HM Revenue & Customs is preparing to write to more than 5,500 overseas companies that it suspects have failed to pay enough tax on the British properties that they own.
As part of the tax agency’s latest attempt to ensure taxpayers comply with the rules, the Revenue will send “nudge” letters to thousands of individuals who own UK property through offshore companies that “appear to have failed to notify” it of tax owed.
HMRC said it plans to write to more than 4,000 companies within the next year that it thinks owe either corporate income tax or annual tax on enveloped dwellings (Ated) on UK property. A further 1,500 companies will be targeted for unpaid capital gains tax on property sales between 2015 and 2019.
“These numbers sound like a lot, but they also sound realistic,” said Adam Craggs, partner at law firm RPC, adding that many non-UK domiciled individuals choose to own property via a company to preserve their anonymity on the UK’s land registries.
HM Land Registry data in November showed that around 93,000 property titles in England and Wales were owned by overseas companies.
The tax advantages for wealthy non-doms of owning UK property through an offshore company have been tightened over the past decade. Ated was introduced in 2013 as an annual tax charged on companies which own UK homes worth more than £500,000 and not let on a commercial basis.
According to HMRC’s accounts, Ated raised about £100mn in tax over the 12 months to March 2022. The annual charge payable through Ated increases with the value of the property, from £3,800 for properties valued between £500,000 and £1mn, to £244,750 for properties worth more than £20mn, in the current tax year.
Since 2015, foreign-owned UK estates have been brought within scope of capital gains tax, which is charged at 28 per cent on the profits of sales for higher and additional rate taxpayers. Since 2017, non UK-resident shareholders in an offshore company that owns UK residential property have fallen within scope of UK inheritance tax too.
Jamie Mathieson, a partner at JMW Solicitors, said while it was “definitely beneficial years ago” to own property through a company, “the advice now is generally to have direct ownership”.
HMRC has increased its use of nudge letters in recent years to encourage taxpayers to make voluntary disclosures.
Tom Wallace, director of tax investigations at WTT, a consultancy, said that tax non-compliance “usually arises from a misunderstanding of the rules and how they are applied.”
There are nuances in this area of property taxation. Companies that hold UK properties as part of a rental business can qualify for full Ated relief, for example, but it is not automatic and must be claimed, Wallace said.
Yet where property is rented to a family member, even on a commercial basis at the prevailing market rate, Ated is chargeable and no relief is available.
For property owners who receive a nudge letter, Jack Prytherch, counsel at law firm CMS, said while there is “generally no strict legal obligation to respond” to the letters, it “would be inadvisable to ignore” them.
The campaign to recover tax from offshore property owners comes as HMRC is under pressure to close the offshore tax gap — the difference between the amount of tax paid and the amount of tax owed — for overseas taxpayers.
Earlier this year, the Revenue admitted it had no idea how much tax it was missing owing to money kept offshore, but said it would publish “a new standalone offshore tax gap” in 2023, which will estimate the amount of tax evasion and avoidance by UK taxpayers holding assets offshore.
In the 2021-22 tax year, HMRC issued 18,260 nudge letters relating to all offshore related matters, which resulted in £29mn collected. This would otherwise have gone unpaid, it said.
HMRC said its nudge letters “combine data from multiple sources to ensure that we can reach the desired audience”.
“We want customers to come forward and bring their tax position up to date or tell us why they don’t owe any tax. If customers can’t pay the tax they owe, we’ll work with them and provide support,” it said.