A series of important legal changes mean those with holiday homes owned through offshore investment structures should be prepared for any tax exposures to be assessed, with the ultimate beneficial owners ready for any potential tax investigation"
A series of important deadlines are looming and action needs to be taken now to avoid serious consequences, according to Jason Porter, director of Blevins Franks Financial Management.
Owning a holiday home overseas continues to grow in popularity - even though the UK is (potentially) leaving the EU. Many of these properties have been acquired through trust and/or company structures, but the introduction of the EU's Fifth Money Laundering Directive in 2018 could well end this structuring, Porter warns.
"One of the key changes introduced by EU Directive 2018/843 is broadening the access of governments to information surrounding beneficial ownership and improving transparency in the ownership of companies and trusts," he said.
"Member states are required to set up beneficial ownership registers for corporate and other legal entities by 10 January 2020 and for trusts and similar legal arrangements by 10 March 2020. Central registers, connected via the European Central Platform, are required by 10 March 2021. Many buyers created their structures years ago and have since given them little consideration."
Most EU civil law jurisdictions had no concept of trusts, which meant it was assumed the structure and therefore the property fell outside the domestic tax system,"adds Porter, with the popular expat destination of Portugal failing to introduce any law for assessing and taxing trusts until December 2015.
"Even with domestic legislation, the issue for many of these jurisdictions has been trying to find the culprits," he said. "Since the mid-1970s, scant regard was taken for how the property was acquired - it was simply the accepted way of doing things. The drivers were to avoid paying perhaps wealth tax and inheritance tax but they were also used to evade taxes like capital gains tax, VAT, stamp duty, as well as local taxes."
The 1990s saw another serious expansion in holiday home development and the tax authorities, particularly in Spain, became aware of the size of the problem, beginning to target those companies. At the same time tax authorities across the EU took on board all that modern technology could offer, building large databases of information.
'Compliance and taxation'
The issue prior to the sale of the property or the death of the settlor is not the actual acquisition itself, but the fact a holiday home, even if it is not occupied or rented out gives rise to some form of ongoing compliance and taxation - either nationally or locally, Porter states.
"The complete lack of comprehensive accounting, tax and legal compliance and administration means the real owners were sitting ducks for investigation."
"Tax advisers in the UK did not seem to link HMRC's push on domestic property-owning structures and ‘shadow directors' following the Dimsey v Allen case, with that of similar structuring in respect of holiday homes abroad.
'Eye of the storm'
"UK nationals owning property in the EU in 2019 through these kinds of structures are very much in the eye of a storm. EU Directive 2018/843 means any EU company must disclose their beneficial owner(s) via their annual corporation tax return, declaring any shareholder owning at least 25% of the share capital," he added.
Tax authorities will be able to access shareholder details, individual, company or trust. These registries will be freely available to all EU member states.
A structure put in place decades ago, perhaps involving an offshore company resident in a tax haven territory, is, Porter concludes, "ripe for attack".
"It is imperative the tax exposure is assessed and the ultimate beneficial owner prepares for any potential tax investigation," he said.