UK Property Investment and PFIC

Hi Everyone,

My unmarried partner and I are US citizens living in the UK. We're looking to invest in UK properties for income. We’d most likely have bought the properties under our own names wherever possible, and used a company structure where it made sense. The thing we’re concerned about and want to learn more about is how a company structure can be used for property investment without falling foul of the PFIC rules.

Adding to the problem … though clause 24 of the Finance Bill is currently under judicial review, one possible outcome is that in the future a company structure will make more sense than ever for most property investors.

First question: If you are a US person and involved in property investment in the UK and using company structures, I’d love to hear about strategies for avoiding PFIC problems.

Second question: I understand that form 8832 (entity classification election) can be used to cause a UK company owned by, say, my partner and me, to be treated as a partnership for US tax purposes. Anyone currently using this election? I’m interested in any pros and cons you’ve experienced, things to be wary of, etc. One thing I’m aware of is that it could create a timing issue whereby the partnership is taxed in the US on earnings that the UK company has not yet distributed. Any information about the mechanics of how this would play out in US/UK taxes would be very helpful.

Third question: Following on from the second question, it appears (from the reading I’ve done) that a company owned by ourselves and non-Americans (say, in a joint venture) could still be treated as a partnership for tax purposes in the US by taking this election. Anyone experienced with this scenario and, if so, what can you say about it?

Again, my aim is to be able to make property investments through a company structure in the UK without falling foul of PFIC. Any ideas or tips you may have are welcome.

Many thanks

I would like to offer some observations on nypopi’s email but only on UK related aspects.

The implication of the email is that the investments are in residential property, rather than commercial property.

His email refers to the restriction in interest relief for individual investors for buy to let property. (The rules are in Finance No2 Act 2015 s24, rather than the current Finance Bill.) There are no equivalent interest restrictions for corporate buy to let investors.

However, there are additional factors which could make the use of a company less attractive than individual ownership-
•   The special higher rates of SDLT/LBTT applying to corporate purchases.
•   The extra tax where a company makes a gain, pays corporation tax but there is further tax on a distribution as a dividend or on a winding up.
•   Possible paperwork to claim ATED reliefs, depending on values.
•   The requirement for accounts filed at Companies House.