If yes, your property will now be subject to UK inheritance tax (“IHT”) even if it is held indirectly by a company or by a trust. Maitland’s legal advisory team in London gives the low-down.
In the past, it was quite common for non-UK residents and “non-doms” (those who live there but are not UK domiciled) to hold UK residential property via an offshore company, or an offshore company held by an offshore trust. This is because the shares in such offshore companies were not subject to IHT.
However, from 6 April 2017 the law in this area changed. All UK residential property interests, including those held by offshore companies and offshore companies owned by trusts are now subject to IHT. Virtually all forms of residential property are caught, regardless of value and there are no exemptions for rental properties.
Taxpayers are subject to IHT on assets in excess of the tax free threshold known as the ‘nil-rate band’ which is currently £325,000. If the Property interest has a value in excess of the nil-rate band then IHT will generally be payable. Furthermore, the rules are very broad and seek to catch other ‘leveraged’ arrangements which otherwise might reduce the IHT exposure. IHT can also apply to loans used to acquire UK residential property as well as security, collateral or a guarantee for a loan which is used to acquire UK residential property.
Broadly speaking, the new rules treat shares in offshore companies which derive their value from UK residential property as being subject to IHT. This means that IHT will now be charged on the “taxable value” of the shares in the same manner as a direct holding of the property. For example, IHT charge will arise in the following circumstances:
• The death of a person who directly owns shares in an offshore company which owns UK residential property.
• A gift of such shares, if the donor dies within seven years of making the gift.
• For trusts which own such shares, on each 10-yearly anniversary of the trust’s creation or the distribution of such shares to a beneficiary.
The taxable value of the shares generally corresponds to the value of the residential property held by the company, less certain deductible liabilities. Third party (i.e. bank) borrowing incurred to purchase a property will be deductible in most cases. However, a lender may be within the scope of IHT as the new rules extend IHT to the rights of a creditor in respect of a loan (“relevant loan”) used to purchase UK residential property, whether directly or indirectly.
Therefore, in situations where an individual, such as a family member, or a trust has provided a loan for the purchase of property, the lender is also exposed to an IHT charge.
In addition, any assets given as security, collateral or guarantee for such a relevant loan will also be within the scope of IHT in the estate of the provider of the security, up to a maximum of the value of the relevant loan.
Double tax charges could therefore potentially arise where:
• A tax charge arises for both the lender and the guarantor; or
• A tax charge arises for the lender, but the borrower does not get a deduction for the loan.
what to do now?
With the withdrawal of IHT protection from 6 April 2017, the primary remaining tax advantage of using an offshore company structure to hold UK residential property is gone. In short, UK residential properties in these structures are subject to the annual tax on enveloped dwellings (ATED); capital gains tax (CGT); and now also IHT.
Most people are considering ‘de-enveloping’ their UK residential properties, given the substantial ongoing tax costs of operating the offshore companies which own these properties.
When weighing up the decision whether to de-envelope or not, particular consideration should be given to the CGT cost of crystallising gains within the structure and any stamp duty charge. Whether the tax cost of doing so will be prohibitive will depend on the facts of each particular case.
It is important to bear in mind that de-enveloping will not necessarily leave individuals in a better position from an IHT perspective, as the value of the property (less the nil-rate band and any deductible debt) will remain subject to inheritance tax at 40%. This IHT risk could, however, be managed by taking out an appropriate life insurance policy to fund the IHT that would be payable by their estate on death.
Non-residents and non-doms that currently own UK residential property via an offshore company or an offshore company and trust structure should urgently review their position.
For more information or for advice regarding these new changes, please contact
Rupert Clarey : +44 203 077 1278 / firstname.lastname@example.org