of an interest in or right over land will generally be exempt from VAT.

The transfer of a let or partially let building may be outside the scope of VAT even if an election has been made under the transfer of going concern rules.

What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

SDLT, payable on the acquisition of property, becomes chargeable when substantial performance takes place, which is generally the earliest of the following:

• When payment of substantially all the non-rental consideration is made (above 90%);
• When the purchaser, or a connected person, obtains the keys to the door and is entitled to take possession of the property; or
• When payment of any rent is made.

Capital allowances are the tax equivalent to depreciation and are available to corporate tax payers as an expense against income profits in the following areas; industrial buildings (only available until 2011), business premises renovations and flat conversions (above business premises).

Capital allowances are also available for certain items of plant and machinery. Of relevance to real estate are allowances for lifts and air conditioning.

Real estate capital gains tax

Capital gains made on the disposal/deemed disposal of real estate will be taxed. For individuals this will be capital gains tax, for corporations this will be as chargeable gains under corporation tax.

The rate of capital gains tax for individuals is 18%. Corporation tax is charged at a rate between 21% and 28% depending on level of profits.

Non-resident companies escape capital gains tax, however, if where a company would be a close company (controlled by 5 or fewer participants or controlled by its directors) if it were resident in the UK, chargeable gains are attributed to any shareholder and certain other persons with an interest in the company where that shareholding or interest exceeds 10%.

Income tax (corporate and individual income taxes)

Corporate income is chargeable to corporation tax, therefore any real estate income, such as rental income will be charged at a rate between 21% and 28% depending on the corporation’s profits.

Individuals are charged income tax on their income at 20% up to £36,000 and 40% for income above that.

If a corporation holds residential property for its employees (including directors and shaddow directors) the employee may incur a benefits charge.

Non-resident landlords are subject to the non-resident landlord’s scheme. The scheme requires UK letting agents to deduct basic rate tax (20%) from any rent they collect for non-resident landlords. If non-resident landlords don't have UK letting agents acting for them, and the rent is more than £100 a week, their tenant must deduct the tax.

Real estate transfer taxes

SDLT is a tax on transactions, not documents which taxes the substance of the transaction over the form of the instrument effecting the transaction.

SDLT is payable where the transaction is substantially performed. SDLT is chargeable at a rate between 1% and 4%. The highest rate is applicable on all property valued above £500,000.

Inheritance and gift tax

IHT is charged on lifetime transfers and transfers on death.
Lifetime transfers:

• the value transferred by a chargeable transfer which is immediately chargeable at lifetime rates; and

• a potentially exempt transfer which will not be chargeable unless the donor dies within 7 years of the transfer.

Transfers on death:

• To bring the charges on death and on settled property in which an interest in possession subsists then for the purposes of IHT a deemed transfer of value is made.

Transfers of value of chargeable to tax – a transfer of value is any disposition which reduces the value of the transferor’s estate (s.3 IHT Act 1984). A disposition includes transfers by way of gift, settlement or surrender of debt.

A commercial transaction is not a disposition  and therefore does not incur IHT if the donor can demonstrate that no gratuitous benefit was intended.

Foreign situs property is excluded from the remit of IHT provided that the settlor has neither an actual or deemed UK domicile when the settlement is made. It is immaterial whether the settlor subsequently becomes UK domiciled. This regime means that a non-domiciliary can preserve the advantage of the excluded property status even after acquiring UK domicile.

Net wealth tax

N/A

Special tax on immovable property

N/A

Value added tax (VAT)

VAT is chargeable on taxable supplies made in the UK by a taxable person in the course or furtherance of business
(s.4 VAT Act 1994.). Supplies can be exempt, standard rated or zero rated. Suppliers making standard or zero rated supplies are able to reclaim any input VAT they have paid relating to the supply whereas suppliers making exempt supplies cannot.

