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No mercy for non-doms: Another tax hit looms for those who own UK property through offshore structures

Created: November 2016

In August the Treasury confirmed that the UK inheritance tax (IHT) advantages enjoyed by non-UK domiciled owners of UK residential property will end, as planned, in April 2017.

The measure, first announced in the Budget of summer 2015, will mean that UK residential property owned by an offshore structure – such as a company or trust – will be liable to IHT.

The removal of the exemption from IHT is the latest change affecting non-UK domiciled individuals, who have seen the tax advantages of owning property through such structures stripped away steadily since 2012.

The measure, first announced in the Budget of summer 2015, will mean that UK residential property owned by an offshore structure – such as a company or trust – will be liable to IHT.

Who will be hit and when?

The new IHT will come into force from 6 April 2017 and will be legislated as part of the 2017 Finance Act. These changes will apply to all ownership structures regardless of when they were set up.

As of 6 April, HMRC will be able to assess whether an IHT charge is due simply by focusing on the underlying residential property asset, and “looking through” these overseas structures.

Any one of the following “chargeable events” could trigger such HMRC assessments:

  • The death of an individual holding shares in an offshore company which owns UK residential property
  • The death of the donor within seven years of the gifting of shares in an offshore company which owns UK residential property
  • The 10-year anniversary of a trust holding UK property through an offshore company

Which properties will be affected?

The government is yet to confirm exactly which properties the new rules will apply to, but has suggested that it is likely to apply the same definition as is currently used when assessing capital gains tax, in which ‘residential property’ refers to any building which is used, or suitable for use, as a dwelling. This excludes care or nursing homes, any building with 15 or more bedrooms that has been purpose-built for student accommodation and is occupied by students, as well as prisons and military accommodation.

It is not intended that the new IHT charge will have any minimum value thresholds, and, importantly, it will apply not just to properties caught under the enveloped dwelling rules, but to any UK residential property interest held by a non-UK resident through an offshore structure.

The government is yet to confirm exactly which properties the new rules will apply to, but has suggested that it is likely to apply the same definition as is currently used when assessing capital gains tax, in which ‘residential property’ refers to any building which is used, or suitable for use, as a dwelling.

However, there may be slightly less pain for the owners of mortgaged properties. Any outstanding mortgage debt on a property can be offset against its value when calculating the IHT charge, but only if the mortgage was taken out when the property was purchased.

Anti-avoidance backdrop

The government also plans to introduce targeted anti-avoidance rules in the new legislation, which will deliberately disregard any arrangements whose whole or main purpose is to avoid or reduce an IHT charge on UK residential property.

In order to boost the reporting of “chargeable events” to HMRC, a new liability will be imposed on anyone who has legal ownership of a UK residential property (including directors of a company which holds the property) to ensure that the reporting requirements are met, and that any IHT due is paid.

Finally, the government intends to allow HMRC to block the sale of an indirectly- held property on which IHT is owed until the tax is paid.

A wide variety of ownership structures – from offshore trusts to companies – will be affected by these changes.

It is crucial that anyone who owns UK residential property this way takes expert advice, as failure to do so could leave them exposed to a substantial IHT liability they could not have anticipated when setting up the ownership structure.

Jamie Morrison, Private Client Partner
T 020 7874 7983
E jmorrison@hwfisher.co.uk