Changes in UK Inheritance Tax on UK Property
17th November 2017 saw the introduction of new rules for the way UK inheritance tax (IHT) is charged on UK property. It was to affect all non-UK domiciled individuals (non-doms), non-UK resident/trustees that own UK property directly or indirectly. The changes will see UK residential property owned through certain non-UK structures become chargeable for IHT. This is irrespective of residence & domicile status of the ultimate owner.
Who’s it Aimed At?
If the value of the shares (or other interests) in a non-UK close company come predominantly from UK residential property. Also if any interests in overseas partnerships derive their value from UK residential property. Consequently, that value will be within the scope of UK inheritance tax (IHT). These offshore structures that non-doms use as protection from IHT for their UK residential property will be liable to tax. IHT charges will potentially arise on the death of and following certain gifts made by non-doms. Also during the life of certain trusts established by them (‘ten-year anniversary’ and ‘exit’ charges). This is the case regardless of whether the individual is UK resident or non-UK resident. The legislation will override all double tax treaties.
The following assets will be subject to IHT charge if they derive their value from UK residential property:
- Shares (or other interests) in non-UK close companies (controlled by five or fewer individuals).
- Interests in overseas partnerships (limited & unlimited).
When companies or partnerships hold UK property and the value is less than 1% of the total entity itself then they will disregard the asset. The chain of indirect ownership is said to be broken.
They will base IHT liability on the value of the shares (or other interests) that comes from UK residential property. The property value will apply on a pro rata basis in line with the beneficial owner’s interest in a close company. The liabilities linked to the residential property will be deductible when determining the value chargeable for IHT. These rules will be applicable irrespective of whether the property is occupied, let or the property’s value. If a property is being built or modified for residential purposes then it will be treated as UK residential property.
On Top of That
The UK Government is keen to counter any attempt by individuals who might consider taking steps to avoid the charge. As a result, it is also proposing wide-ranging anti-avoidance measures in the new legislation. The effect of this will be to disregard arrangements where the main purpose is to avoid or mitigate IHT liability on UK residential property.
The new legislation states that the responsibility for paying the applicable tax will fall on the executor, trustees or beneficiaries of the estate.
Furthermore, HMRC is also aware that they may have difficulty identifying whether a chargeable event has occurred overseas. To counter this they intend to extend responsibility for reporting. Consequently this will include any directors of a company or any person who has legal ownership.
There are no reliefs from other taxes, notably capital gains tax and Stamp Duty Land Tax, where someone chooses to unwind existing property structures. Those considering alternative ownership options will need to fully understand the tax implications of so-called ‘de-enveloping’.
Irrespective of how you choose to hold UK residential properties in the future. They will subject to an IHT charged at 40% of the value of the deceased share of the asset. Whilst all of this may seem bewildering there is a cost effective and simple solution to the issue. This is the use of an international life insurance policy to cover the potential IHT liability.
Many leading tax specialists and lawyers acknowledge that a life insurance policy written in trust provides an inexpensive way of covering the IHT liability. The proceeds themselves are free of tax. Such a solution also means the estate of the deceased does not have to finance the tax liability following the bereavement.