How to Use Your US Limited Liability Company to Buy and Sell Real Estate in the United Kingdom

For the UK citizen who would like to reduce or eliminate the capital gains on investment properties owned in the UK, the US Limited Liability Company (hereinafter US LLC) is an ideal tool. For this purpose, the US LLC must be owned by a carefully structured International Privacy Trust. If structured correctly, the International Privacy Trust will act as an ideal asset protection and probate avoidance tool as well as a tax reduction entity par excellence. The International Privacy Trust is important because without it, there would be a risk that the UK tax authorities would consider the structure a sham or fraud established solely for the purpose of avoiding taxes. With the trust, it is simply a part of a valid and useful effort to protect assets and avoid probate. The fact that there are also tax benefits are “merely incidental”.

The primary benefit of the US LLC is in reducing and/or eliminating capital gains taxes in the UK. The combination of the UK tax laws and the tax treaty between the US and the UK means that the US LLC would pay no capital gains taxes, and would have reduced withholding requirements on real property owned inside the United Kingdom. Since the US LLC has no credit in the UK (or anywhere else) there will need to be some careful planning when it comes to arranging financing. There are essentially three ways of transferring property into a US LLC:

1. For a property that has been paid-off simply sell it to the US LLC at advantageous terms. (Remember not to be too greedy -- It is important that the price be a “reasonable” price.) Then when the US LLC decides to sell the property, the capital gains will be zero.

2. Properties that have a current mortgage lien will require a bit of extra attention. Most banks in the UK have “offshore” branches in various tax havens surrounding the UK (usually on a small island off the French coast!). You should contact your banker and let him know that you have a potential buyer who is from the USA. Let the banker know that you really want to sell the property, and ask what needs to be done in order to arrange a transfer of the loan or similar financing arrangements for the US company. Although every bank is a different, and some may simply say they don’t want to handle non-UK business, most banks will ask that you guarantee the loan, and, in turn, you will agree to do so in exchange for a vendor’s lien of your own on the property. This is a fairly common type of transaction when you have a highly motivated seller and a buyer with little or no credit. It is sometimes referred to as bank assisted owner financing. This will most likely need to be the mode of operation until the US company establishes its own credit and banking relationships.

3. When buying properties from unrelated third parties, it may be done more or less as described above in item 2 with the UK client buying the property, then flipping it over to the US company at a small profit, or you can agree to enter into a joint venture with the US company, and agree to own the property in joint tenancy. Again, your personal credit will be the anchor that secures the loan. Over time, you may be able to sell (at a reasonable price) your interest in the joint tenancy to the US company, effectively placing 100% of the property into the US company, and out of the capital gains tax. Even if it is never possible to have the US company buy out the joint tenancy interest, this system will still result in a 50% reduction in the capital gains tax.

As you can see, the use of the US LLC, when combined with the International Privacy Trust, as an owner of UK real estate can result in some very real capital gains tax savings. However, there may be other ways of using the US LLC to reduce the taxes on the operating expenses of the properties. Although the rental income of the real property in the UK will result in taxes being due regardless of who owns the properties, these rentals should be offset by the mortgage expenses. Also, it may be possible to further reduce these taxes by careful use of the tax treaty between the US and the UK by characterizing some of the income going to the US LLC with an eye to gaining the reduced tax treatment found in the tax treaty for some types of income. This will depend upon individual circumstances, and will vary from person to person, and project to project, but it is possible.

Using a US LLC to own property in the UK can dramatically reduce your capital gains taxes. It will also provide excellent asset protection, probate avoidance, and added privacy. No one needs to know that you have any relationship at all with the US company, or you can structure a relationship that satisfies you by having the US company retain you to perform management services as you like. The same company that helps you reduce your UK capital gains could also provide an excellent means of obtaining competitive insurance policies and other investments outside the UK.

NOTE: This system would NOT be appropriate for investing or doing business in the USA itself. Since the US taxing authorities would disregard the LLC, it would be the International Privacy Trust that would be treated as the ultimate tax payer, and the US tax treatment of offshore trusts would be inadvisable. For investments in the USA, it would be better to simply have direct ownership of the LLC by the UK citizen, in effect taking advantage of the same tax treaties described above, but in reverse.