Mr Chan is Chinese resident and domiciled. He has two UK properties (referred to as Property 1 and Property 2) held through two BVI companies in which he holds all of the shares. Property 1 was valued at £4.5m on 1 April 2012 and valued at £5m on 6 April 2013. It has a current market value of £5.5m and is unencumbered. Property 2 was valued at £2m on 1 April 2012, £2.5m on 6 April 2013 and has a current market value of £2.8m. There is a mortgage on the property of £1m. Property 1 is used by the family when they visit the UK. Property 2 is occupied by Mr Chan’s son who is studying law at UCL and hopes to remain in London for the foreseeable future. Mr Chan and family plan to move to the UK in the summer of 2015 and will use Property 1 as their main residence for the foreseeable future.


Both properties are within the scope of the annual tax on enveloped dwellings (ATED). As Property 1 was valued at more than £5m on 1 April 2012, the company was liable to pay the first charge of £35,000 by 31 October 2013 and the second charge, relating to the second chargeable period (from 31 March 2014 to 1 April 2015), of £35,900. The charge for the 2014/2015 period had to be paid by 30 April 2014. An ATED return also needed to be filed. Property 2 falls within the lower bracket so the other BVI company was required to pay charges of £15,000 and £15,400 on the relevant dates for the first two chargeable periods. The third charge will be due on 30 April 2015 for both properties. It is the companies and not the beneficial owner that are liable to account for the charge and file the return.

The companies are exposed to the special ATED CGT charge. The charge will be imposed on the post 6 April 2013 element of the gain (the 6 April 2013 value forms the company’s base cost). The rate of CGT is 28%. The current latent gains (i.e. gains yet to be crystallised) are therefore £0.5m (Property 1) and £300,000 (Property 2).

As the properties are held in companies there is a danger that the shadow directorship income tax charge could apply. This is entirely separate to the above charges and can apply to non residents who use UK property as shadow directors. In this case the Mr Chan would be most at risk.


Mr Chan is advised that the most tax efficient option would be to transfer the properties into trusts and utilise the “de-enveloping planning”. The plan would work as follows:

  1. Mr Chan’s mother establishes two irrevocable offshore discretionary trusts (Trust 1 and Trust 2) from which she excluded as a beneficiary. The beneficiaries are Mr Chan, his wife and children.
  2. He injects £1m as capital into Company 2 which the latter uses to repay the mortgage.
  3. Mr Chan sells the both company shares to the respective trusts in exchange for a loan note issued by each trust which are structured as discounted securities. The loan does not bear interest but instead rises in line with the UK property’s value.
  4. The Companies are liquidated and the properties are transferred to the trusts (Property 1 to Trust 1 and Property 2 to Trust 2) as part of the liquidation process.

Tax Treatment of the proposed plan

The above should not give rise to a corporation tax (CT), stamp duty land tax (SDLT) charge, income tax (IT) charge, value added tax (VAT) charge or a lifetime inheritance tax charge (IHT). The only tax charge will be the ATED CGT charge triggered when the property is transferred from the companies to the trusts during the course of the liquidation. The charge will be imposed on the companies. Company 1 will liable to pay an ATED CGT charge of £140,000 (£500,000 taxed @28%). Company 2 will be liable to pay an ATED CGT charge of £84,000.

NB: it is generally better to de-envelope sooner rather than later as it should ensure that the gain will be smaller.

The end result is that:

  • Trust 1 holds Property 1 directly and owes a debt to Mr Chan which rises in line with the property’s value.
  • Trust 2 holds Property 2 directly and owes a debt to Mr Chan which rises in line with the property’s value.
  • The trusts are not exposed to the ATED charge or the ATED CGT charge.
  • The ten yearly charge should not apply as the value of the relevant property is effectively zero.
  • There should be no IHT problem.
  • There is no shadow directorship problem.

If CGT is introduced from next year for all persons, in this example the trustees and the beneficiaries should be in a position to claim main residence relief which should ensure that a future gain made by the trustees is exempt from CGT.