Update - inheritance tax on UK residential property

06 January 2017

As a result of the changes, more UK property will fall within the UK IHT net from 6 April 2017.

We have been waiting for some time for clarity following the 2015 Summer Budget on the proposed changes in the taxation of UK resident non-UK domiciled individuals (non-doms). On 19 August 2016 the government issued a new consultation. On 5 December 2016, its summary of the responses to the consultation was published, alongside the draft Finance Bill 2017, which provides more clarity on certain aspects of the proposals. This article provides an outline of the proposals.

Indirectly held property

From 6 April 2017, the value by which UK residential property enhances interests in close companies or partnerships will be brought into the charge of IHT. The definition of ‘residential property’ will be based on that used for the non-resident capital gains tax (NRCGT) for UK residential property.

The charge to UK IHT will be based on the value of UK residential property owned by an offshore company or entity when a chargeable event occurs. These events include the death of the individual who owns the company shares and the charge that arises on the ten year anniversary of a trust that holds UK residential property through a company etc.

When valuing the impact of holding residential property in a company, liabilities of that company are attributed to all of its property rateably, rather than being allocated to the specific assets they relate to.

Consideration should therefore be given to leveraging such companies with debt to reduce any potential IHT charge (for both existing and new ownership structures), although any tax planning would need to address the wide ranging anti-avoidance measures that may apply. 

The draft Finance Bill brings into the IHT net a new proposal to tax a loan, security, collateral or guarantee which relates to debts lent to close companies to acquire, maintain or enhance a residential property. 

Additionally, an individual or trust will be exposed to UK IHT for two years following disposal of an interest in a residential property or repayment of loans, where these assets would have been brought into charge on the above basis.

Compliance

Responsibility to account for the charge and the payment of the IHT will principally fall on executors, trustees and beneficiaries. Previous proposals to impose an additional liability on directors of a company that owns UK residential property have been scrapped. 

The government will grant HMRC new powers to prevent the sale of a property until any outstanding IHT liability has been paid. This could bring with it enforcement issues and it is possible that the call for a register of foreign companies owning UK land could be renewed or, alternatively, foreign companies may be required to disclose their beneficial ownership before they are allowed to buy UK land and property. In addition, the proceeds from a sale will remain relevant property for two years after the date of disposal, giving rise to the potential for exit charges etc.

These new rules also bring additional obstacles when structuring the purchase of UK residential property, following previous measures including the introduction of NRCGT and the annual tax on enveloped dwellings (ATED), a higher 15 per cent rate of stamp duty land tax (SDLT) for higher value residential properties acquired by companies etc and the 3 per cent surcharge on the rates of SDLT (or land and buildings transaction tax (LBTT) for properties in Scotland), charged on second or buy-to-let homes.

What now?

There may still be some benefits in maintaining certain existing residential property ownership structures. In some cases non-doms may need to consider de-enveloping (ie unravelling the current ownership structure) and personal ownership of UK residential property going forward. Although there may be an annual saving from no longer running the ownership structure, there will also be the costs of de-enveloping to consider. Property investors may prefer to invest in commercial property which is not caught by these new rules. 

Action should be taken now by affected individuals and trusts to consider if de-enveloping would be beneficial.

For more information, please get in touch with Rajiv Vadgama or Adrian Benosiglio.