The measure, first announced in the Budget of Summer 2015, will mean that non-UK domiciled investors who own a UK residential property through an offshore structure – such as a company, trust or combination thereof – will be liable to IHT in the same way as UK domiciled individuals.
The removal of the exemption from IHT is the latest change to the taxation of UK residential property affecting overseas and UK-based non-UK domiciled individuals, who have seen the tax advantages of owning property through such structures steadily eroded since 2012.
Who will be hit and when?
The changes will take effect from 6 April 2017 and the new IHT rules will apply to all ownership structures, irrespective of when they were set up.
Once the changes come into force, HMRC will assess whether an IHT charge is due by purely by focusing on the underlying residential property asset, and “looking through” these overseas structures.
Such HMRC assessments can be triggered by any one of the following “chargeable events”:
There are further chargeable events that can trigger an inheritance tax charge.
Which properties will be affected?
The details have yet to be confirmed, but the government has said it is likely to apply the same definition as is currently used when assessing capital gains tax.
This defines residential property as any building which is used, or suitable for use, as a dwelling. It 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.
Crucially, it will not only apply to ATED properties, but to any UK residential property interest held through an offshore structure.
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, although only if the mortgage was taken out when the property was purchased and provided the debt has not been financed from a ‘connected’ party – broadly a person or entity related to the property owner.
The government also plans to introduce targeted anti-avoidance rules, 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 increase 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. There has been no change to the tax treatment of commercial property, where the tax benefits of such structures are retained.
However it is essential that those who own UK residential property this way take expert advice. Failure to do so could leave them exposed to a substantial tax liability they could not have anticipated when setting up the ownership structure.