Lease for real estate

[Macr2]

I have a relative whos a UK citizens and tax resident in the UK he who owns a stone quarry and rubbish tip. Hes due to start receiving payments from the company whos leasing. The payments are £300k every 3 month. Would like to hear your most tax friendly setup for this setup if you was in his position. Thanks in advance.

 

[Tax Cow]

As I understand, all parties are UK resident individuals or companies? It's not a £250 pcm Leeds basement bunker, and it will get someone's attention eventually. Tax enforcement on individuals or companies receiving 1M+ of real estate income in the developed world is very good. Be prepared for an audit. I'd be careful.

1. The basic rule of rental income is that you can deduct the costs that help you maintain the income stream and value of the property, and that's about the end of legal methods.
2. It might be a good idea to put the title in a UK limited company and receive the income in the name of a company at a lower tax rate. Consider title transfer costs, all taxes, amortization, and time horizon (for how long does the quarry produce income?) to determine whether the title transfer is worthwhile. Any trained UK accountant can help you with the calculations.

Fancy more? If you want to go wild, consider pushing the limits of "arms-length".

Since it's a stone quarry, the obvious Achilles heel is in pricing. How many people are qualified to say how much a stone quarry is worth, or what it should rent for? At your own risk, receive a quarter of rental income in envelope cash. Don't go greedier than 1/4, and you can argue that your price is "about fair" when probed by HMRC or auditors.

 

[Macr2]

As I understand, all parties are UK resident individuals or companies? It's not a £250 pcm Leeds basement bunker, and it will get someone's attention eventually. Tax enforcement on individuals or companies receiving 1M+ of real estate income in the developed world is very good. Be prepared for an audit. I'd be careful.

1. The basic rule of rental income is that you can deduct the costs that help you maintain the income stream and value of the property, and that's about the end of legal methods.
2. It might be a good idea to put the title in a UK limited company and receive the income in the name of a company at a lower tax rate. Consider title transfer costs, all taxes, amortization, and time horizon (for how long does the quarry produce income?) to determine whether the title transfer is worthwhile. Any trained UK accountant can help you with the calculations.

Fancy more? If you want to go wild, consider pushing the limits of "arms-length".

Since it's a stone quarry, the obvious Achilles heel is in pricing. How many people are qualified to say how much a stone quarry is worth, or what it should rent for? At your own risk, receive a quarter of rental income in envelope cash. Don't go greedier than 1/4, and you can argue that your price is "about fair" when probed by HMRC or auditors.

The envelope option isnt possible the company leasing is a big company and very above board. When you say the only deductions that can be made are to maintain income stream and the upkeep of property what about transfer pricing options if a there was a foreign holding company holding the UK LTD? Or is that only possible with a assembly type products?

 

[Tax Cow]

Hello Marc2,

Just pay the tax and sleep well at night. Some pleasures in life are non-monetary.

In this scenario, the Offshore Hold.Co + UK Op.Co transfer pricing won't hold up to HMRC scrutiny. Technically, yes, you could sub-lease the property at a different price, or siphon all sorts of fees for management and technical assistance, but since you're in control of the offshore company, those tricks will be classified as artificial fiscal engineering that serve no other purpose than tax reduction. They can tear down those arrangements without breaking a sweat.

 

[Tax Cow]

2) With unrelated parties as beneficiaries and controlling persons of the Hold.Co, there would be some room to maneuver, but even if you can find high-end and off-the-radar nominees, how do you justify essentially "gifting the income" of your quarry lease to some mysterious foreigners? That'd be another low-hanging fruit for the HMRC.

 

[speedster]

OP, it will be worth your while reading up on CFC rules as these are essentially what @xzars are referring to. Moving offshore has become considerably more complicated since governments have tightened up these rules.

 

[Macr2]

2) With unrelated parties as beneficiaries and controlling persons of the Hold.Co, there would be some room to maneuver, but even if you can find high-end and off-the-radar nominees, how do you justify essentially "gifting the income" of your quarry lease to some mysterious foreigners? That'd be another low-hanging fruit for the HMRC.

What if it wasnt a foreigner but a relative who moves out of the country to a more tax friendly location in order to gain residency in order to hold the asset?

OP, it will be worth your while reading up on CFC rules as these are essentially what @xzars are referring to. Moving offshore has become considerably more complicated since governments have tightened up these rules.

Yes im aware of these rules but they go away with foreign tax residency a lot of countries haven’t implemented these rules. And with the figures involved long term it would make my relative 40% better off.