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
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
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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