In the Summer Budget 2015, it was announced that significant
changes would be made to the taxation of foreign domiciled
individuals resident in the UK. From a residential property
perspective, the most drastic measure is the proposed change of
treatment to properties held within a company structure – a
common way for non-UK domiciled individuals to own properties.
As the rules currently stand, where an owner-occupied
residential property is owned by a company, there is a tax on this
known as the "Annual Tax on Enveloped Dwellings" (ATED), the rates of which correspond to the
taxable value of the property. One of the main reasons for setting
up such a structure was to take advantage of the Inheritance Tax
relief this provides, since the asset held within the company would
not form part of a person's estate for Inheritance Tax
purposes. This meant that, where possible, it was encouraging for
properties to remain within these structures.
However, change is due with effect from 6 April 2017 to the
extent that the value of that holding forms an interest in UK
residential property. Where this applies – and the exception
is very limited – the asset is no longer deemed
"excluded property" and becomes subject to Inheritance
Tax. The legislation then extends further by introducing measures
to prevent anti-avoidance tactics entered into after 5 April 2017.
As a result, any arrangements which seek to avoid the purpose of
the legislative changes and achieve a tax advantage will be void.
Although requests for it were made, the Government has not provided
any relief for structures closed down before the rules come into
effect. As a result, a decision should be taken as to whether:
1. the structure remains open;
2. the structure is closed, incurring Stamp Duty Land Tax and/or
Capital Gains Tax.
Where the first option is taken, a view should be made as to the
advantages, if any, of paying ATED with
no corresponding Inheritance Tax benefit.
Accordingly, those affected by the changes are strongly
encouraged to seek legal advice as soon as possible and well in
advance of 5 April 2017, bearing in mind that off-shore legal
advisers will often need to be consulted as part of any
de-enveloping process. Ultimately, whether option one or two is
taken, Inheritance Tax relief appears to be off the cards.
Under current law, where a business subject to corporation tax or income tax reallocates an existing asset into its trading stock, the basic rule is that there is a deemed market value disposal of the asset...
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