Supplies of interests in, rights over, or licences to occupy commercial land or buildings or a civil engineering work are generally exempt from VAT. The main exceptions, which are standard-rated (17.5%) are:

• The sale of a freehold interest in an uncompleted commercial building or civil engineering work;
• The sale of a freehold interest in a commercial building or civil engineering work completed less than three years before the sale;
• Any supply of an interest in land, buildings or a civil engineering work where an option to tax has been made by the supplier;
• The granting of rights to take game or fish;
• The provision of holiday accommodation, caravans and camping facilities;
• The grant of parking facilities; and
• All or part of the supplies by a landlord under a developmental lease, licence or tenancy.

Supplies of interests in, rights over, or licences to occupy non-commercial (i.e. residential or charitable) land or buildings or civil engineering works are, with a few specific exceptions, exempt supplies. The exceptions are:

• Where a landowner has constructed a building on a site and subsequently makes a supply of a major interest in the building (zero rated);
• Where a landowner has converted a commercial building/residential building that has been empty for at least 10 years into a residential building and subsequently makes a supply of a major interest in the building (zero rated); and
• Where a landowner has substantially reconstructed a protected building and subsequently makes a supply of a major interest in the building (zero-rated).

Licences to occupy land are exempt supplies unless the licensor has opted to tax.

Other taxes

N/A

Generally, according to the Double Taxation Treaties (the “DTTs“) conluded by the UK, the right of taxation of income derived from property lies with the country where the property is situated.

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

N/A.

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

Generally, according to the DTTs conluded by the UK, the right of taxation of capital gains derived from the alienation of property lies with the country where the property is situated.

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

Generally, the UK adopts the tax credit method for the elimination of international double taxation in the DTTs it enters into.

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

I. Real estate is part of private wealth of an individual

Case 1

Part A (Your jurisdiction is the country where real estate is located)

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Real estate capital gains tax

Any capital gains made on the transfer of ownership will be chargeable to capital gains tax at 18%.

If the property sold is the seller’s principal private residence (and has been throughout the seller’s owenership) full relief from capital gains tax is granted.

Income tax

No income tax is chargeable.

Real estate transfer tax.

SDLT is payable by the purchaser at up to 4%. No SDLT is payable on transfers of real estate valued at less than £125,000.

Inheritance and gift tax

If the transfer is made to an individual on the death of the owner an inheritance tax charge will be incurred if the value of the estate exceeds £312,000.

Other taxes (VAT, etc.)

VAT is not chargeable on residential property transactions.

Net wealth tax

N/A.

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

Rental income is chargeable to income tax at between 20% and 40% depending on the individual’s total income. Mortgage interest is in principle tax deductible.

Other taxes

An annual council tax charge is payable on all residential property. Council tax is administered by local councils and pays for local services such as policing and rubbish collection.

All properties were valued and put into a 'valuation band' – in England these bands are based on their value on 1 April 1991, not their current value. The valuation band determines how much Council Tax is payable.

If the property is tied to a management company and a share in the management company is transferred simultaneously with the real estate generally no stamp duty is payable on the transfer of the share.

Part B

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Real estate capital gains tax (RECGT)

Under the DTT the UK provides that capital gains on real estate are chargeable in the state where the real estate is situated. Therefore in this situation, no UK RECGT is chargeable.

Income tax

Under the DTT the UK provides that income derived from real estate is chargeable in the state where the real estate is situated. Therefore in this situation, no income tax is chargeable.

Real estate transfer taxes (RETT)

SDLT is payable only on UK property, therefore, no SDLT is chargeable.

Inheritance taxes

IHT is only charged on the UK situs assets of a non-UK domiciled person.

Gift taxes

N/A.

Other taxes (VAT, etc.)

N/A.

No comments.

Case 2

Part A

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

A company holding real estate will be taxed as a company, therefore any gains will be classified as chargeable gains as part of the corporation tax charge.

