UK: A More Taxing World For UK Property Loans

In the July 2015 Budget George Osborne announced that all beneficial owners of UK residential property would be brought within the charge to inheritance tax, regardless of how that property was held.

With the publication of the draft Finance Bill on 5 December 2016, the detail of how these rules will operate from 6 April 2017 is now available. While in many respects the rules will operate as previously announced, the rules in relation to loans are significantly wider than anticipated and will bring many structures into charge that had previously looked as if they would fall outside these rules.

What is taxable?

  • Company shares – the ultimate (individual or trustee) shareholders of closely held non-UK companies that own UK residential property will be treated as if the shares in those companies were UK situs and therefore liable to inheritance tax.
  • Partnerships – partners in partnerships will also be treated as if they own UK situs property directly, rather than an interest in the partnership.
  • Reservations of benefit – particular care needs to be taken with arrangements where a property has been gifted (in particular into trust), but the donor/settlor retains the use of the property or is not completely excluded from the trust, as both the individual and trust inheritance tax charges can arise.
  • Exemptions – widely held companies (broadly ones not under the control of five or fewer persons) are exempt from these rules, as are companies or partnerships where UK residential property makes up less than 1% of that entity's total assets.

How much is the tax?

  • Valuation – in each case, it is the value of the shares/partnership interest that is taxable, rather than the value of the property itself, so discounts may be applied to minority holdings. Liabilities such as loans/mortgages will be deductible in determining the value subject to inheritance tax. More details are set out in this regard below.
  • Individuals – inheritance tax is charged at up to 40% on UK property that is held at death or by a trust from which the settlor can benefit or was given away in the previous seven years (but after 6 April 2017). Exemptions are available for gifts and legacies to spouses and some charities.
  • Trusts – inheritance tax is charged on the value of UK residential property at a rate of up to 6% on each tenth anniversary of the establishment of the trust, or on the property being distributed to a beneficiary.

How are loans treated?

  • Deductibility – as set out above, loans and mortgages will be deductible in calculating the value subject to inheritance tax, subject to various restrictions that already apply to directly held property:

    – Loans are generally only deductible if they have been used to acquire (or enhance) the interest in the UK residential property. Additional financing taken out after the purchase is complete for other purposes will not be deductible.
    – Loans other than from commercial third parties may need to be repaid after death before a deduction to be claimed.
  • Liability to inheritance tax – in an unexpected move, the value attributable to the right of repayment of any loan taken out to acquire, maintain or enhance a UK dwelling or a acquire a company owning a UK dwelling will also be subject to inheritance tax in the same way as a direct interest in a property. Further the value attributable to any security, collateral or guarantee given by a borrower, or a third party in connection with such a loan will similarly be subject to inheritance tax.

    This means that wherever funds have been (i) lent to finance the purchase or enhancement of a property, or (ii) made available to support a purchase or enhancement those funds will be subject to inheritance tax. This will apply to the following arrangements:

    – any additional security given by a borrower for a mortgage;
    – any security given by a borrower under 'Lombard' loans or similar arrangements;
    – 'bank of Mum and Dad' loans to children;
    – loans from trusts to beneficiaries; and
    – guarantees from family members, companies or trusts.

    There is no restriction on the amount liable to tax under these arrangements and while the capital right to repayment of a loan is fixed, the value of security given may considerably exceed the value of the property purchased and give rise to a larger inheritance tax exposure. The value of a guarantee could potentially be unlimited. It is also possible that double charges to inheritance tax could arise in relation to the same property.

What happens when I sell?

  • The liability to inheritance tax does not cease on a sale, the repayment of a loan or the release of a security/guarantee and the proceeds of sale, repayment or released security remain subject to inheritance tax for a further two years.

What about Double Tax Treaties?

  • For residents of countries with which the UK has IHT treaties (France, India, Ireland, Italy, Netherlands, Pakistan, South Africa, Sweden, Switzerland, USA) they will only be subject to this charge if there is no inheritance tax on the same taxable event in their home country.
  • Currently India, Pakistan and Sweden do not apply inheritance tax and their residents will therefore be taxable in the UK, but residents of the other countries may escape the charge to UK tax.

So what should I do now?

  • As anticipated, all UK residential property ownership structures need to be reviewed and the liability to tax assessed urgently so that any remedial action can be taken before 6 April 2017.
  • In addition, any loan or security arrangements put in place to assist with the purchase of UK residential property also need to be assessed urgently so that any remedial action can be taken before 6 April 2017.
  • If any ownership changes are required, such as gifts between family members or distributions from trusts, these need to be completed before 6 April 2017.
  • Reservations of benefit in particular need to be identified and assessed before 6 April 2017, so that double charges to tax do not arise.
  • Finally, all corporate holding structures should be reviewed.

    Following the introduction of the ATED in 2013, 'owner-occupied' residential properties have been subject to an annual charge (up to Ł220,350). Some of these structures were maintained because of the inheritance tax protection they afforded and the cost of 'de-enveloping'. From 6 April 2017, these structures will no longer offer any inheritance tax protection. Further, with capital gains tax at a rate of 20%, probably a long-term low and the property market in something of a slump, and now is likely to be the best time to de-envelope.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.