Using an Offshore Structure to Purchase Property – Case Study

Jace Monroe owns a small-scale soap company that’s called The Monroe Soap Company in Illinois. The company uses organic products and natural ingredients to manufacture a wide range of scented body soaps. 

Jace started his business seven years ago in his garage, and over the years, has increased the areas he serves, reaching up to Chicago. Two weeks ago, Jace’s aunt who was based in Glasgow passed away and left her estate to him. Jace decided that he’s going to move to Glasgow permanently with his family. 

With this in mind, Jace is now looking to relocate The Monroe Soap Company. He doesn’t have anyone in Illinois to keep the factory running for him and that’s why he’s decided to look for property in Glasgow to begin his set-up, look for suppliers in the region, as well as retailers to sell his soap. 

Jace knows that purchasing and owning a property overseas is subject to taxation, just like local property ownership is. So if he wants to acquire ownership of foreign land, there are a few things he should do.

Situational Analysis

Before Jace gets down to brass tacks, it’s worth noting that tax and ownership laws vary from country to country. However, regardless of Jace’s American nationality, place of residence, domicile and differences in local taxation systems, certain fundamental principles apply in most places.

Tax Troubles of Foreign Land Ownership

Most countries levy the same basic taxes on property purchase, ownership, or resale. Jace should know the following:

Income Tax

Every country charges local taxes against income that’s generated from a property. Whether Jace rents out a room or benefits from the resources from a piece of land, he’s liable to pay taxes. The percentage of income tax that needs to be paid differs for each country, which is why what it is in Chicago might not be the same in Glasgow. Regardless of who the renter is or how the rent is paid, i.e., hard cash or credit, income tax will apply.

Capital Gains Tax

The person selling his property in Glasgow to Jace will be liable to pay capital gains tax. This is applied based on the profits made during the resale process. This mostly indicates the difference between acquisition and final value.

Stamp Duty

When Jace’s seller transfers the property’s ownership, stamp duty applies on the value of this property at the time of transfer. Stamp duty is one of the biggest costs incurred in a property sale.

Estate Duty

After becoming the owner of the property, if Jace dies, the estate tax is charged on the value of his property at the time of death. Since the asset is inside a foreign country’s borders, estate duty or an equivalent tax is levied.

Tax Avoidance Strategies

For financial stability, it’s critical that Jace is aware of all these taxes before an acquisition. The truth is that Jace wants to buy a property and so he has to pay taxes, but that doesn’t mean he needs to pay the maximum possible amount. There are a number of ways for Jace to reduce the tax burden he incurs on the property he acquired in Glasgow, so let’s take a look at some of them:

1. For starters, Jace can avoid estate tax if he buys a property through The Monroe Soap Company. Estate duty will apply to Jace upon the owner’s death, and since his company cannot die—even if Jace dies himself—estate duty will not apply.

But, there’s a catch; Jace still can’t completely eradicate estate tax. Many countries have started charging estate duty on worldwide assets of the owner, so even with corporate ownership, the deceased individual will be paying for the value of the shares of the assets—which, in this case, translates to the value of Jace’s property in Glasgow.

So, if Jace has dodged local estate tax, he may end up paying worldwide estate duty, one way or the other. Even if the value of the shares is reduced by taking out a loan against the Glasgow property’s value, the loan itself—or the assets it was used to purchase it with—will fall under the estate of the deceased and therefore be taxable. This is why further financial planning is necessary to pay minimal taxes on international assets and properties.

1. The same thing applies for capital gains tax; Jace can minimize local tax, but not worldwide capital gains tax. So if he transfers shares of The Monroe Soap Company’s property—within the company—a transfer of ownership will be initiated. In simpler terms, many countries consider the transfer of shares to be equivalent to the transfer of property. However, this is quite rare and Jace can avoid capital gains tax altogether by transferring The Monroe Soap Company’s shares instead of property ownership.
2. Even though income tax is charged on revenue generated from a property, there are ways to minimize it. Jace doesn’t have to pay income tax on the total amount of profit if a part of it is going toward maintenance or paying off the loan that the Glasgow property was purchased with. With allowable expenses, he can minimize and even completely eliminate income tax, and, therefore, improve his financial bottom line.
3. One way to avoid stamp duty altogether with corporate property ownership is by transferring shares to an overseas company. Without triggering any taxes, Jace can use equity divisions to easily transfer ownership, free of expenses.

While it’s a common practice to transfer property without changing the title by way of transfer of shares, Jace will be charged a capital gains tax when selling a property out of his company. This is why it can be potentially expensive to purchase a property through the transfer of shares. A possible solution to this predicament for Jace would be to find a seller who agrees to an equitable deduction, implemented by compensation in the selling price.

Concluding Thoughts

Corporate ownership offers significant leeway when it comes to tax payments, but without expert advice, you can fall victim to high taxation rates. There’s very little information available to the public about rebate policies and on top of that, there’s minimal awareness about the issue. 

Tax avoidance is a completely legal way of improving financial stability, but without tax specialists, it can be impossible to understand the complexities of tax credits and rebates. Whether you’re investing in a foreign property for commercial gains or pleasure, research hard and long about the ramifications and advantages. 

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