The clock is ticking towards April 2017 when the
UK Government intends to implement the proposals outlined
at the Summer Budget on 8 July 2015 on new inheritance
tax (IHT) rules on residential
property in the United Kingdom held indirectly by
non-domiciled individuals or excluded property trusts.
The UK government continues to focus on the taxation of high
value residential real estate particularly where such assets
are held indirectly or by non-UK resident and/or domiciled
individuals. The recent changes together with the 2015 Summer
Budget proposals have a number of practical implications for
those who purchase, hold or sell UK property. If you are a
foreign domicile person and you have residential property
in the United Kingdom, whether or not it is occupied by you,
your family or paying tenants, proposed changes to the
UK's inheritance tax regime may mean that it is time to
review your current arrangements with respect to that
property. This is particularly so if the property is held through
an offshore company or trust.
This article explains the issues and suggests options that may
be appropriate for your personal wealth and succession
planning.
Why is this relevant?
In brief, the announcements made last summer relate to the intention to bring all UK residential property held directly or indirectly by foreign domiciled persons into charge for IHT purposes on the occurrence of a "chargeable event". This includes residential property held through offshore companies. A "chargeable event" includes:
- the death of an individual who owns the property holding company's shares (the Shares), wherever resident
- the gift of the Shares into a trust
- the ten year anniversary of the trust
- a distribution of the Shares out of a trust
- the death of the donor within seven years of a gift of the Shares to an individual; or
- the death of the donor or settlor where he benefits from the gifted UK property or within seven years prior to
- his death – the reservation of benefit rules will apply to a company owning UK property in the same way as
- the rules currently apply to UK property held by foreign domiciled persons and generally to UK domiciles.
The new IHT rules will apply to all UK residential property regardless of its value and whether it is occupied or let. However, it is not intended to change the position for non-UK domiciled individuals or excluded property trusts in relation to UK assets other than residential property, or for non-UK assets. The reforms will also not affect those persons domiciled in the UK. Broadly speaking, it is intended that the same IHT reliefs and charges will apply as if the property was held directly by the owner of the company but there are likely to be exceptions.
Pushing the envelope?
Historically, offshore companies have been used as property
holding vehicles, primarily so that a sale of the property
which was structured as a sale of the shares in the offshore
company was not subject to Stamp Duty Land Tax (SDLT).
Offshore trust structures have also provided IHT and capital gains
tax benefits for non-UK domiciled individuals. The Annual Tax
on Enveloped Dwellings (ATED) was introduced to target
occupied residential property (as opposed to property let to
an unconnected person) held through a corporate vehicle (known
as "enveloping"). The introduction of the ATED did not
lead to the predicted deluge of offshore company liquidations
as many non-UK domiciled individuals and their advisors concluded
that the IHT benefits of their existing arrangements
outweighed the annual charge.
It is widely thought that the financial success of the ATED led to
research into the reasons behind enveloped property and the
conclusion that IHT planning is a primary concern for many non-UK
domicilliaries, hence the new changes which will effectively
remove the "block" on IHT for those using offshore
structures to hold their residential property in the UK. It is
likely that the removal of the IHT benefit will tip the balance and
result in a widespread review of enveloped structures.
Non-UK domiciled individuals and trustees will need to be aware of
the new circumstances in which a chargeable event for
inheritance tax purposes may be triggered. For example, the
transfer of company shares into or out of trust, where the company
holds UK residential property. Advice will be essential in any
transaction involving an entity whose value is derived at
least partly from UK residential property.
So... for some, removing the envelope will be an option they wish
to consider and this is where Harneys can certainly help. Our
highly experienced team of lawyers and fiduciaries can provide
clear and concise advice to clients and guide them through the
process from an offshore perspective and work together with your
tax and UK property advisers to ensure a seamless transition
through the process.
For other non-UK residents some of the benefits of holding UK
property through an offshore company will remain. Those
holding dwellings which are let will benefit from the rental income
being subject to the basic rate of income tax (20 per cent)
rather than the individual's marginal rate if held directly. A
lower rate of capital gains tax may also be available.
It is clear that each structure should be reviewed holistically in
advance of the April 2017 deadline in order to ensure that it
continues to meet objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.