21 Mar 2012 2:44 PM:

What is the Wincham Scheme?

The Wincham Inheritance Tax Protection Strategy is a scheme offered by Wincham Investments Limited, a UK company, designed to ‘remove’ or ‘sidestep’ Spanish succession tax on the death of UK resident owners of Spanish property. If only life was so easy: they only tell you half the story.

How does it purport to work?

Under their scheme, you place the Spanish property into a UK limited company.

Wincham claim that simply acquiring or transferring an existing Spanish property into a UK company will automatically circumvent Spanish succession tax for UK residents. This half of the story is true.

Why doesn’t it work?

Firstly, it takes no account of UK inheritance tax. This will be payable on the shares as UK limited company shares are always subject to UK inheritance tax. Arguments that business property relief will apply to exempt the shares from this tax are muddle headed: this relief only applies to real trading companies, not a single property investment company.

Example:

An elderly widowed individual with a total worldwide estate of around £1 million, including a Spanish property worth around €300,000, and two children, who will inherit equally on their death, the Spanish succession tax on the property would be around €36,000 in total (about €18,500 per child), with a top rate of tax in Spain of 18.7%. However, the UK inheritance tax on the same property would be around £104,350 (assuming an exchange rate of £1 to €1.15). This is clearly a much higher tax bill.

Therefore, even if you manage to avoid Spanish succession tax on an inheritance, you may not avoid UK inheritance tax, and if this is higher than the Spanish tax would have been, you have gained nothing, but spent money on the scheme.


Secondly, the scheme fails to emphasise the potential problems of capital gains tax when transferring an existing property in. If you have an existing Spanish property that you want to put into a company, you will be making a disposal of that property for capital gains tax purposes in both Spain and the UK (for a UK tax resident). If the value of the property has increased, you’ll be liable to tax even though you have only transferred it into a company. If there’s no gain in euro terms, there might still be a taxable gain in UK sterling terms payable to the UK tax man for UK residents. Even worse – you haven’t actually sold the property, so will have to find the money for the tax bill out of your own pocket.

Thirdly, when you eventually sell the property (it’s highly unlikely that you’ll find a buyer for the shares: most buyers want the property only) the company will be liable to Spanish and UK corporation taxes, and then the gain (after paying tax) is liable to further tax as a dividend if you extract the money from the company! You’ll end up paying far more than if you had left it in your own name.


Fourthly, putting the property into an existing limited company has all sorts of other problems including generating benefit in kind tax charges in the UK and losing business property relief for an otherwise trading company. You might also end up increasing the rate at which the company’s profits are taxed.


Fifthly, Whilst there have been claims that transfer tax (7% on property) could be avoided by using a company to own the property (because when sold it is the shares that change hands, not the real estate itself), there are anti-avoidance provisions in Spanish law to prevent this, and so this anticipated saving may not arise either.

Sixthly, many people wish to buy a property now for an ultimate retirement to Spain. This scheme could cost those people capital gains tax exemptions on that property if they ever move into it to live there.


Finally, Wincham claim that any rental income generated by the property is taxed solely in the UK. This is not correct – the Double Tax Treaty between the two countries which governs what is taxed where (not EU directives, as Wincham claim) state clearly that even in the hands of a company, rental income is primarily taxed in the country where the property is located, and also in the country of residence of the owner. Whilst the Spanish tax can be offset against the UK tax so that you are not taxed twice, this still means that the higher liability is due wherever it arises, plus you will have two sets of annual accounting costs.


Conclusion

Don’t put your Spanish property into a limited company. You generate costs and tax liabilities for no real gain. In any case, when you work out the numbers, the amount of tax being saved isn’t nearly as much as you might believe."

Source: costa action group
 

Thread: Spanish Income Tax on rental income for non residents

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