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Buying or Selling Property – Should I buy via a Limited Company?

Tenerife Solicitors often get asked for advice regarding this subject. In recent years, certain unqualified firms have been advising clients to purchase or register their property in the name of a limited company in order to minimise or avoid Inheritance Tax, regardless of their individual circumstances.

The fact that no qualified lawyer, accountant or other regulated professional has ever offered such scheme as a universal solution for all clients should ring alarm bells for anybody considering such a scheme.

The main problem with registering a property in a limited company is that nearly every developed country (including the entire EU and USA) treat limited companies with no purpose other than to own one or two properties as ‘Property Holding Vehicles’. They are generally considered to be a form of tax evasion and most authorities will effectively dismantle such schemes by treating such property as being beneficially held by those behind the company, namely the shareholders.

The only legitimate way to avoid this is to prove that the company has some other legitimate business reason to exist, other than to simply hold property. For instance, an engineering company that just happens to own a corporate villa in Tenerife as a perk for directors and employees is entirely legitimate. Similarly, a company owning several properties in Tenerife and which actively manages and rents out those properties in a commercial manner (e.g. with a dedicated website and full business and tax registration in the country(ies) of operation, may also be able to convince the taxman of the legitimacy of the company structure.

Conversely, a couple owning just one villa or one apartment in a company’s name, which they use themselves as a holiday home and perhaps rent it out a few weeks of the year to friends or tourists, is highly unlikely to be treated as a legitimate scheme.

Historically, ingenious investors tried to hide the true ownership of the company’s shares by placing them into an offshore trust controlled by lawyers, who would refuse to disclose confidential information regarding their clients. In response, Spain introduced a provision whereby if a company’s directors/administrators refuse to divulge the true beneficiaries behind the company, the taxman can impose a punitive 5% tax on the entire value of the relevant assets held by the company in Spain. Ouch!

So what about the claim that such company schemes avoid inheritance tax? Whilst theoretically possible, there are pitfalls. Firstly, such scheme assumes that the true owners of the company’s shares will remain non-resident in Spain for the remainder of their lives. The trick is that when they die, they are not actually leaving property in Spain (which would be subject to Spanish IHT rules). Instead, they are actually leaving SHARES in a UK Limited Company, whereby those shares indirectly represent ownership of the property held by the company. Hence, nothing is left in Spain, so there is no Spanish IHT to declare.

However, if a shareholder in the company decides to later retire to Spain, they will then become a resident for tax purposes, under which their WORLDWIDE assets are declarable for IHT purposes. This will obviously include the shares in the U.K. company.

In any event, in January 2016 Tenerife reintroduced a 99.99% IHT exemption/reduction for property held in the Canary Islands that is left to direct 1st line relatives (i.e. spouse, direct children, or parents). Hence, there is now even less reason for using such schemes for IHT avoidance.

The above information is for guidance purposes only. TENERIFE SOLICITORS can advise clients on the pros and cons of purchasing via a limited company to enable clients to select most appropriate structure for a purchase. In any event, clients should obtain specific advice tailored to their individual circumstances.

Tenerife Solicitors