The Summer Budget 2015 introduced yet another significant (and perhaps the last) tax targeting of UK residential property, with the proposal to apply UK inheritance tax to property held indirectly by non-doms including through excluded property trusts.
Over a period of several years we have seen the UK government roll out a series of tax changes to increase the tax take in respect of UK residential property; including stamp duty land tax (SDLT), the annual tax on enveloped dwellings (ATED) and non-resident capital gains tax. The plan was also to encourage the ‘de-enveloping’ of property, making HMRC’s life easier in terms of the administration and collection of tax.
HMRC’s research has suggested that the most common reason for enveloping properties is inheritance tax (IHT) planning undertaken by non-UK domiciliaries (non-doms). It is therefore perhaps not unexpected that the Summer Budget proposed that all UK residential property held indirectly by non-doms will be subject the UK IHT regime.
If a non-dom owns a UK property personally then it will be included in their estate for UK IHT purposes as the property is situated in the UK, and may therefore be subject to IHT at 40 per cent on their death. If, however, the property is instead held by a non-UK company and the shares are not situated in the UK, the UK property will fall outside of the UK IHT regime; hence the incentive to envelope the property, as IHT on property usually equates to a big number!
A typical extension to this structuring is to transfer the ownership of the non-UK company to a non-UK trust prior to the settlor becoming UK domiciled (or deemed domiciled), thereby creating an excluded property trust not subject to UK IHT. Other investment assets of the non-dom may also be held in such a trust structure to mitigate UK IHT.
It is proposed that the Government will amend these rules so that trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle (other than diversely-held non-UK companies) will pay IHT on the value of such property (subject to utilising the available IHT nil rate band and reliefs). This will include residential property whether it is occupied or let, and of any value.
IHT chargeable occasions, where UK residential property is held in a structure, will include, for example:
- the death of an individual, wherever resident, owning company shares (40 per cent IHT);
- the lifetime gift of company shares into trust (maximum 20 per cent IHT);
- the 10 year anniversary of a relevant property trust (maximum 6 per cent IHT); and
- the transfer of company shares out of trust (maximum 6 per cent IHT).
There is complex tax legislation surrounding IHT in this area, not to mention the new UK property taxes referred to earlier. A consultation period will be announced at the end of summer 2015 with changes expected to come into force from 6 April 2017.
It would be advisable for non-doms, non-UK trustees/company directors to start reviewing their UK residential property structures in view of this significant proposal. The UK government is attempting to encourage ‘de-enveloping’. However, the numbers at stake here will invariably be large and the pros and cons of keeping or changing the current structure, which may hold other assets, will need to be weighed up carefully. This review will need to include analysis across all applicable taxes including the IHT position.
There are also broader changes to the non-dom regime that will need to be considered –read further information here.
If you require assistance in this area, please contact your usual RSM adviser.