An alternative structure of property holding is a Real Estate Investment Trust (“REIT“) which is a listed property investment vehicle aimed at enabling tax efficient investment in a professionally managed portfolio of real property. REITs are exempt from capital gains made on the real estate they hold. On entering the regime, UK resident companies will get an untaxed step up in the base cost of properties

The individual will be liable to capital gains made on the increase in the share value of their holding in the REIT.

Corporate income tax

A real estate company is charged corporation tax on any income derived from real estate holdings. In addition, income tax is charged on any gains made on disposal if the real estate company is trading in land.

REITs are exempt from corporation tax.

Real estate transfer taxes.

Companies and REITs are subject to SDLT in relation to their UK real estate transactions.

The sale of shares in a REIT is not subject to SDLT, but will be subject to the normal stamp duty and stamp duty reserve tax rules. Therefore, sales of REIT shares will generally be subject to stamp duty at 0.5% which compares favourably with an SDLT rate of up to 4% on sales of real estate held directly.

Inheritance and gift tax

If shares are transfered on death they will be charged to IHT in the normal way.

If the donor dies within 7 years of the share transfer they will be charged to IHT, unless the transfer was a commercial transaction with no gratuitous benefit.

Other taxes (VAT, etc.)

No VAT.

Net wealth tax, net equity taxes

N/A.

Corporate income taxes.

A company will be subject to ongoing corporation tax on profits.

REITs are effectively transparent for UK tax purposes, therefore no corporate income tax is chargeable at the REIT level.

Other taxes

Any distributions made by the a REIT to a shareholder will be subject to witholding tax at the basic rate of 20%.

Distributions by a company to its shareholders are subject to tax in the hands of the shareholder at an effective rate of 25%.

There will be a benefit in kind charge if the property is the home of a shaddow director.

UK REITs are required to distribute 90% of their income to shareholders.

Part B

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

The non-UK investor is still subject to withholding tax at 20% on all distributions.

Case 3

Part A

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

No distinction is made in UK law between residential property and business property for the purposes of capital gains and income tax.

For SDLT purposes, if the value of the property is less than £150,000 no SDLT is chargeable on transfer.

VAT is chargeable on non-residential property where the supplier, in this case the individual owner, opts to be taxed. An individual can opt to be taxed if they are a taxable person under the VAT Act 1994 (this can be an individual who makes taxable supplies of over £67,000 in a year or who voluntarily registered for VAT).

Business rates are payable to the local authority (instead of council tax which is payable on residential property).

Part B

No comments.

Case 4

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Please also see Case 2.

Part B

Please see Case 2

II. Real estate is a business asset of an individual

Case 5

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Please see case 1.

Part B

Please see case 1.

Case 6

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Please see case 2.

Part B

Please see case 2.

Case 7

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Please see case 1.

Part B

Please see case 1.

Case 8

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

Please see case 2.

Part B

Please see case 2.

III. Real estate is an asset of a legal entity

Case 9

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

Any gains made on the sale of a residential property will be chargeable gains taxed via corporation tax at between 21 and 28% depending on the profits of the legal entity.

Any rental income will be an income charge to corporation tax at the rates above.
A Limited Liability Partnership (“LLP”) is a transparent legal entity. If an LLP carries on a "trade profession or other business" with "a view to profit" then all of the activities of the LLP are generally treated as being carried on in partnership by its members and not by the LLP as a separate entity

The tax transparency of an LLP is modified in the case of property investment LLPs (PILLPs). PILLPs are LLPs where the business consists wholly or mainly of investments in real estate and derive the principal part of their income from land. If pension funds, pension businesses of life assurance companies and friendly society businesses are members of a PILLP and receive income or gains from PILLPs, they are denied the normal taxation exemptions that such entities otherwise enjoy. The exemptions are overridden so that LLPs cannot be used to create tradable interests in a corporate tax transparent investment vehicle.

For detail on other taxes see case 1.

Part B

See case 1.

Case 10

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

See case 2.

Part B

See case 2.

Case 11

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

See case 9, residential and business property will not be treated differently.

Part B

See case 9.

Case 12

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

See case 2.

Part B

See case 2.