New proposals will mean more UK property will fall within the UK inheritance tax (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).
There were rumours that the proposals would be delayed or even scrapped altogether, but on 19 August 2016 the government issued a new consultation, confirming that the proposals would be going ahead with effect from April 2017, as originally planned. The consultation includes details of the proposal to bring UK residential property that is held indirectly by non-doms into the scope of IHT.
Indirectly held property
From 6 April 2017, it is proposed that the value of offshore company shares, which are currently excluded from IHT for non-doms, will be brought into the charge for IHT insofar as they derive value from UK residential property. The definition of residential property is likely to be based on that used for the non-resident capital gains tax (NRCGT) for UK residential property, although the consultation paper also consider using the definition used for the annual tax on enveloped dwellings (ATED).
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, the redistribution of the company share capital or the ten year anniversary of a trust that holds UK residential property through a company etc.
When determining the UK IHT charge, debts which relate exclusively to the property (eg outstanding mortgages) will be allowable as a deduction against the value of the property. In cases of part ownership the debt can be pro-rated. Consideration should therefore be given to leveraging 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.
Responsibility to account for the charge and the payment of the IHT will principally fall on executors, trustees and beneficiaries, with an additional liability to be imposed on directors of a company that owns UK residential property. The government will also grant HMRC new powers to prevent the sale of a property until any outstanding IHT charge has been paid. This could bring with it enforcement issues and it is possible that the call for a proposed register of foreign companies owning UK land could be renewed, or indeed foreign companies may be required to disclose their beneficial ownership before they are allowed to buy UK land and property.
These new rules bring additional obstacles when structuring the purchase of UK residential property, following previous measures including the introduction of NRCGT and ATED, a higher 15 per cent rate of stamp duty land tax (SDLT) for higher value residential properties acquired by companies etc and the additional 3 per cent surcharge on the rates of SDLT, and land and buildings transaction tax (LBTT) for properties in Scotland, charged on second or buy-to-let homes.
There may still be some benefits in maintaining certain existing residential property ownership structures. However, it is likely that many non-doms will 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 structure there will also be the costs of de-enveloping to consider. Individuals may also want to consider purchasing commercial property which is not caught by these new rules.
Action should be taken now by affected individuals to consider if de-enveloping would be beneficial.