Replies to queries - Going to Barbados

Going to Barbados

I should appreciate readers' experiences of dealing with the taxation implications of purchasing an investment property in Barbados.
The following matters should be considered.

1 The taxation position in Barbados re investment property producing rental income and owned by a UK resident and the availability of deductions from the income.
2 The implications of purchasing the property via a mortgage either  from a Bajan lender or  a UK lender and the terms. Whether the purchase should be in sterling or dollars.
3 The UK taxation implications.
4 Any other points which could usefully be contributed.

Readers' comments on the above points would be most appreciated.
Query T16,612                   — Janus.

Assuming the property owner is UK resident and domiciled, he will be subject to income tax on rental income. Interest on loans taken out to acquire the property will be an allowable Schedule A expense. Whether the loan is from a Bajan or UK lender is not relevant to this analysis.
The UK resident and domiciled owner will also be subject to capital gains tax on a disposal. The usual reliefs will be available, including taper relief at the non-business rate.
It is not clear whether the property will be held directly via a company. If a company is proposed, Janus would need to consider the corporate residence and controlled foreign company rules, as well as the potential for a Schedule E charge if the shareholder is held to be a real or shadow director.
Janus should take advice from a Bajan tax adviser in respect of the local tax implications. He should note that the UK/Barbados tax treaty does not offer relief from Barbados taxes on property either in terms of income or capital gains. Any Bajan taxes suffered whether on income or on capital gains should be creditable against corresponding UK tax liabilities.    — A.N.A.

If only I had clients who could afford to invest in property in Barbados; who knows, I might even be invited out there to prepare the property income and expenditure accounts. Blue skies, warm seas and tax returns …
Looking at the first question, it is probable that the person who can afford to make this investment can afford to pay for some local or specialist advice on Bajan tax. With no particular recommendation, my Internet search found www.lowtax.net, which provides background information that may be of use. Attention is drawn to the existence of land tax and stamp duty there, and at first sight, income and corporate taxes appear similar or even higher than in the UK.
The answer to the second question follows on from the above. It seems that the risk of currency exchange rates aside, whether the purchase is made in sterling or dollars may be unimportant from the UK tax position although there may be implications of currency exchange as set out, for example in the Revenue's Capital Gains Manual at CG78408. In either event, the interest paid will be allowable against the rental income.
In reply to the third question, the UK income tax position will depend upon the querist's UK residence and domicile status. If resident and domiciled here, then he will be subject to income tax on the profit. If not resident, whether domiciled or not, he will not be subject to UK income tax on this source. Finally, if he is resident, but not domiciled in the UK he will only be taxable on any amounts remitted to the UK.
For those subject to UK tax, Simon's Direct Tax Service at A4.101 describes the basic tax situation:

'Profits from land outside the UK are taxed under Schedule D Case V, in respect of which there are also new rules for income tax from 1995-96 onwards and for corporation tax from 1 April 1998. Such profits are treated as profits of an “overseas property business”, a term introduced by FA 1998, calculated in the same way as those in respect of land in the UK (subject to transitional provisions), but the UK Schedule A business and the overseas property business are treated as separate businesses, so that surplus expenses of one of them cannot be set against profits of the other.'

So, the normal Schedule D, Case I rules regarding the computation of income and allowable deductions are as for domestic UK property income, i.e. the rules of TA 1988, s 74 apply, but if he has other UK sources of rental income then losses on the Bajan property cannot be set against UK rental income and vice versa. N.B. if the client is resident, but not domiciled, then the 'Schedule A business' rules do not apply and the amounts remitted are subject to tax under TA 1988, s 65A(4) and (5).
Under 'other points, the availability of the property for personal use will restrict the level of expenses that can be claimed against the rental income.
If the client owns rental property in other countries, Janus should note that separate computations may need to be prepared for each, rather than pooling all sources into one 'offshore business'. This is because any foreign double tax relief is only allowed against the property income from that same country. The Revenue's Property Income Manual at PIM4700 has an example of this and additional information on property abroad.
There may also be a suggestion that the property be purchased via an offshore company. If 'central management and control' is exercised in the UK, then any company profits will be subject to UK corporation tax. Getting this wrong can lead to dire consequences as evidenced by the Dimsey and Allen cases [2001] STC 1520/1537, although note the recent decision in Wood and another v Holden (Taxation, 21 April 2005, page 66). There will also be issues of a taxable benefit in kind if the property is available for the private use of the client. According to the Revenue's Inspectors Manual at IM4621, Barbados is a 'well-known tax haven', so Janus could expect some interest from the Revenue in his client's plans there.
Claiming the costs of travel to 'check on the property' can also be problematic
TA 1988, s 65A(6) states that 'TA 1988, ss 80 and 81 (expenses in connection with foreign trades and travel between trades etc) do not apply in relation to the computation of the profits of an overseas property business'. So these more generous rules are disapplied and the travel must be wholly and exclusively for the purposes of the overseas property business.
Janus should also note that there is a double taxation agreement between the UK and Barbados which should be carefully considered.  

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