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Why do some properties have an offshore company attached?

While personal ownership remains the favoured way of purchasing a property across many of the world's key housing markets, a quick survey of the documentation attached to assets in some of the more luxurious corners of the globe will show that a high percentage of homes are owned under the banner of a company.

The investor in question is usually based somewhere else, with this individual usually taking advantage of certain benefits by registering their company 'offshore'. This fairly ambiguous term often relates to managing, conducting, operating or simply registering in a foreign county, with many businesses doing this for financial, legal and tax reasons.

As is par for the course at most companies, an offshore firm might enter into contracts, open bank accounts or make investments, with property being one of the most popular avenues to pursue.

Companies tend to choose residential homes in places where growth is assured. A prime target for overseas investors is the property market in Algarve, the southernmost region of mainland Portugal, which has used its affluent surroundings to become a hotspot for assets owned by corporations.

Though talking specifically, why, after around 15 years of this evolving from a trend into a common practice, do people still deem this worthy of the extra effort?

Basic set-up

In property transactions it's often possible to buy the asset under a company name instead of an actual person's. This method requires the buyer to create a limited company or corporation to own the property, although they will own this asset indirectly by possessing shares in their new business.

There are of course certain costs that come with setting up an offshore company. However, if the investor has done their research, these won't cancel out the money saved on taxes.

Limited companies usually have to contend with expenses like initial company capital, although other charges may be applicable. In addition, the company will need to file accounts every year and name a fiscal representative in the property's country if the business is offshore.

Advantages

In order for the individual to reap the benefits of taking this approach to home ownership, the property's potential revenue (from rent or growth in its value) must exceed the company's overall management costs. That's why so many investors choose to base their ventures in luxurious surroundings, as prime property is easier to source.

Now, if the individual is looking to reduce taxes on any rental income, having the property listed under the company name is the most profitable method of purchase. The main reason is that the company rate of tax (around 20 per cent) will be much less than the rate of income tax on any rent payable to the company.

In addition, some countries offer the ability to deduct property running costs from any profits they make on their property (by letting it out or otherwise). This limits the cost to maintain the asset and keeps it making money.

Also, if the purchaser - or company - wants to buy a property which is already corporately owned, they can avoid paying property transfer tax (IMT) by simply buying the vendor's interest in the company. This can represent around six per cent of the property's price and, if it's an expensive asset, the owner will not encounter any stamp duty tax or land registry fees.

So, while the buyer will have saved around seven per cent on the cost of their property, the owner will receive the full amount of their sale; a win-win scenario for both parties.

Buying a property under a company also hands the investor complete anonymity and, with this, a limited exposure to any third party ownership information requests.

Finance

The type of investor that goes down this route of acquisition will generally have the finance required to buy their property outright. After all, they're looking to avoid what could be a hefty amount of tax.

If not, they might find that financial institutions are not all too keen on lending to companies for property transactions. Should the mortgage default, the bank would be able to repossess the property through rules stating their entitlement to 'company assets' in the event of this happening. In addition, banks will generally lend around 50 per cent of the property's total value, so a sizeable deposit is always needed.

Key considerations

There are very few downsides to buying a property through a limited company or corporation. However, overseas investors should anticipate encountering capital gains tax in the event of them having to sell the property.

Typically around 30 per cent, this levy is applied to any profit made by the property, from the difference between its original value and sale price to any rental income generated during ownership. In this case it's better to sell the company and keep the asset in the company at home so overseas tax cannot be applied.

As aforementioned, there are also costs to set up the business along with ongoing expenses for maintenance, although generally it is established that buying a property in the name of a company, rather than an individual, is a profitable move.

Posted on Monday, September 23, 2013

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