UK: Update: ATED And IHT – Is It Time To Push The Envelope (Or Unwind The Trust)?

Last Updated: 31 August 2016
Article by Tatenda Gotosa and Rachel Graham

 The clock is ticking towards April 2017 when the UK Government intends to implement the proposals on new inheritance tax (IHT) rules on residential property in the United Kingdom that is held indirectly by non-domiciled individuals or excluded property trusts.

On 19 August 2016, the UK Government published draft legislation to reform the taxation of non-domiciles for consultation. This follows proposals first outlined in the Summer Budget on 8 July 2015 as part of the UK Government's aspiration for a tax system that balances fairness and international competitiveness.

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 new legislation will have practical implications for those who purchase, hold or sell UK property through offshore structures.

If you are a foreign domicile person and you own or have an interest in residential property in the United Kingdom, whether or not it is occupied by you, your family or paying tenants, the 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 options that may be appropriate for your personal wealth and succession planning. Contact your usual UK advisers for detailed advice or reach out to your usual Harneys contact, who will be able to make a suitable referral through our extensive network of expert advisers.

Potential impact of the changes proposed

In brief, the proposed changes will take effect from 5 April 2017 and will bring all UK residential property held directly or indirectly by foreign domiciled persons into charge for IHT purposes by removing residential properties which are held through an overseas structure from the definition of excluded property, for the purposes of IHT. These structures are most commonly offshore companies or trusts, but also include instances where a non-domiciled individual is a member of an overseas partnership which holds the property.

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.

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. This may now change, particularly given the widening of the ATED net to cover all properties valued in excess of £500,000, and the increasing ATED levy across each property value band.

Informed and timely advice for non-UK domiciled individuals and trustees will be essential in any transaction involving an entity whose value is derived at least partly from UK residential property.

For some, removing the envelope will be an option to consider, which is where Harneys can help. Our experienced team of lawyers and fiduciaries can provide clear and concise advice to clients to guide them through the process from an offshore perspective, and work together with tax and UK property advisers to ensure a seamless transition through the process.

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. Consideration should also be given to the requirement for third party consents for any transfer of the property (eg from landlords) and the need to appoint a suitable and experienced liquidator in good time.

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.

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