Island of advantage

Monday, 01 October 2012
The advantages of establishing and running a tax-efficient property-holding structure on the Isle of Man.

According to real-estate analysts, investors can expect little further yield compression among commercial assets during 2012; average returns are expected to hover around 6.5 per cent. Also, the UK’s commercial property sector has recently seen an encouraging shift towards stability.

This news will interest astute overseas investors who appreciate that a resolution to mainland Europe’s sovereign debt crisis will boost the UK’s commercial property sector. Of further interest will be recent evidence that prime real estate values continue to recover: for example, the Investment Property Databank UK monthly property index reported a 0.9 per cent rise in London commercial property values during June and emphasised the sector’s lower volatility compared to equity markets.

Such encouraging signs have prompted discerning international investors to revisit the variety of tax-efficient methods by which they may invest in a sector that appears well-positioned to benefit from several complementary factors.

Ordinarily, and with the principal motive of avoiding unwelcome exposure to UK inheritance tax, non-UK-resident commercial property investors have created either a company or another form of investment vehicle through which to undertake property transactions.

The list of suitable offshore jurisdictions where such structures can be established appears lengthy, but the choice of territory to host a commercial property vehicle is often a matter of routine. Such prescriptive decision-making can overlook other advantageous aspects of a commercial property transaction and the longer-term benefits that can accrue to international investors.

As a result, many overseas investors are losing out as they, or their advisors, fail to investigate the advantages of operating a tax-efficient property-holding structure in the Isle of Man.

The Isle of Man is a well-established, secure jurisdiction that enjoys an eminent stature as an offshore business centre. As other territories suffer in the wake of the global financial crisis, Moody’s and Standard & Poor’s both rate the Isle of Man’s financial standing highly, grading it as, respectively, Aaa and AA+. Both agencies class the island as ‘stable’, a classification that offers much-needed security for overseas investors.

Although some advisors consider the imposition of value added tax (VAT) to be a disadvantage, in fact the reverse is true for more than 90 per cent of UK commercial property transactions.

The Isle of Man enjoys a customs union with the UK through an arrangement called the Common Purse Agreement. This means that VAT registrations made via the island’s Customs and Excise department are effectively UK VAT registrations. Accordingly, recovery of VAT through an Isle of Man-based investment structure is extremely straightforward.

In addition to the fact that VAT registration and transfers of going concern can usually be completed within seven days, property-holding investment vehicles can be rapidly formed on the Isle of Man. Such fleet-footedness ensures that commercial property deals concluded there rarely suffer the headache of having to resolve a 20 per cent – that is, VAT – cash-flow problem.

Other advantages include:

  • The cost of establishing an Isle of Man property holding structure is very competitive, irrespective of whether a VAT liability exists.
  • There is no requirement to obtain costly, time-consuming local regulatory approval before the establishment of either closed-ended investment companies or open-ended property funds that are scheduled to be offered to fewer than 50 investors and that are not the subject of a public offering.
  • Zero per cent corporation tax and no capital gains tax, inheritance tax or higher-rate income tax for overseas investors or UK-resident, but non-domiciled, investors.
  • British-based lawyers are used to dealing with Isle of Man companies, trusts and partnerships.
  • The island is a leading jurisdiction for international companies admitted to trading on AIM and other stock markets.
  • An abundance of knowledgeable and professional advisors on the island can service sophisticated investment entities and financial institutions.

It is clear, therefore, that where transactions involve commercial property that is opted to tax, there are compelling reasons why the advantages and tax-efficient solutions offered by the Isle of Man make it the jurisdiction of choice for shrewd international investors and their advisors.

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Mark Lewin

Mark Lewin TEP is a Director at IFG International Ltd.

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