Finance brief - July 2012
- Implications for bankers of the new tax regime on loans secured by offshore held UK dwellings
- The LMA Real Estate Finance Facility Agreement
- Lending to individuals
- Yacht Finance – Spotlight on Cyprus
In our recent Finance Brief Alerter we referred to the new tax regime that the Chancellor announced, which could apply to high value UK dwellings (over £2 million). In essence the proposed changes amount to a three-pronged attack on the purchase and ownership of UK dwellings through corporate vehicles whether offshore or onshore. The first (already in force) is a 15% rate of Stamp Duty Land Tax on the purchase price of the dwelling. The second is a proposed annual charge of between approximately 0.3% and 0.75% per annum depending on the value of the dwelling. The third is the extension of the UK capital gains tax regime to include gains on the disposal of UK dwellings by non-resident non-natural persons and gains on the disposal of shares in corporate vehicles which derive the majority of their value from dwellings worth over £2 million. The rate of applicable CGT has yet to be announced. The charges are intended to take effect in April 2013 following consultation and the publication of draft legislation in the autumn.
It is likely that customers with existing offshore holding structures will be seeking advice as to how to reorganise their dwelling holding structure so as to minimise their potential tax liabilities. This could involve the unwinding of existing schemes by, for example, transferring the dwelling into the name of an individual (ie. direct ownership) or transferring to a nominee of the individual or to an offshore trust or partnership.
It is likely that the dwelling which is subject to one of these tax structures will have been financed and banks will need to consider the following:
- Is the proposed new tax holding structure acceptable to the bank or is it too aggressive?
- What are the implications of the proposed new tax holding structure on the bank's loan and security?
(a) A transfer of ownership of the dwelling is likely to mean a new security package over the dwelling. Unless a new loan is made to the new owner, the bank will need to take a guarantee or third party security from the new owner. Third party security is not as good as direct security so a bank might prefer to put in place a new loan to the new owner.
(b) If the dwelling is transferred into the name of an individual, the new security may need to be a regulated mortgage (and the lender will need to be authorised to take such security) as it is taken from an individual. Note that for these purposes an individual would include a trustee. The Consumer Credit Act 2006 will need to be considered and, for example, the high net worth exemption utilised. See our briefing paper below on Lending to Individuals for more detail here.
(c) Another possibility is for the dwelling to be transferred to the new owner, subject to the existing mortgage which would work provided no further advances were made and the borrower remains the same.
(d) Certain insolvency avoidance legislation will need to be considered. For example, voidable preference on transactions at an undervalue under the Insolvency Act 1986 which could affect the validity of any new security granted to secure existing liabilities where the grantor of such security is or becomes insolvent as a consequence of creating the security.
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